My primary stock on the Open was GMCR. It is a classic momentum stock that had fresh news and a large pre-market gap. This type of setup is usually my #1 choice to trade on the Open if available. I have internalized the possible price patterns for this setup having traded it hundreds of times over the years.

My second choice was MCP a former high flyer that had announced they were buying a company in their space that would help them to vertically integrate their business. At least that is what it looked like in the article I read on Benzinga. MCP has been beaten down for the past year and was in a steady downtrend on pretty much every time frame. I thought that perhaps today’s gap up would be the beginning of a reversal of its daily and weekly downtrend. But if not there would be some money to be made on a gap fill.

Here is the video from our AM Meeting where I discussed which price action I would look for to determine whether to trade it long or short.

The bullish price action discussed in the video played out once the market opened so I got long. The annotated chart shows how I adjusted my trailing stops a few times during the day. I sold most of the position and will look to reload closer to 29.50 on Monday.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

Steven Spencer is currently long MCP

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

After the market closed yesterday P released their earnings. It was immediately sold aggressively down to 12.50. A controlled bear flag developed with the next major support about 2.5 points lower. I noticed on the StockTwits stream @ldrogen say the conference call was not going well at all. From the back of my mind emerged my negative bias having watched its bearish price action in the days following its IPO last June. My “trading brain” was quickly calculating how many traders might now be trapped long from much higher prices after its recent runup.

By reviewing the long term chart you can see that almost every trader who bought $P in the past two months was in from a price above 12. How could the market most efficiently punish those longs? The next major support area was around 10 where it had been accumulated prior to its recent run up. I considered dropping the project I was working on and firing up the trading platform for some after hours trading. I opted instead to do the obligatory shout out to our head trader “Hey, you looking at P?” I said hoping he would start trading it and I could return to my project. I did not initiate a trade.

By the time our AM Meeting finished this morning P had already bottomed at 10.35 and had begun to bounce. I remarked during the meeting that the easy money on the short side had already occurred and I tweeted that as well. I thought if it popped to 11.50ish on the Open there might be a safe short entry but otherwise was only looking for quick scalp type trades.

In the first 15 minutes P had about a 75 cent range so there was some money to be made. My first two trades in P were longs and both were profitable. After 9:45 the range got tighter and tighter and it was clearly being supported at 10.80. I put on a long position with a stop below 10.75 and left the trading desk.  It had a trading range of 30 cents for the rest of the day and I was eventually stopped out.

The question I sit here asking myself now is whether I should have bothered trading P at all during the Open. There was a great short trade in the after hours yesterday. There was a pretty good continuation play in today’s pre-market with a safe entry point. By the time the bell had rung at 9:30 P had already bottomed at 10.35 but hadn’t really bounced enough for a bigger picture entry on the short side to make sense to me.

I have been considering very strongly during the past few months not trading stocks that have already run up or down in the pre-market to major support/resistance areas. At least not in the direction of the trend. It doesn’t suit me to catch the last 10% of a trend. I would rather be in for the “meat” of the move or get involved once the trend has reversed itself. That is why I put on a long position with a tight stop before leaving the desk.

 

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Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for 16 years. His email is sspencer@smbcap.com.

Steven Spencer currently holds no position in P.  Other SMB traders are currently short .

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

I tweeted early this afternoon that it looked like VVUS had put in an intra-day bottom. Here is the tweet.

i think bottom is in for $VVUS today. a hold above 20.25 should get it trending nicely

Here is a pic annotated that sums up what I was thinking. The long trade didn’t work out as VVUS failed to get above 20.25 and eventually made a new intraday low knocking out the 19.50 support area. This is a stock that will offer a lot more short term trading opportunities in the days and weeks to come. I will continue to monitor it closely.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

No relevant positions

There are three ways short term traders lose money: incorrect analysis, expectancy (a certain % of trades just don’t work), or making trades based on emotion (this one is a biggy for most). Take a look at the price action from GMCR and QCOM after they reported earnings. Since the initial down moves on the Open one has been a great long and the other a great short. From my perspective one had price action that signalled it could be a good long while the other had price action signalling a short.

I would love feedback from both new and experienced traders on these two setups. I will conduct a webinar next week discussing the importance of understanding the difference in price action for these two names.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

No relevant positions

Here is the followup from my earlier post titled “The Value Added Tweet“. I will break down my thoughts in bullet points to move this along so I can try to get some sleep.

