I have never written a blog about the trade setup I’m about to discuss. For the most part we share pretty openly the setups and techniques we use on a daily basis to make money. I have been contacted by many developing traders who actually can’t believe the amount of information we provide free of charge via our blog.

There are a few setups that I have been reluctant to discuss for fear that somehow the trades would become more crowded and impact my ability to make money. Most likely that fear is unwarranted as trading is about finding setups that work for YOU and figuring out how to best trade them. Even if I were to discuss the following trade setup during our AM Meeting 80%+ of our desk would not make the trade because either it is not part of their playbook or they would be focused on a different stock when the setup triggered.

The trade is a fade trade based on a breakout on heavy volume during the prior trading day. On the second day the stock opens higher than the prior day’s breakout price. You buy the stock when it drops to the breakout price. You are relying on the fact that those who paid on the prior day’s breakout are willing to defend the stock at that price, and those who missed the initial breakout may initiate a position at that price as well.

The example from today was FSLR. Yesterday it popped on big volume from 110. This morning when it pulled back there it was bought. There was a huge surge in volume and it traded up four points in 15 minutes. Depending on the time of day and what the box looks like when it hits your entry price will help you to determine how much size to have for the play. But this is a trade I am willing to make 100% of the time. The risk to reward is generally greater than 1:10.

I have been talking a lot to our traders recently about properly allocating their mental capital. What do I mean by this? Each stock we look at as a trader will offer a certain amount of opportunity each day. If a particular stock is likely to offer far more opportunity than another then all other things being equal the traders attention should be focused on the stock with more opportunity.

I reiterated this point to one of our better traders in a one-on-one meeting the other day. There are very specific trade setups that this trader usually crushes. We agreed that he should focus most of his energy and risk on these setups. One such setup was offered by AIG today. He crushed it. Good job by him!

Some traders on our desk myself included did not crush it. At the end of each day I go through a review of each of the important trades I have made. There are usually only a handful of truly important trades. I want to figure out what I did well and what I could have improved upon in each trade. In the case of AIG it is clear that I did not crush it because I pulled my focus away from it at a key moment around 1:27pm. I started watching RIMM at the 74 level. Huge mistake!!

The 74 level in RIMM was important but the volume surge in AIG that began at 1:00pm was a signal that it was going to have a multi-point move. I know that some of you are thinking that hindsight is 20/20. Well, this is what I said in our AM Meeting yesterday about AIG, “If I see a huge surge in volume above 29 then I’m gonna be all in for a multi-point move…” And if that wasn’t enough the only twitter message I have sent out in the past 30 days under “spencermagic” was “initiating a position in $AIG. long if it holds above 28. if breaks above 29 on volume monday lookin for a multi point move” March 5th

Based on my preparation and conviction I should have given AIG my full attention as soon as it traded above 29 and the volume picked up. I failed to execute and that is squarely on my shoulders. If I executed properly then worst case scenario I would have been up over 5K today.

There was some chatter from other traders on the desk that they did not make money in AIG because it is not in their “playbook”. That is a crock of you know what. There are no traders on our desk with more than one year’s worth of experience that don’t trade “flag patterns”. The move in AIG from 29 to 31 in about fifteen minutes was a very clear flag pattern on enormous volume. The consolidation that occurred during the next ten minutes was an opportunity for any skilled day trader to get involved.

At the end of each day you should always ask yourself if you were properly allocating your mental capital. If not, your results are not meaningful.

RIMM is a stock that Steve has been chirping for weeks. “If RIMM gets above 71.80 and then 72 I am going to get aggressively long,” chirped Steve. These were important technical resistance levels for RIMM to clear. Finally there was today. RIMM got above these levels and we got aggressively long. This was another Trade2Hold for SMB.

For those who did not get into this trade, I suggest you reevaluate your stock screening process. For those in this trade, now the work begins. Were you in at good prices? Did you put on enough risk for this opportunity? Were there prices to add more size?

For example 72.35 never dropped the bid after RIMM cleared these important technical levels. Did you add appropriate size here? As RIMM traded higher did you take off too much size, though the uptrend was still intact? Often developing traders tend to take off too much risk near big offers and whole numbers. Be careful to keep your risk on for such a set up and not convince yourself that you ought to lighten up without a very good reason.

