We are in a downtrending market!  What?  We are in a downtrending market!! What? downtrend!!!!!! What does this mean for short term traders?

1. Short stocks if they pop to previous support levels
2. If the market trends up for two days then pray for a third day gap up so you can short the market!!
3. Trade with less size as downtrending markets tend to be more volatile
4. Be mentally prepared for the market to meltdown at any time.  See traderfeed.blogspot.com on an excellent post on what to look for. http://bit.ly/945ZkT
5. If the market gaps down and there is a feeble attempt at a bounce on the Open then put your short caps on.
6. Remember that stocks go down more quickly than they go up.  Take a deep breath when your shorts start working and give them some room to trade lower
7. If a stock makes a hard down move on volume wait for it to pop a little before initiating a short position
8. Don’t fade down moves. Fade up moves!!
9. Remember that in a weak market we don’t need to have a down day every single day.  If we have two hard down days in a row be careful with your shorts on the third day.  This isn’t September 2008.  The market isn’t gonna drop 20% in a week
10. It is OK to trade on the long side in a downtrending market.  We certainly trade on the short side when the market is trending up.  You just need to understand that the bigger chops are gonna be on the short side. i.e. AMZN 124.50 to 114, AAPL 202 to 190, GS 171 to 158.  These moves all happened intraday.  Correct.  They weren’t swing trades.  I guess you could call them intraday swing trades

Good luck with your trading tomorrow!

Our “Best AM Idea” that we tweet each morning as part of our morning roundup blog is a trade idea that is based on all of the information we have prior to the market’s Open. Yesterday, I suggested that FCX be bought on a pull back to 71.50. FCX has traded down about 20% since reaching a 52 week high up around 90 on January 11th. The prior day, it bounced nicely in the afternoon and was gapping up in the morning. It was a perfect candidate to buy on a quick drop on the Open. I was willing to risk 15 cents to catch 2-3 points of upside.

But a funny thing happened on the Open yesterday. The market came off hard and dropped the 109.80 support prior to FCX trading down to 71.50. By the time FCX was heading towards our buy price of 71.50 the market had already attempted to rally above 109.80 and had failed. My mindset was that I should be focusing on my short setups rather than longs since our next support on the SPYs was 108.20. Nevertheless, I put on a small long trade on FCX when it traded down to 71.50. In fact, since the market was coming off so quickly I figured the 71.50 bid would get hit out so I bid 71.42 for some stock. My bid got hit and FCX actually traded up to the 71.60s. Unfortunately, it quickly went to the low and I got stopped out at 71.35.

After I got stopped out, that silly program that Bella so often talks about, “buy the new low”, caused FCX to spike back up to 71.87. I was not fooled. I began trading it on the short side. The “buy the new low” program was overwhelmed when it dropped the 71.35 level and it traded down to 70.87. When it quickly popped back up to the 71.30s, similarly to the move from 71.35 to 71.87, I shorted some more stock. I covered my position into the next down move to the 70.60s.

About an hour later FCX popped back up to 71.50. I failed to short it there as I was engrossed in my AAPL short that was tanking at the time. FCX trended down for the next two hours to 68. The 71.50 level that originally was intended as our “best am idea” on the long side became our best “lunchtime idea” on the short side. As a trader you must always be flexible and re-evaluate planned trades based on the data the market is presenting.

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This morning we saw some pretty heavy selling pressure for the third consecutive day. We then saw some of the leaders bounce from very important prices.

GS did not breach the 166 breakout price and is now trading at 168.90.

AAPL did not trade below 204 and is now trading at 206.50. If AAPL can hold above 207 it has at least two more points of upside to the key 209 level.

FCX is currently trading two points off the low and if it holds above 85.50 could run to 87

A big part of gauging the health of this market going forward will be whether GS and AAPL can stay above the low prints from today.

The financial stocks are still capable of having sharp down moves intraday circa 2008 and early 2009. We saw this when Meredith Whitney lowered GS estimates intraday on Tuesday and we saw it again today when federal regulators reminded banks to protect against a future rise in interest rates.

But on both occasions the “news” was shaken off and the affected stocks traded higher. One of our traders was a beneficiary of the interest rate “chirp” today as he was short the FAS when it hit the wires. Another one of our more experienced traders said that he was irked by the down move and that he was not interested in getting long FAS. I reminded him of the current market environment.

