I make trading decisions based on 3 factors: Tape (order flow), Technicals (trend, support, resistance) and Catalysts (News). The least understood of the three is the Tape. It is a skill that takes thousands of screen hours to develop. But once developed it is a skill that enhances the risk/reward of your trades and often enables you trade with larger size with a minimal increase of risk.

Yesterday I was trading URBN that had released earnings. The initial reaction to the news was negative as you can see from the two day chart. I was interested in looking at a short trade around 28.50 with confirmation below 28 for a move down to 27.50. (28.20 level highlighted as well for reason listed in next paragraph).

The market opened and URBN was bouncing around for the first ten minutes. The range started to tighten between 28.10 and 28.20. A seller at 28.20 could clearly be seen on the offer absorbing dozens of buy orders. I established a short and added to my position when the 28.10 bid dropped breaking the tight range. I continued to trade it on the short side for the next 30 minutes with my ultimate stop above 28.20.

I was looking at URBN because it had fresh news and was reacting strongly to that news in the pre-market. But the decision to open a short position was based on The Tape.

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.

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

 

Learn how to read the order flow

One of three In Play names discussed in today’s AM Meeting was SODA. It was gapping up to 36 which is a longer term resistance level. My initial thought was the news didn’t seem like a big deal and it would be a nice short on the Open against this level. As the market opened it traded a few cents above 36 and then began to quickly drop out.  But by 9:45 it was clearly holding above this key level.

When a stock gaps up significantly there is often some quick profit taking right after the opening bell. If by 9:45 the stock is still trading near its high and above a longer term resistance level you should be thinking about how to get long. Shorting is the low percentage play.

In the case of SODA it did short term traders the favor or actually being accumulated at 36 the key level identified in the AM Meeting. The appropriate stop on a long at 36 would be below 35.80.

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.

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As a pro trader my bias in a stock is largely a result of the price action. As I observe the price action I start to ask myself questions like what are the other players in the stock doing? What are the big institutions doing? Are swing traders buying or selling now? Are intraday momo traders trying to play the short side or long side? Asking these questions allows my brain to build a road map of how a stock may trade.

Yesterday, FNSR released their earnings report. The initial reaction was a strong drive down to long term support of 18. This morning in the pre-market it was trading around 18.50. Not much of a bounce. The first trade I considered making was a short against 19 for a move back down to the 18 level. But a funny thing happened when the market opened. Traders bought. FNSR drove from 18.80 to 20.20. It pulled back to 19.40 and then consolidated in a 30 cent range for about an hour.

As FNSR began to hold above 19.50 I initiated a long position. I eventually caught a move up to 20.70. I was stopped out on the remainder of my position on a wick below 20.30. As I was already off the desk at that point I had no chance to re-establish for the third leg up to 21.50.

My original trade idea was completely wrong! I was certain that other short term traders would be looking to get short as well, and each time FNSR held higher I was more confident it would eventually get positive and cause some more pain to those trying to short. We have seen this recently on a lot earnings plays. Stocks that have initially gapped lower and reversed powerfully to the upside. The key on these plays is to not predict that the bounce will occur but actually wait until it does occur. Then trade the stock long.

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.

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

SMB Capital Stocks In Play Call Review. Each morning before the market opens we discuss the stocks that we believe will offer the best risk/reward trading opportunities intraday. Today’s review featured GRMN, MOS, NFX, MGM, DELL, INTU.

February 22nd gameplan

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.

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

In the fall of 2010 I wrote a post called “The Money Trade“. It outlined the mindset of momo hedge funds and how when they all decide to pile into growth stocks such as CMG, FOSL, CRM, LULU etc. you can quickly identify their fingerprints via after hours and pre-market price action.

A few days ago LNKD reported earnings and the AH/PM price action was indicative of our momo buddies. Here is the video of our pre-market discussion of how LNKD might trade for the day. Followed by a chart of how it traded later that day. SMB Fundamental #1 is Proper Preparation!

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.

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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.

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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.

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Last week I wrote a column talking about how I had moved towards using 15 minute charts more often intraday to keep me focused on a stock’s most relevant trend. I still use lower time frames and the tape to identify the best entries but the higher time frame view will inform whether I am short or long. I thought the price action from SNDK on January 26th illustrated this point rather well.

Take a look at this chart that includes the price action from the after hours on January 25th when SNDK released their earnings and the pre-market action from the 26th. This price action can only be described as bearish. The initial reaction to the earnings release was a two point down move. This was followed by a second wave of selling.

The next morning in the pre-market SNDK continued to consolidate near the prior day’s after hours low. When the market opened the initial drive was to the downside. This is one of my favorite short setups. A stock with a fresh news catalyst has been aggressively sold when the news is released. The next morning it trades lower in the pre-market. And finally it creates a new low after the market Opens. At this point the burden of proof is on the stock to get me to shift my bias to the long side.