• AMZN has a history of being bought on large gap downs after earnings. Even if it doesn’t fill gaps it still is capable of having large intraday up moves
• After a stock has a powerful up move on the Open I watch the pullback to try to identify a large buyer. If I can identify a large buyer I am interested to see if the stock will hold higher.
• I then watch closely at previously identified S/R levels
• AMZN drove very powerfully from 172 to 176 at 9:45AM. 176 was a key level identified as support in the prior day’s after hours session and resistance in today’s pre-market
• After the powerful drive AMZN dropped down to 174.50 but never violated the 174.40 level where I first saw a large buyer defend the bid. Bullish
• AMZN consolidated for 20 minutes directly below 176 and then broke above on higher volume. Bullish.
• AMZN had a very shallow pullback from 177.20 to 176.50. It was now clearly above a key resistance level and not dropping back below. Bullish
• This was enough evidence for me to formulate a plan to get long
  • As I tweeted here the plan was to buy in the range from 176.50 to 176.30
  • The trade would be considered a failure if it traded back below 176
  • The next major resistance was 180 and that is why that target was chosen
• This trade idea required no more than 30 cents of risk on the entire position
  • Assuming you established the position at the mid point of the buy zone at 176.40
  • Once AMZN clearly demonstrated it would not trade below 176.30 a sensible trade plan would be to hit out 50% of the position below this level. Assume  a fill of 176.25. The remainder of the position should be hit out below 176. Assume a fill of 175.95.
  • The above stop placements would create an expected loss of 30 cents on the entire position
• This trade offered about 2.5 points of upside under a normal scaling out strategy
  • Assume selling 25% of the position at 178 based on the prior intraday high
  • Assume selling another 25% of the position on the failure at 179
  • Assume selling the remaining 50% between 179.90 and the 180 target

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

No relevant positions

New blog format: Short trading lessons with charts for illustration.

Trading Lesson #1: Second Day Play–Buying A Strong Stock After It Pulls Back To Prior Afternoon’s Support Area

INHX was on our radar yesterday after another fresh news drug catalyst. As you can see from the two charts below INHX is trending higher on multiple time frames.

Here is the info from this morning’s gameplan:

We had a stock that had an explosive move the prior day and closed in the top 20% of its intraday range. The first trade we look to make the following day in this stock is a pullback to the prior afternoon’s support area.

Disclosure: no relevant positions

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com

Over the years I have seen a very strong tendency with traders wanting to be short the market at the first signs of any strength after they have just observed major weakness. It feels like yesterday a former trader I worked with was shorting SPY at 76 one or two days after we had put in the March 09 bottom. I remember walking over to his desk and saying “JZ we just had a down move in the market of historic proportions we may continue the uptrend for a little longer”. He shrugged at me and a few hours later hit his daily trading loss limit. I think as traders, and perhaps as humans, we have a tendency to overvalue certain data.

When you see the market drop from 118 to 108 in a few days it is kind of hard to believe that the market could ever be strong again. But the fact is that since the market broke its long term uptrend in early August and began consolidating we have had many more consecutive up closes in the SPY than down. Take a look at the big picture spy chart below and you will see each time we have moved off the bottom of this range we have trended higher at least for a few days.

So common sense would dictate after last Tuesday’s powerful close that we remind traders on the desk that they should be focused on trading the market on the long side as long as the uptrend remained intact. Of course this is easier said than done and most struggled as we moved higher Wednesday and Thursday. When the jobs number came out Friday morning and the market popped we were 10% from Tuesday’s low. This indeed seemed like a spot to me where the risk/reward made sense on the short side. I actually shorted the market that day at 117.50 and again at 117 but lost money as I did not follow good risk management rules.

There is a responsible way to get short a market that has trended higher for a few days in anticipation of a powerful rollover. Look at the intraday chart below. I have labeled four key S/R levels that could be used to establish and then add to a short position in the market. I created this chart the second day after the market bottomed so these particular price levels are no longer relevant but they can be applied to any two day period in the market when you are looking for a short term reversal in trend.

1. This was the afternoon high from Day 1. On Day 2 if you fail to trade above this level you can establish a short position with 25% of our ultimate position size. If this level is breached to the upside traders should quickly cover their positions as the uptrend is certainly still in tact
2. This was the afternoon support from Day 1 and if it is breached can be used as confirmation as a change in short term momentum. A move below this level and you could add another 25% to your position. This level tends to be more important if it also had served as resistance earlier on Day 1
3. This was the morning and midday support from Day 1. Notice that on Day 1 after the market had a small down open it quickly traded above the high from the prior day and then pulled back to this level. A move below this level on Day 2 would have me start to believe a reversal was really taking place but I probably would not add here.  However, after a sharp down move below this level I might short on retracement.
4. This was the Opening low from Day 1. This was the market’s last chance to bounce. I would be aggressively covering my short here if I saw any type of defense at this level. Now over three points from the high on Day 2 and the last chance for pullback buyers to jump in so the risk/reward on a short above this level not so good. BUT if this level gets taken out then there are a lot of longs would want out and I would want to be all in on the short risking 20% of what I had captured on the multi-point down move. This is the trade where the best momentum traders will press their bets on the short side looking for many to panic out causing another dramatic down move.

