Trading Crack..…A Lesson in Fading Momentum

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Friday an alert goes off, it’s SNDK making a momentum run in the morning. Wow an awesome move that we completely missed off the open. The SPY is down over a buck and SNDK has buyers squeezing it higher. The alert was set for $40 bucks a nice big round whole number. The reason the alert is set is because Thursday SNDK failed just above this nice big round number which happens to be in an area of previous support on the daily.  At the time SNDK is moving thru $40 the SPY has just come off a higher low and is pushing the top of the days range just below $118 another nice big whole number.

On Thursday SNDK printed a high volume top at $40.28, a great reason to get eyes on the tape here and now. Multi-day highs/lows often act as important inflection points. SNDK pops $40 and gets quickly sold right back to its 10 am high (opening range), and then just jacks right back to $40, hesitates a bit, and rips to the other side. Now the place to watch the tape is $40.28 the scene of yesterday’s top. SNDK marches right up there and just a few pennies higher starts to stall with volume blossoming, on the tape you see the action on the offer fail to move it higher and it comes in back to the ¼,it takes another flurry on the offer above .30 but it doesn’t free up, this time it comes below the ¼ and its time to get short.  Volume couldn’t push it at a spot where it failed on volume yesterday in a down market (even though its pressing its high of the day the SPY is below the figure at $118 likely resistance).  Once below the ¼  the thinking is use the  highs as an out(defined risk), bid for some in front of the figure(40) and gauge the action there to determine what to do on the rest. On a quick push below .10 some gets covered and now the last 2/3 is a “don’t lose money” position. SNDK powers right back up as buyers defend in front of the figure so the last 2/3 is cut for a few pennies as SNDK goes to a new high on noticeably lighter volume (a run for the stops)  and once again starts to fail dropping the ¼ again. At 10:49 a buy program pushes the SPY to new highs on the day and the new higher ticker starts flying, but SNDK only pops a few pennies, no new high! Time to short again! Another defined risk at highs but showing a slight difference in not leading the market to highs but failing to make a high with the market. On the tape the action on the offer is showing SNDK tiring after a big run straight to resistance. GMAN asks if I like trading crack?

The tape is giving clues and the level is proven, and the risk is defined. SPY is still down big trading up into the figure, the internals are decidedly red and SNDK is showing signs of tiredness. Yup, it’s crack if you just jump in front of momentum without any real reason except, “it’s up to much.”  Also, if SNDK starts to leak back to $40  there’s a good a chance the algo’s will want to check the other side on a stop hunting mission as the late momentum longs are using $40 as their backstop no doubt. SNDK is now just leaking and the leap frog on the bid has ended as the SPY stalls at $118. The SPY finds some mild selling when it can’t hold $118 and SNDK heads for the figure and swaps below it, when a big buy program jams the SPY back up and thru $118, but SNDK only pops $40 and starts to fade quickly! The tape has given confirmation now of momentum death, and below $40 its time to get bigger! Now the backstop on the whole position becomes a held bid over $40. The chart is now screaming “double top” off yesterdays high and momentum has died. Now the action becomes predictable, leaking lower will get the early longs in SNDK to start taking profit and shorts will start playing and pressing the double top.

What a great position to be in! You get to manage the trade, nice and relaxed, while trading crack! All that’s left to do is monitor the action on the bid and watch the volume. If you want to trade crack you need a few good reasons on the tape to do it. Reading the tape isn’t just seeing each price printed, it’s using volume, levels, relative strength and experience to exploit an opportunity. Learning to read the tape will help confirm those reasons before chart traders become involved and help your position. This allows your size to be bigger and risk smaller. Use your levels and alerts to let you know when to drill down into the prints and find entry. Fading momentum is trading crack if not done right, but when done right its just good risk/ reward old school trading.

Jeff Davis


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