As I taught last night on my StockTwits TV show, SMB University, trading is about finding the patterns that make sense to you. This is a pattern that should make sense to most traders. Now we have to find more patterns like this, and trade them with more size.

For those who crushed this trade, very well done! On our desk nice job Z$, Rosie, Danny, and Scuba.

For every trading decision we consider three factors: Reading the Tape, Intraday Fundamentals, Technicals.  Let me explain how we do this while discussing RIMM from today.

Tehnicals

GMan has been pounding the table about RIMM 70 for a few days (GMan actually started his position at 70.50 so he was in a position of strength near this level).  We draw all these fancy lines on our charts during our AM Meeting representing trend lines.   Adam and GMan had some lines glittering on our 65inch Flat Screen TV highlighting the 70 level.  The idea was if RIMM trades near 70 than this is a trading opportunity for us.   This is not an automatic short or long.  We focus our attention on RIMM at this moment and look for excellent risk/reward opportunities.

So when RIMM traded below 70 it received our full attention.

Intraday Fundamentals

There was no major news on RIMM today.  Joe P did make the interesting point that EVERYONE has this 70 circled on their charts for RIMM.  So below this level may bring out the selling and shorting. Also since this is such an important level we knew to be careful about the HFT’s playing their games, stopping us out of excellent risk/reward trades just because they can. So we had nothing from this element to aggressively short RIMM.

Reading the Tape

RIMM dipped below 70.  Spencer and I treaded lightly because RIMM was clearly not below this level.  And then we both started saying the same thing with different words.

I began with,”I don’t see the selling below 70 yet.”

And then five minutes later from Steve,”There is no seller below this 70 level.”

We didn’t see the bids getting smacked.  We didn’t see offers holding and then stepping lower.  We didn’t see bids dropping out quickly.  We didn’t see an increase of speed with the order flow.

So we both were short, but not for size since only one of our factors, technicals, called for a short.  We were ready to pounce if we saw selling.  We did try and stay short as long as RIMM was below 70.  But we were not willing to risk significant losses until we saw the tape showing weakness.

These are the three factors that we consider before every trade.  Perhaps some of them can help you.

Best of luck with your trading! Don’t forget to follow us on Twitter!

We had been waiting for BRK.B to hold above 80 for a Trade2Hold to perhaps 82.  Friday we almost had the hold above 80 but ran out of time.  80.10 became the new hurdle to clear before BRK.B knocked on the door of 82.

Today during one of those times Steve always warns that stocks can move, lunch time, BRK.B cleared 80.10.  I was doing something partner related and missed the first ticks above the level.  I made it back onto our trading floor and a few traders were chirping that BRK.B was above the level. SPY had cleared all important intraday resistance levels with 113 the next most likely stop.  So we had a very strong market on our side as well.  We had another check in our favor.  BRK.B was 80.25 bid, I sat down, bid 80.25, and  got hit.

GMan has some dopey meeting he wanted me in, so I set a stop for below the fig and exited the floor.  There was nothing really for me to do.  80.10 was a huge level so I didn’t need to do much other than stay long.  Periodically I checked in on my positions and reset my stops higher for BRK.B.  But I wanted to be in this trade.

Now certainly if I would have had more time I would have wanted to add here and there and increase my size.  But I didn’t have the time so I just stuck with my Trade2Hold from above 80.10.  Into the Close I added some size here and there, but not much.  Before the close I scaled out of 2/3 of my position at 81.90.  The only reason I lighted up was I was not interested in much overnight risk.

When we review our best Trades2Hold it is important to decode why they worked.  We cannot discount how strong the market was.  We cannot overlook that the market was strong AND it trended smoothly higher.  There were no moments when we wondered whether the uptrend in SPY would break and thus cause our stocks to break their uptrend.  We do not get days often like this as mostly the market provides us some moments of indecision and surprise.  But today was not one of them.  BRK.B did not offer moments of indecision.

We talk about needing a Reason2Sell when we enter a Trade2Hold.  Sometimes that reason is simply the bell is about to ring.

Best of luck with your trading!

