In this video, Steve Spencer talks about breaking news trades that involve momentum stocks. If trading momentum stocks is of interest to you, then you won’t want to miss this video.
View Video Transcriptin today’s trading lesson we are going
to talk about
a kind of breaking news trade that
involves momentum stocks
names like peloton amazon
netflix if trading momentum stocks
is of interest to you stick around
my name is steven spencer i am a
partner at smb capital we are
proprietary trading firm
in midtown manhattan where we trade
stocks
futures and options
so today’s trade
is what i like to refer to as the
smartest dumb trade
you’ll ever make and this is a trade
that’s been around for many many years
it usually crops up a few times during
the year
and it is a subset of a breaking news
trade
so the idea the idea behind the setup
is basically there’s a market leading
company
um they have a segment that they’re a
leader of and i mentioned
at the beginning of peloton so they have
this particular segment like
home exercise or perhaps you know years
ago netflix
market leading segment would be online
streaming
and then what happens is news breaking
news story will happen during the day
that one of the large market leaders
like an apple
or an amazon or one of these huge
companies google
microsoft will come along and they’re
going to somehow compete
with this company that’s become very
strong in a particular niche
now when you step back and you think
about it
the the the market leader of a
particular segment like a peloton
they’re the market leader
the segment leader for a reason they
figured out an addressable need
they developed a product that’s popular
and they’ve executed really well
and so just from a pure analysis
standpoint
the fact that amazon or apple or someone
might come along and compete
that’s not going to change peloton’s
long-term prospects at least it’s not
the vast majority of the time most times
when a very big company says they want
to compete in a particular segment
that’s fine it’s usually because they
can’t actually take over the leader of
that particular segment and so they have
to
basically develop their own thing
internally
but almost never is it a situation where
you know to give you an example from the
iphone moment from 2007
where apple came in and they said you
know what the way that this sector
is going right now with smartphones
nokia blackberry this doesn’t make any
sense
we’re going to come in disrupt and
completely take over this segment or a
more recent example
in the last few years maybe tesla the
way automobiles are manufactured
it should be electric it should be
software fully integrated we’re going to
come and disrupt this segment and
completely take it over the next
decade so that’s those are the
exceptions that’s very very very rare
what happens normally is a large very
large conglomerate will come along
they’ll try to compete in a narrow area
and
they might have some modest success or
maybe they’ll even do quite well and
compete
with with the segment leader but they’re
not going to destroy that
that company but that doesn’t matter for
in terms of intraday trading if news
breaks during the day
because the reality the fact of the
matter is that if you have breaking news
during the day
that somebody like apple is going to
come along and compete or somebody like
facebook is going to come along and
compete
the algorithms that are scanning all the
news feeds scanning the bloomberg
terminal stories and using natural
language processors
to look for stocks to buy or sell
they’re going to see
that headline for that news story and
that announcement
and they’re going to shoot first and ask
questions later and what happens is
there will be some initial cell pressure
when a story like this comes out
then human traders short-term traders
such as traders at our firm
they come along and they will start to
trade intraday
and they will use their trading skills
to pile on on the short side
and then ultimately the stock might have
some bottoming action and we will look
for a reversal intraday
and then over the coming days because
the stock that’s
that’s being sold off is a segment
leader in their particular niche
we will look for a longer term swing
trade to the upside
so for those of you are interday traders
what we’re going to look at this is
great for you for those of you who are
intraday and swing
we’re going to also address the swing
component the swing setup
as well our first example the best
example i could think of for the last
couple of years
from the last couple of years was in
2018
in the middle of the day facebook
decided to announce
that we are going to start producing a
dating app
and we’re going to compete with the
you know the the top people in the
dating online dating space now
there’s one publicly traded company
that’s controlled this space for many
many years and is
dominant and that’s known as match.com
and it’s actually
mtch so when that news broke the
algorithms hit the bids
the stock went down very quickly and
bedlam ensued here’s a multi-day chart
what you can see is very clearly on day
one when that announcement came out at
one o’clock or two o’clock or whatever
it was
it was boom went straight down several
dollars
and eventually ended up selling some off
some more the next day if we actually
zoom in
and take a closer look at what happened
is you can see and i’ve labeled this
there i’ve given you three potential
action points
and the first action point is really you
know it’s either going to be
algorithms seeing the news scanning the
