My Thought Process: $LIFE

Jan 18th, 2013 | By | Category: General Comments, Steven Spencer (Steve's) Blogs
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It isn’t my regular practice to “Live Tweet” when I’m involved in actively managing a position. By nature I am not a good “multi-tasker” (don’t get my girlfriend started on that topic :) ). But LIFE was so In Play today that I wanted to share some of my thoughts and actions right as the market opened for trading. So here is a stream of my StockTweets with some notes below regarding my thought process. This includes a Five Minute chart from the Open as well. Enjoy!


We discussed LIFE as the most In Play stock in our AM Meeting. Each day in the AM Meeting I prepare the desk to trade the best risk/reward opportunities for the market Open. By 9:00AM LIFE had already traded more than 50% of its average daily volume. It also had developed two very strong trends in the pre-market which for me was a foreshadowing of good opportunities ahead.


I shared this information with our traders and then StockTwits because it was important. We train our desk to share important relevant factual trading information. This type of sharing puts traders on the desk on alert for potentially good risk/reward trades. A large amount of volume often leads to a stock making a significant move and that is why I shared it.


At this point I saw a large buyer defend the $60 level twice, and that information, in conjunction with the large amount of buying I saw at $60.85 and $60.50, led me to believe the stock could be bottoming. I was in very light as the stock was still in the downtrend although starting to move sideways a bit.


I wanted to let our traders know that although the significant buying could lead to a large up move, the buyers were still not in control. In order for the buyers to take control, which would justify a large long position, we would need to see a break of the downtrend and a move back above 60.50 which was a significant level on the way down — and also a failure area the first time LIFE attempted to bounce.


At this point it was clear that the buyer meant business. Hundreds of thousands of shares had been bought at 60 and over 2 million shares had traded between 60 and 60.50, which is greater than the stock’s average daily volume. If the 60 level held it was increasingly likely that it would bounce at least to 61.50 where it was sold for 15 minutes prior to the open of the market.


I was letting people know that it finally moved away from 60 and that those who are more conservative might consider getting involved as it was about to push through the key 60.50 level


The 61.50 target I had in mind matched the price where a large seller emerged so I got flat. My intention here was to buy the shares back on a quick drop out to 61 and then sell again into 61.50 unless the seller lifted. This is an example of taking off risk after a 1.5 point up move but still willing to get back in at a price with a better risk/reward.


The main reason I made money on the long side in this stock was that I saw significant buying at several levels leading to 60 and the huge buying at the 60 level. The HFT programs were pretty basic so I had no trouble on the way up seeing when buyers were gaining an advantage on sellers which helped me better manage my risk.

I really wanted to build up a position on a 50-75 pullback just in case LIFE tried to push back to 62 or higher. The way I look at these pullbacks after a nice trend is that I should risk some of the money I made trying to capture the next move. This mentality is extremely important to turn good trades into great ones. It turned out that I didn’t get any executions below 61, so I had a half position in the teens.

My final sale was at 61.87 on a very quick spike above 61.50. If a stock moves suddenly and is not in a slow uptrend quite often it will have a large retracement, which means I will look to take sales. That, in conjunction with the fact that all the funds trading the stock today were buying/selling at the half and whole numbers, got me flat.

 

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

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  • gm

    Thank you sir for your thoughts. I constantly look for your tweets during the day. I don’t know why I bought so many books in the past. I have learned a lot from your generosity.
    I turned LIFE green into red due to recency bias and confirmation bias. Good thing did not do revenge trade. Yesterday, I scaled out of ASML sooner than I should have. So, I determined to stay with LIFE longer (recency bias). Another mistake, listened to CNBC anchor (while in the trade) saying that hedge funds won’t even sell out at $65 or so on take over. Bingo, I got confirmation bias and so decided to stay longer. Thus, turned it into chop shop. I saw your tweets live that you’re done with the trade. Well, I ignored your view due to my bias. Well, next time, I need to stop and think fresh.

    Thanks again for your time.

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