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This morning it was announced that SXCI was buying CHSI in a cash and stock deal (story from Benzinga). Both stocks were gapping up significantly. It is unusual for the acquirer to gap higher in a merger that involves stock as a major component of the transaction. There is usually a huge amount of selling pressure from the “merger arb” funds who will short the stock to capture the deal spread. Also a large gap up will induce other shareholders to take profits initially.

Selling pressure often leads to a down move right as the market opens. So traders will look to short any weakness they see on the Open. In fact today my mentee Sammy caught a quick 1.5 point drop in SXCI after the market opened. Nice trade. But perhaps a bigger trade would be available later? We urge our desk to pay attention to the big picture during our AM Meeting.┬áTo pay attention if SXCI is accumulated after the initial selling pressure subsides. Are the bigger players viewing this acquisition as such a huge positive that they are willing to accumulate shares 6+ points higher than yestrerday’s close? If so, perhaps the stock will trend up later in the day. And perhaps have several days of upside follow through.

Also as traders we are trained to take notice when price action looks different. In the case of stocks that gap up a large amount we take notice when despite huge selling pressure the majority of the gap holds on the Open. Buyers willing to absorb selling pressure at much higher prices than the prior close usually leads to even higher prices.

In the middle of the day SXCI was accumulated. In fact there was a large spike in volume around 1:00PM which is a very unusual time for a stock to see a large increase in volume. I often hear traders talk about how they don’t want to get caught in a fake move in the middle of the day or moves aren’t real in the middle of the day. If the volume comes into the stock whether it is 8:00AM 11:00AM or 1:30PM the move is more likely to be real and see follow through.

One of our traders was very vocal about the accumulation. He also shared it with other traders in our chat room. His paying attention to the Big Picture allowed him to make a trade that maybe he would have passed on in the past. It also got a bunch of other guys on the desk involved as well. Great example of younger traders learning. And putting to practice what they have learned. Next step is getting bigger when the setup happens again. And it will. They always do.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is [email protected].

No relevant positions

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


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