news
and getting short match when facebook
says they’re going to compete with
match.com
those are the first people to get short
the the algorithms that are quicker than
the humans
the humans on our desk will have
scanning
software that’s built into our trading
platform and that scanning software
within
usually within a few seconds we’ll pick
up on the unusual trading activity
or maybe even within a second we’ll pick
up the unusual trading activity
um in match mtch
and so as it’s dropping a point or so
the momentum traders who trade breaking
news stories
will actually start to get short um
match and then watch to you know for
that initial
momentum down and then the the traders
who are kind of more wait and see
approach
will look at that initial down move in
the first five 10 15 minutes
look for some sort of retracement some
sort of bounce
and you can see that’s where i labeled
number two it’s actually an area i
circled
it went down pretty pretty hard in that
first
first 15 or 20 minutes or so there was
about a two dollar bounce two to three
dollar balance
and that sort of normal retracement is
where experienced traders
who weren’t participating in that
initial momentum down move will look to
see where it starts to move sideways
because anytime you have a momentum down
move intraday
there’s going to be a natural
retracement one of the things to look
for for that retracement is
did volume hit a crescendo did volume
really get quite high and then start to
tail off again
i circled on the bottom part of that
chart where the volume is being
highlighted
and you see those last two down bars on
the chart
that the volume got extremely high and
that marked the intraday low for that
for about an hour or so and
that is where people who shorted on a
momentum basis would probably start to
look to cover as it starts to move
sideways
but as it starts to consolidate and the
sellers emerge at the top of that
consolidation
some cradles will start to build into a
short position again and they won’t
actually
wait for the break of that consolidation
for myself
i’m actually looking to see which way it
breaks because
in this scenario where facebook decides
that they’re going
to announce a competing product at some
point in the future
with the dominant player my natural
skepticism kicks in
and so what i’m for the most part
looking to do
is just waiting to see those sellers
step down lower
and a break of the consolidation and
play that
and that’s where even the traders that
are perhaps shorting during that
consolidation towards the top of the
range
they’re not going to get really
aggressive until they see the break
as well and that’s where i’ve labeled
point number three where it actually
breaks out of consolidation
in addition to what we see when the
initial story comes out in the
algorithms
hitting the bids and causing this
downward pressure intraday what you have
usually in the next day or two
is what i refer to as the dumb headlines
we know that a lot of publications are
designed
to make money by getting people to click
on headlines click on stories that’s how
they make money through ads
and so we’ll see um after a stock like
match sells off
um these online publications know
that if they have headlines like here’s
an example right here
facebook is a beast unlike any other
that match group has
seen and so that’s a big headline from
business insider they’re known to
kind of puff up stories and do things
like this they’ve been doing that for
years
um but you have to think about it from
the standpoint of on day one
if something moves down intraday and
then closes pretty weak
you’re going to then get these headlines
online you’re then going to get the
financial media
the people the you know investors
watching tv that night
you know saying match.com dropped 10
or 15 facebook’s going to compete and so
you’re going to get more people
putting in orders perhaps that are even
long match deciding oh my goodness i
better sell it the next morning because
there’s competition coming from facebook
and that
usually on day two if that stock closed
week will create some further pressure
but what i referred to at the top of the
video was
once you get that initial selling on day
one once you get people jumping in on
day two and selling some more
as long as we’re coming into longer term
support we’re going to start to look for
sideways action over the next two or
three days
maybe some sort of bounce and then over
the next week or two
pretty much erasing um erasing that down
move that that we saw and so in this
chart that we’re looking at right here
what you can see is over the last few
months i’ve circled on the left side of
the chart
where they reported earnings where mtch
reported earnings
it actually had good earnings just you
can tell by the chart
it moved up in the coming days after
that from the 30s into the 40s
and then the announcement from facebook
caused it to drop
not all the way down to the 3435 area
where it was on the prior earnings
but pretty close but on day two you can
see it flushed into that longer term
support
and then you can see in the next couple
of days people starting to nibble
starting to move sideways
and that’s what it looks like when
something stocks come off really hard
what it looks like after that big down
move on day one and then some selling on
day two or day three possibly
you’ll start to see then a range form
and a bounce attempt and usually
that i would say most times that first a
balanced attempt doesn’t go straight
back
up you’ll have some more selling and
