Yesterday one of our most improved traders was trading GS. Great stock to be in. Great job of being in when many were taking off. This talented young trader, let’s call him MROD, developed a detailed trading plan for GS. MROD saw that 80 was resistance on the longer term chart in GS, remembered that the last time it saw these levels it traded just a bit thru to 80.10, and developed a plan to short GS at 80.10. This was all excellent. But then it got ugly. And he started shorting when GS was NOT a short. Let’s discuss.
On the longer term chart resistance could be found at 80 in GS. The next levels for us were 82.20ish and 87ish. We trade a short term style so if your levels are different understand our different trading time frame. And MROD wanted to short at 80.10 because of his memory trading GS. I really like this short. Not for huge size. But I like the idea. The longer term significant resistance level trumped the intraday low volume uptrend. I like that he remembered how GS traded and a level not necessary recognizable on the chart. I like the fact that he was not a slave to the chart and factored in how GS traded. This was all terrific. And GS had trouble trading above 80.10 yesterday at first. This was a really solid, thoughtful trade.
But then GS traded above 80.10 and MROD shorted the 80.20. And then GS went higher and I heard a few others on our desk short GS at 80.35. MROD tried to short GS again at 81. This is not good. GS above 80.10 and especially 80.20 is just not a short. The level was 80, 80.10. And now GS is above this price. Now granted the volume was light but it is still was not a short. GS had been in an uptrend for four hours intraday. GS was now above the 80 level. The next level was not for points. There was not evidence watching the Box that GS was about to trade lower. Now maybe because of the light volume GS was not a long for you yesterday. But above 80.10 it is not a short.
I perfectly understand what some on our desk were thinking. One of our new traders and I discussed his confusion about GS’s upmove yesterday before today’s Open. There was no news catalyst that was announced yesterday. GS had trouble trading above 78 and now it’s above 80 with no news. This doesn’t make sense. GS cannot trade higher. Sure it can. And there was one very good reason that some of our younger traders had not considered, which we discussed at our SMB AM Meeting. And there was really no reason for them to consider this other than Steve and I kept commenting on what might be happening throughout the day. So what was this mysterious catalyst yesterday? The stock was being marked up.
At the end of the year stocks can get marked up. Someone wanted GS higher. There are many reasons why. Maybe some have GS in their portfolio and a higher GS will make their portfolio more attractive to investors. Maybe some need GS higher for an options play. Whatever the reason GS acted like a stock being marked up. So in the back of your mind when trading GS yesterday you needed to understand that the desire to mark GS up could be a catalyst.
Stocks above resistance are almost always not shorts. Fighting the tape above resistance will manifest a frustrating and short-lived trading career.
Happy New Year!