We are in an uptrending market. There are tons of people looking to buy on any type of unusual dip. Whether it is a market dip or a dip in an individual stock. If you review our SMB Morning Rundown blog you will see that almost every time the market touches a multi-day support level that we have highlighted the market rallies. This is not rocket science.

When you see a GS drop two points suddenly after it has been trending steadily higher your first instinct should always be to find out if there is any real breaking news. But if there is not then you should be looking for information on the tape to get long. You should be checking your charts to see if it is near an important technical level. Because the odds are that it will bounce. This is the complete opposite of my mindset from 12 months ago. And that is because the market has changed…

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Gilbert “Gman” Mendez, head trader at SMB Capital, sat down for an interview with Tim Bourquin from TraderInterviews.com. In the interview Gman discussed his trading style and how he has adapted to the changes in the Market because of HFT.  Gman also highlighted the importance of reading the tape, and why he chooses to trade stocks that are in play.  Read or listen to the interview here.

GMan and the desk was VERY long HAL going into the oil number at 10:30 AM. I would tell you how long but it was probably more long than we should have been. We were in a Trade2Hold and HAL was working. But then most on the desk did something very smart for the intraday trader. They lightened up before the oil number and 32.45ish.

Before an important economic number like the housing number or oil we take our risk off the table or at least a lot of our risk. GMan loved the HAL position. 32 had been a big level. Oil is very strong especially now that it has cracked the $80 resistance level. Oil was at its intraday highs of 81.90 at the time. Above 82 and the price of the barrel and oil stocks probably would find higher ground. But before the number GMan cut his risk by 70 percent.

What happened? That is not really as important as the principle. We have no idea what the oil number would be. We are short term traders. A disappointing number could erase serious intraday gains in a millisecond. In fact a bad number could turn open P&L into a major rip instantly. That is not the type of risk/reward in the self interest of the intraday trader.

For those curious, the number was not so good and HAL slipped to below 32. We rebuilt our position just above 32.

Best of luck with your trading!

Long HAL, GERN, JPM, MS, FDO

GOOG announced today that the Nexus 1, their new phone, would be carried on the Verizon network. RIMM started to trade lower. It was already on our radar as a short candidate below 66.50 and 66.20 based on its recent price action. We knew the next major support was not until 65 so it was game on for a short trade.

Once news is released on a particular stock it is the job of the short-term trader to gauge the strength or weakness in the stock by reading the tape. By carefully examining how aggressively a stock is being bought and sold a trader will be able to form a hypothesis as to what price levels the stock will trade. Also, by reading the tape a trader can quickly recalculate in their mind, almost automatically, whether the risk/reward is still favorable for an open position.

When RIMM traded down to the important 65 support level I was hyper-focused on the Level II quote box on my platform. By absorbing all of the information that was being relayed to me via bids, offers, and prints I was able to determine it was time to cover my RIMM position. I watched as a huge number of bids got hit at the 65 level. This was most likely from those attempting to press RIMM further down through this key support level. After all of the bids were hit out at 65 RIMM dropped a WHOPPING seven cents to 64.93. Then in less than ten seconds the bid was above the 65 level again.

Although I covered my short I was not 100% comfortable establishing a long position. I was waiting to see how quickly and how far RIMM would trade above 65 before establishing a long. After It traded up to 65.28 I started to watch the bids very closely. I was attempting to identify a large buyer above the 65 level. At 65.18 I spotted my buyer. Although the 65.18 bid was only showing a few hundred shares I watched as many thousands of shares printed at that price without the bid dropping. I bid for some stock at 65.20 and got long.

RIMM traded up about 50 cents where I sold the final piece of my position. When RIMM started to trade lower I had a great level to re-establish my position at 65.18. This was not a price that was apparent from just looking at the chart.

My short chop in RMBS got busted. Dov made the biggest chop on our desk and his profits were eliminated. NASDAQ put out this statement. Tough spot for NASDQ.

I am the last person to complain about this stuff. The market is like the Wild West and I have come to accept this. Trade long enough and you will as well. But as a veteran trader I was surprised by the decision to bust these trades. Here’s why…..