There was a lot of chatter on the desk about this one. Mike even tweeted that he would consider getting long if it got above the 47.50 level. If you look at the 5 minute chart you can get some insight to his thinking. Around 11:00AM SNDK was clearly being bought at the 47 level, which was about 70 cents above the opening low. If it were to then start to hold above 47.50 he viewed the short term trend as having changed.

SNDK did eventually trade above 47.50 and made a new high. But what immediately followed its new intraday high was telling for me. It quickly sold off and then began to consolidate below the 47.50 level. This was the first evidence that the higher time frame trend was beginning to reassert its influence. If you were only watching the 5 minute trend you might argue that it simply was having a pullback and consolidating higher than 47. Therefore you might be thinking long.

Those focusing on the higher time frame trend who were interested in being short this stock were presented with a well defined consolidation where they could start building a position. See the annotations above for additional spots where you might have added to a short position. (note this was a circuit breaker stock so you would have had to offer shares to establish short positions)

After the downtrend resumed SNDK found its November 25th low of 45.50 before being bought into the Close.

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.

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After having trading professionally for 16 years I still find the lack of understanding among friends and family as to how myself and other short term traders make a living humorous. Here are some of the comments I still hear on a regular basis from my parents and close friends “Market was flat today so I guess you didn’t make any money?” “Market was up 3% you must have really crushed it?” “Market was down over 2% did you lose a lot of money?”

Discretionary intraday traders make money based on intraday price movement. Period.  Whether a stock closed up 1% or down 10% is in no way determative as to how much money a trader will make in a particular stock. All that matters is what happens in between.

Let’s exam the statistics and take a look at the chart for AYI from January 9th and see if we can assess the trading opportunities that were presented to the intraday trader.

The first thing that catches my attention is the stock’s intraday range (the difference between the high and the low during normal market hours of 9:30-4:00). Its range was over 5 points which represents about  10% of the stocks price. If we examine the distinct moves that occured in the stock the intraday there was even much greater opportunity than the 10% range suggests.

1. The stock opens at 54.98 and then drops to 52.25 which is 2.73 points
2. It then bounces from 52.25 to 57.81 which is 5.56 points
3. It then drops from 57.81 to 55.10 which is 2.71 points
4. It then bounces from 55.10 to 56.93 which is 1.83 points
5. It then drops to from 56.93 to 54.06 which is 2.87 points
6. It then drifts up from 54.06 to 55.06 which is one point before closing for the day

The total movement described above is 16.7 points which represents more than 30% of intraday movement. But a casual observer might say AYI opened at 54.98 and closed at 54.94 and that is only 4 cents of movement all day. How would a day trader possibly make any money on such a small move?

My response: the change from Open to Close is not a relevant metric for determining opportunity for a day trader. It is as meaningless as whether a basketball team loses by 1 point or 30. Either way the team has a single loss added to its record.

By the way, this type of intraday movement is fairly common for stocks that are In Play. But it is far less common for the market overall. That is why SMB focuses on trading Stocks In Play each day. They offer more intraday trading setups with better risk/reward ratios than trading the broader market. One of our trading tools the SMB Radar, has a column titled “Days Range” which ranks stocks such as AYI that have unusual intraday ranges compared to what we might see normally.

Obviously the money any individual trader makes will not only depend on the opportunity available but also his or her skill level and trading playbook. That is why SMB focuses on building fundamental trading skill during year one as well as helping our trainees build a playbook that makes sense to them.

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.  For more information on the SMB Radar that contains a series SMB’s of proprietary algorithms click HERE.

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One of the questions I am asked most frequently by aspiring traders is what time frame do I use on my charts for intraday trades. My stock answer (no pun intended) is that from 9:30-10:00 I am looking at 1min or tick charts and then I zoom out to 5min. But recently I have found that a 15 minute view is more helpful for guiding me in intraday swing trades. Previously I had used 15min charts mainly to identify multi-day inflection points and trading zones.

Let’s take a look at SWN which I traded on the Open today. It was gapping up with the strength in natural gas and very In Play. I got long around 9:50AM when I noticed the 31.50 bid would not drop. Based on the price action I was seeing I believed my upside was in the 32.30-32.50 range. It made a new high around 10:25AM but failed to consolidate higher so I moved my stops up to 31.59 and 31.49 thinking that the price action had become less bullish.

I was stopped out after I left the desk on the down move around 11:30. As I looked at the 15 minute chart in my office an hour later it still looked like a great long to me. Each price spike below 31.50 was met with buying  causing a close above this level each bar. At 1:00PM when it began its next up leg it consolidated very tightly against 32 which was the longer term resistance. Based on today’s price action it seems like the next resistance area of 33.75 is in the cards very soon.

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. for a free trial of the Stocks In Play call send an email to rmendez@smbcap.com.

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