I want to discuss in more detail how I believe I can press my advantage prior to the start of earnings season.  As previously mentioned I spend a great deal of time looking at longer term charts.  I am able to get a sense of which stocks are poised to make sizable intraday moves.  I then set alerts at important price levels so I can watch these stocks trade once they reach critical levels.

I believe the key to maximizing profits during this time period are 1) Once I have identified a stock may potentially make a large move I must make sure that I identify the great risk/reward entry points  2) If I am unable to establish positions at the greatest risk/reward entry points then slowly build a position 3) If I identify a trade that works well I need to understand the key inflection points for the next several days 4) Do not under any circumstances remove my attention from a trade that is working extremely well.

In order to highlight the above I will talk about an AAPL trade from last week.  Let me share some background first:

1 ) AAPL released earnings about 1 month ago and had moved up from 120 to 145

2 ) AAPL recently had failed twice to hold above 144.  The longer term chart indicated that it could easily pull back to 135-136

3 ) The day of the Mac conference it showed some weakness by briefly trading below a key support level of 140.

4 ) After the market closed the day of the Mac conference I observed a large seller at 142.70 (nsdq) who pushed the stock all the way down to 141.30

5 ) The day following the Mac conference AAPL gapped up in the premarket as high as 144.  By the time I arrived at the office it was already trading at 144.30, which was a key selling level the prior day and offered a great entry point on the short side

Based on all of the above I was interested in being short AAPL the day following the Mac conference.  I was hoping that it would open around 142.70 and I could identify the seller who had previously driven it down during after hours trading the previous day.  My initial downside target would be 140 which had shown support the prior day.  On a failure below 140 my expectation was a down move to 138.30 the 5 day low.

My trading plan in AAPL was to get short if it opened below 142.70.  In the event it opened above 142.70 then I would look to get short between 143.30-143.40 where it had failed in the afternoon two days prior.  My core position would be 1600 shares.  I use more core position as a way to measure how well I have traded a stock.  If a stock trades two points in my favor I consider it a good trade if I make more money than 2*core position.  If I make less than this amount then I did not trade the play well.

I will add to my core position when my risk is 10 cents or less.  At most I will trade with 3X my core position.  So in AAPL I would have no more than 4800 shares.  And if I have that large a share amount the additional 3200 will present no more than 10 cents of risk.  These additional shares are how I can potentially outperform the benchmark I have assigned myself for this trade.

Another important point is that I should not close any of my core position if the trade is working unless the stock hits a predetermined price target where the risk/reward of the position is no longer favorable.  This is how most traders (myself included) will underperform on a given trade.

Let me discuss exactly how AAPL traded that morning and how I traded it.

1 ) When I sat down in my seat in the premarket it was at 143.30.  This was a dream entry price for me so it dictated that I should establish a core of 1600 shares right away.  This wasn’t possible as I run our SMB In Play Stocks Meeting at 8:50AM.  So I compromised and shorted 400 shares.  Some may wonder why I wouldn’t establish the full position here since it was such a great entry.  Well, I don’t really trust anyone enough (except maybe Gman) to watch my positions in the premarket so I have to wait until after our meeting is finished to have a substantial position size

2 ) By the time the meeting was over I was about one point in the money.  It appeared that it was going to open well below the 142.70 level I had identified in the after hours the previous trading day.  I offered to short an additional 1,000 shares at 142.50 as bids were being hit around 142.20

3 ) The market opened and I was taken at 142.50 for 500 shares so I had a position of 900 shares.  I got the high print of the day but unfortunately couldn’t get fully executed on the full 1,000 shares order.

4 ) AAPL quickly traded down to 141.50.  I was on the lookout for a safe entry point to add to my position.  A move back up to 142 and failure would allow me to short some more shares.  This never happened but I noticed after the 141 level was breached for the third time that AAPL wouldn’t trade above 141.10 so I added 2k shares to my position into the momentum below 141.

5 ) The stock traded down fairly quickly and I lightened up as it approached 140.  This is where I made my first mistake which probably cost me at least 1K in PnL.  I covered half of my short in front of the 140 level as this was an important support level and there were a ton of bids supporting the level.  A couple of guys actually got long looking to make a quick 50-75 cents.  Smart play by them as the stock had just dropped 2.5pts to support.  My mindset was to reestablish the shares I covered into an up move.

6 ) I was able to short around 1,000 shares at 140.80 and the second time AAPL approached 140 I reduced my position size to 500 shares.  Then the mistakes ensued.  After the second failure to break below 140 I covered and got long above 140.50.  This probably cost me about 1K in a lost shorting opportunity on the next failure

7 ) AAPL finally broke below 140 and I was short again and had my 138.30 price target.  I held 800 shares for the move down to 138.50.  But I failed to get flat here even though this was the total upside I saw in the trade.  Also, the stock had come off 4 points from the high which is significant for AAPL which on many days has around a 4 point trading range.

8 ) The next mistake was not recognizing for the next three hours that I should have stuck with it as it just traded up and down in one point range.  There was never more than 5 cents risk being long at the 138.50 level.  And its final move of the day was above the 139.50 resistance which let to an up move to 140.25

In conclusion,  AAPL did exactly what I expected trading down 4pts to a key support level.  Based on the size I was trading I should have been up 4*1600.  I only made a little more than 50% of that amount.  Further I should have added 2K+ just range trading it later in the day.  The one upside was I was able to use the 138.50 level today to get short and caught a 1.5 point down move, which is an example of keeping track of recent significant levels.

On thursday I may blog about possible RIMM trading scenarios after earnings.  Next weekend I will discuss how I believe I can improve my trading next month when earnings season begins.

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