RMBS had a sharp move down from 25. This fast down move got our attention. And then from 12:45 PM to 1:20 PM RMBS consolidated. RMBS is often involved in litigation that invites precipitous moves. Our desk wondered if some negative litigation breaking news was about to hit or had hit and this downmove was the result. On the tape RMBS could not trade above 23.40 after the sharp downmove. I got short. Spencer instructed to a few short on the desk,”Give RMBS some time. It might really tank.” This was a classic bearish technical pattern.

So for 35 minutes RMBS consolidated after a sharp downmove. This is why we were all short. And then RMBS collapsed to 15.75 for a few seconds, popped to 19, and then found 22 pretty quickly. I covered near 19.70. With so much time going by and the consolidation near 23.40-23.20 this seemed like a legitimate downmove to me. Obviously the amount it traded lower was highly unusual, but the fact that RMBS collapsed was not.

This was not like the DNDN move from April (DNDN dropped from 24 to 8 in like 90 seconds). I was in that move and those trades were not busted. I ate the huge rip. NASDAQ probably received a great deal of heat for this move and this may have influenced their decision to bust these RMBS trades below 20.73 today.

According to NASDAQ we cannot appeal their ruling.

This was a good short. One I will make again. When you see a stock make a sharp downmove and then consolidate lower, this is an excellent risk/reward short.

Interesting start to the trading year. The action in RIMM, GERN, STEC, SEED, JOYG, AAPL, CHK offered excellent intraday trading opportunities.

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

Long GERN, STEC

Darrelle Revis, standout cornerback of the NY Jets, offers another example of the power of deliberate practice.

Good news on the jobs front for 2010.

Advice on picking stocks for the next decade.

For New Year’s Eve I was in AC and caught David Gray in concert. His energy, passion, and his band’s mastery of their craft was inspirational.

The wondrous economic creation of the last decade.

Awesome article on how to adapt to High Frequency Trading (HFT)

When asked after Florida’s beating of Cincinnati if he could sense his team was ready to play well in the locker room the day of the Sugar Bowl, Coach Urban Meyer instructed he was confident his team would play well because of how well they practiced Tuesday and Wednesday before the game. Congratulations to U of Cincinnati on a great year.

How the tennis great John McEnroe is now more fit at 50 than when he was on tour.

Things that Todd Harrison, head of Minyanville, learned the past few years.

We at SMB wish all a great start to this new year!

10. The SEC tax declining by about 35c per thousand shares traded.  2009 was a tough year made much tougher because of this tax being raised 400 percent last year.  This will mean a possible extra 17k for some of our traders.

9. Secret Project X.  SMB has developed a practice tool we are very proud to unveil to our in house traders.  Deliberate practice is how you become successful at anything.  This training innovation allows the developing trader the chance to practice.

8. The launch of our new SMB Training website.  We have been working on an improved site for many months.  Roy Davis, our coder and graphics designer are working hard to produce an amazing new product.  I have seen glimpses.  The site design will finally match the quality of the distance learning offered.

7. StockTwits TV 2010. Howard Lindzon and Phil Pearlman have started a killer trading community. The new and improved video for StockTwits TV is so exciting. Can we just fast forward to 1/4/2010 already and launch the new look?

6. SMB Trades2Hold of the Week.  Every Friday we will hold a new session where we discuss the best Trades2Hold intraday from the past week.  This will be an awesome learning session that leverages the trading talent from our desk.

5.  Dov Blogs.  One of our future star traders is starting to get stalkers.  I noticed some google searches directly for his name.  Dov thinks the searchers were his mother and possibly a new young lady seeking to learn if he is out on probation.  See he is very witty.  Much more to come from Dov.

4. The Shark Tank.  They are coming for you market players.  They are hungry.  They prepare for battle.  Stay tuned.

3. Tie: Me losing some weight.  Some jokester sent me an email the other day mocking how much weight I have gained since “Wall Street Warriors.”  I have gained 30 pounds since I started SMB Capital and SMB Training.  Time to take that weight off.

And continuing to exchange ideas with Dr. Steenbarger from TraderFeed on building a world class training program for developing traders.

2. I am about to be an uncle!

1. Watching how much our traders improve next year!

To all of us at SMB Blog thank you for reading.  We look forward to sharing our trading stories and education with you in 2010.

Happy New Year!