Long 1/3 of a lot for BRK.B

The markets are currently set to open flat, the preliminary 4th Quarter GDP revision came in as expected at 5.9%. AIG also reported a $53/share loss this morning and should see very active trading during today’s session. Key levels to watch in the SPYs will be 110.25 and 109.40 for support. Resistance is at 111 and 111.70. Michigan Consumer Confidence @ 9:55AM and Existing Home Sales @ 10:00AM should move the markets.

The market is gapping down violently today, currently the SPYs are trading at 109.30 in premarket. Key levels to watch for the day are 109.50 for support, depending on where the market opens the next area of support is at 108.40. Should we attempt to stage a rally there is resistance at the 110.50 and 111 levels.

We have been waiting for WFMI to explode for days. Above 34 and then 34.30 were levels to add size. During our AM meeting GMan pounded the table about buying above 34 and then 34.30. One of our developing traders did and posted a personal best. Chop Rosie!

Why did we like this set up? The day after earnings WFMI was strong. 33.55 was a huge level as we spotted an unusual hold on the bid the day of earnings. WFMI could not trade below there for two days, finally did but did not stay below for long. WFMI has room to find 40 as we examine our longer term charts. 34 has been a level it could not clear for days. Above 34 and this was an A trade for us.

Now everyone in our firm had these levels in WFMI. But not everyone was in this trade. Rosie was. I was. GMan was and some others. And there was not much to do save manage our position, look for places to add, and hold. This was a Trade2Hold. At one point intraday I tweeted:

If I was on StockTwits TV Talk Your Book I would be screaming “Watch WFMI” $$ and then I would ask poss tech breakout?

Where was @ppearlman when I needed him? And while most of us lightened up or went out flat WFMI there was not a reason to sell save maybe when WFMI traded below 34.90 into the Close.

Rosie bought and did so with size. Rosie held WFMI for a substantial move. She was prepared and executed. I never understand those who go home complaining about a lack of market opportunity. Stocks go up and down all day long. It takes one stock, with one powerful move to make your day. Your job is to perform. To be in these set ups. To seize the opportunity offered almost everyday to intraday traders.

After the close we met with our new traders and discussed an excellent exercise to improve. I highlighted the opportunity in RIMM below 69, and WFMI above 34, and BRK.B at 80, GS at 160, NVDA below 16.50, AAPL below 199.20, and on and on and on. At the end of the day go find these stocks that offered opportunity. Talk to others on your desk about these set ups. Exchange ideas about how to best trade these plays. And replay them simulating trades that would have made sense TO YOU so that you would have found a way to seize these trading opportunities. So you can be like Rosie!

Best of luck with your trading!

I am hanging out at the beautiful jblu terminal at jfk. In one hour I will be taking off for sunny west palm beach.

I decided to participate in one last am meeting prior to my vaca. Most of the stuff I highlighted were strong stock consolidating near highs. Two of them, aapl and rimm, dropped key support prices from last week. I caught the short in rimm but missed aapl as I was about to get up from the desk to grab my clubs.

I still think both probably break to the upside in the near future but I wasn’t deterred from a quick one point scalp short. Afterall, I am an intraday trader. Well, except for my wfmi long, which is gonna pay for this trip as long as it doesn’t break below 33.

SLB was a waste of time as neither the value buyers or the risk arb bunch could move it too much.

Good luck with your trading this week.

SMB would like to thank everyone for their recent interest in our free SMB Training Reading the Tape Seminar. Due to extraordinary demand and limited space we were unable to invite all who expressed interest in our last seminar.  But I have some good news!  This Saturday 2/20/10 at 11 AM we invite you to attend a free Reading the Tape seminar in our training room at One State Street Plaza in NYC.  The seminar will be approximately an hour and a half.

At this seminar you will watch our partners discuss how to develop this vital skill, which gives us an edge in the market.  We will show examples from recorded video of how the tape helps us make excellent risk/reward trading decisions.  Too many traders rely solely on technical analysis to make their trading decision.  At our seminar we will help you become a better trader by exposing you to the important skill of Reading the Tape.

If you are interested in attending, please RSVP promptly as space will again be limited.  Individuals added to our waiting list for last week’s seminar will have first priority and have been emailed their invitation.  Please send your RSVP to: seminars@smbcap.com

For more about the importance of Reading the Tape please see the links below:
http://www.smbtraining.com/overview/smb-reading-tape

http://www.smbtraining.com/overview/smb-training-foundation

Best,
rOy