Notice that on Day 3 above the market did initially fail at point 1 allowing a small short to be established, but the market never breached any of the other points and eventually trended higher for the day. By following these rules you would never have a large short position and would cover any remaining initial short from point 1 when this level broke to the upside.

The outline above can play out in many slightly different ways depending on how the multi-day S/R levels have formed. But the overarching principles are the same which is trend/momentum will not change until key inflection points are breached causing more market participants to feel uncomfortable in their positions and start to exit.

Steven Spencer is a co-founder of SMB Capital and has been trading professionally since 1996. More of his trading and market commentary can be found here.

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

I am really starting to sound a lot like Bella these days. When he lectures our trainees he tends to repeat himself over and over and over again. My style tends to be more like “this is the concept–good luck” (maybe not that bad:) I didn’t fill out a lot of “blue books” in college and law school. I like to get right to the point and then move on to the next thing. Perhaps that is not the best teaching style for those who are new at something and trying to develop an extensive set of skills. So now I am Mr. Repeat. I’m pretty sure I have discussed at least 6 times during our AM Meeting this month that people must follow pre-market trends right on the Open. Let me explain.

Many In Play stocks we follow and the market itself as viewed through the SPY trade significant volume before US Markets open at 9;30AM. The trends and patterns that we observe from 8:00AM to 9:30AM give us a HUGE advantage right as the market Opens. We have a better understanding of whether a stock that has gapped up or down significantly will follow through or fill the gap.

By following the trend that has occurred in the pre-market traders simultaneously can achieve two things that potentially will completely change their results for the day.

1. They avoid getting in a quick hole right on the Open which invariably causes them stress and drains some of their mental capital fighting to get positive
2. They can make a quick chop, which puts them in a position of strength to attack the trading opportunities that present themselves following the Open

If you want to know how important both of the above can be just speak to anyone who has attempted to trade professionally for more than a few months. Even the most experienced traders receive huge boost in their psyche from making a quick profit right on the Open.

Take a look at the chart below in ORCL. It reported earnings yesterday after the close. The initial reaction was positive in after hours trading. When we came in this morning it was gapping above the after hours high which is generally bullish. As pre-market trading picked up at 8:00AM sellers appeared and it started to trend lower. So as I began to discuss the price action in the AM Meeting I pointed out that if it dropped below 29.20 I would focus on being short. But as our meeting progressed ORCL started to move higher breaking the pre-market downtrend establishing a new pre-market high. My only option at that point was to focus on getting long.

The market opened and 29.80 held the bid so I got long and a few minutes later I was selling between 30.40 and 30.60. This put me in a position of strength to buy on the pullback to 30.20 and made it easier to be patient enough to hold the position for several hours as it trended up to 31.

This video explains the concept as well at the 3:10 mark.

Please use the below chart to assist you in trading the market today. The no trade zone doesn’t mean you can’t have a position. It just means that initiating positions in market stocks in the middle of the zone are low probability trades where you will most likely get chopped to death! Look to trade breaks outside of the zone and initiate positions for moves from one side of the zone to the other.

I’m heading to the beach

I must be crazy writing a blog post as I begin my vacation in Nantucket Ma. But I have something I want to highlight that relates to a webinar I gave earlier this month. The topic of the webinar was multi-day inflection points. Identifying these levels and using them as the focal point for various trading plays.

On Thursday August 11th we watched as the SPY support just below 113 in the minutes prior to the market’s Open. Then this level served as support in the late morning and we proceeded to have our first uptrend day in the market since the bloodbath had begun (forgive the term as I just finished viewing episode 1 season 5 of Dexter). The uptrend stalled out right below 119 on Thursday and we saw some pretty aggressive profit taking into the close.

On Friday we gapped up and made a run several times at breaking above 119 and putting in another up leg in the market. But we failed. Yesterday we gapped above 119 and held above on the Open. There was an opportunity to buy on a pullback to 119 in the late morning before it trended back up to the high of the day. That pullback to 119 to the penny and the move up to a new high must place that level at the top of your list for trades in the days that follow.

For me the SPY was pure momentum heaven last week culminating with the slow steady 6% uptrend we saw on Thursday. Now it is about identifying key price levels in the market and making very few discreet trades off of those levels. Most of our attention as intraday traders should be back on Stocks In Play again, and that is why we shared our Morning Gameplan on the blog Friday where we highlighted NVDA and MCP and not the market ETFs.

Now that we know 119 has shown itself to be an inflection point having made two moves of 1+ points from this level you should be ready for the next trade that presents itself.

On Saturday I will be walking for a great charity, Autism Speaks, in support of my 6 year old nephew Jared. Please consider a donation to this very worthy cause. No amount is too small. click here