then maybe a higher low or a re-test of
the low
and then the next time it starts to move
up and takes out the initial bounce high
you start to have a trend and you’ll go
to price targets and we look at the next
chart what you can see is i’ve labeled a
few profit targets as it starts to
balance in the coming days
the other thing to remember is when
cooler heads prevail three four five
days later you’ll start to see some more
headlines
you know match reports earnings they
gave a good outlook
they should be doing fine and so then
people see the stock starting to move up
and they realize it’s down well off the
highs
more people will start to come back in
and then that creates kind of this
uptrend working its way back into
possible bounce areas so the three areas
that i like to trade
um back into the bounce areas and so on
day two on
first of all let me just say on day two
that’s what i’m looking to put in my
swing long trade
usually right on the open you’ll put in
a low remember in the first 15-20
minutes of the morning
stocks most of the time will put in a
high or a low for the day
and so if something gets sold off the
prior day and is coming off on the pro
on this day two’s open we’ll look for it
to put in its low right on the first 15
minutes or so
and so if something is coming into
long-term support in the first 15
minutes
that’s when i’ll start to buy and then
i’ll look for it at ten o’clock is it
holding above the morning high
and then perhaps add to the position
there so that’s on day two
and then my expectation is if it starts
to bounce on day three if it gets into
the first bounce area
that’s a really good spot to take some
profits now i labeled that as the first
potential bounce area on this chart
we’re looking at
because prior to match putting in its
high
i mean it pulled back to that price and
it’s all about psychology so people are
watching the stock bounce
they see oh it’s it’s at this pivot low
i’m going to maybe take some profits
there it takes a few people to take
profits and before you know it it pulls
back
the good thing about it is when it pulls
back from that first potential bounce
area
it starts to then form an uptrend and
then once the up trend is formed and it
makes another higher low
we can feel comfortable until that trend
breaks to
go to the next target or ultimately to
the third target on the right part of
the chart
which just erases the entire download
from the announcement the next thing we
want to take a look at
is what happened to match in the two
years since that sell-off
in the middle of the chart you can kind
of see the markup area from 2018
and lo and behold the fact that facebook
decided to
you know launch at some indeterminate
point in the future
a competing product had no impact on its
long-term prospects
and in fact it’s actually tripled in the
last few years
or the last couple of years from that
sell-off that day it’s it’s uh
it’s gone from 35 to about 115 a share
and so that’s that’s where it is two
years later so i want to take a look
um at a more recent example and actually
the reason i’m doing this this video
in the last month or so it was like it
seemed like every few days there was
another headline about peloton peloton
so the thing you need to understand
about peloton it’s similar to it’s it’s
a momentum stack
that means it’s high growth it attracts
momentum hedge funds momentum investors
and you know those those types of
situations always attract a lot of short
sellers as well i don’t know what the
short interest is right now
in peloton but it’s probably pretty high
maybe lower than it was when it was in
forty dollars now it’s over a hundred
um very similar to tesla in this sense
that um that it attracts a lot of short
sellers
and the competition’s always coming and
so palatine
um we just started to see headlines it
was like in august
apple was doing something with fitness
and they were going to compete
peloton shares dip then recover
after report possible new competition
from apple
um on that apple announcement what was
very different
was that news came out before the market
opened
and so before the market opens you’re
not going to have those algorithms
scanning the bloomberg headlines to
short because they are going to treat
during
normal market hours so when a headline
comes out
in the pre-market most of your selling
your your people trying to get short and
take advantage of those headlines
are going to be human traders and so
human traders
um you can see the in the middle of the
chart there i’ve circled that it’s
gapping lower a few percent
and they’re they’re shorting when the
market opens
if there’s no sell orders materializing
from the algos
and it goes right up those human traders
that shorter in the pre-market they’re
going to have to cover
so this is a very different scenario
very important to remember
when the breaking news headline comes if
it’s not intraday
if it’s pre-market and human traders are
shorting in the pre-market especially a
stock
where you can look on the chart it
already sold off a few days before so it
was already ready to have a balance
and so you should be ready to take
advantage of that if it gaps lower
right on the open if the stock if the
first move is up and gets above the
pre-market high
you should immediately be looking to buy
and looking for what it’s called
filling the gap going positive on the
day
those were the initial headlines and
then we got some more headlines
where there was going to be some amazon
competition this was like a couple of
weeks later
here’s all the headlines amazon
competition low price
bike oh my god amazon’s the biggest
retailer in the world
what’s going to happen to peloton their
business model is over
no of course that’s not the case amazon
as big as they are
have announced a ton of initiatives over
the years and you know the one that
comes to top of mind is they were going
to do a smartphone
which failed miserably and so this is an
example
of where momentum hedge funds and
investors they love headlines like this
because if they happen outside of market
hours
and the stock is going lower they are
ready to buy
and the stock will move higher in fact
we talked about this one in the morning
meeting somebody said
somebody asked in the morning meeting
and by the way what we do in our morning
meeting
is we find the most in place docs for
the day the way we do this is we use our
scanner
we have a pre-market scanner where it
identifies things that are moving in the
pre-market what the short interest is
if you want to learn more about the
pre-market scanner in our stock
selection process
check out the two-hour free workshop
tradingworkshop.com
as long as you are in the right stocks
each day
i found that you’re much more likely to
be consistently profitable
experienced intraday traders going to be
positive 80
of the days um if they’re in the right
stocks the next video i do i will talk
about
the last few months where i only have
one negative day and why that is
stock selection learn about it more
trading workshop.com
okay so getting back to the breaking
news on amazon
there’s going to be this competing bike
oh my goodness oh my gracious
it’s gapping lower in the pre-market in
this case if we zoom in
on the open it’s always about it’s
always about the first move and so in
this case
it actually the first move was to the
downside and so
the way that we look at it is in our in
our pre-market prep is
what is the level the key level we’re
looking at and in this case below 90
we knew 89 and 88 with support and so
what i basically said was like look if
it takes out the pre-market low
and it’s below 80 90 you can trade it on
the short side but understand
that if it gets back above 90 dollars
and starts to hold
and then moves back above pre-market
resistance
we can look for a reversal because this
is not news
that the momentum hedge funds are going
to take seriously
in fact a few days later amazon the
whole thing ended up being a little bit
of a fraud
so the company that said it was an
amazon bike um amazon
issued them i think a cease and desist
order it wasn’t even amazon they were
trying that company was trying to
uh get on i don’t know play off amazon’s
name or something like that but
regardless from an intraday perspective
the news comes out in the pre-market
before the market opens i’ve circled
that little area for you
um i call it reversal bars the reason
why two bars is important sometimes
you’ll get one green bar
then it’ll roll over again and take out
the pre-market excuse me the
morning low it actually will be a good
short but once you have that second
green bar
on the five minute and it closes there
at that point and if it’s above 90 a
share um
you’re looking for it to actually move
higher for the day
and i want to actually take a look at i
want to take a look at a higher time
frame
the way that we talked about it was if
it actually closes at the high
the because it had already sold off a
few days before
this is one where we can look for it to
trend up and work its way back up to a
hundred dollars
and so just to give you a recap of this
particular trading setup
competition there’s announcements from
competition it it it
triggers it triggers knee-jerk reaction
and selling that knee-jerk reaction and
selling the first people shorting is
always going to be algorithms
but you can have scanning software based
on volatility
you set a bunch of different things we
do it internally on our platform
obviously if you’re using tradestation
as a platform or you’re using a scanning
technology
you can set those scans up and
you can in the first few minutes jump on
board on a momentum trade
my favorite trade intraday is after that
first initial momentum down whether it’s
10 or 15 minutes of down
i watch the retracement normal
retracement rules apply
25 30 retracement look for it to start
to move sideways
and then look for that second leg to the
downside much more likely to work
obviously intraday
always a good swing long as i said at
the beginning of the video
it’s one out of 100 times where you have
apples coming along with an iphone or a
tesla’s coming along with an electric
car
integrated with software and batteries
and all these things disrupting an
industry
the most what happens 95 plus percent of
the time
is one of these big players comes in
whether it’s a facebook or an apple or
an amazon or a google
they’re not going to destroy the sector
leader
they are going to create knee-jerk
selling and the smarter
funds larger retail investors
they’re going to step in in the next few
days
and these stocks are going to balance
and you’re going to look back
in a couple of weeks and the stocks are
going to retest the high and depending
on
overall market conditions how strong is
the market that you’re in
and how strong is the uptrend in that
particular stock at that particular time
perhaps not even bounce back to where it
started from but then start
the next leg higher hope you learned
something here
look out for look at it for the next
time this happens it usually happens a
few times a year
please take advantage
