I just spent thirty minutes writing in my trading journal about a trade I did not make. I am pretty sure the young trader recently moved next to me thought this was a little odd. And then I got up and walked around our trading floor (btw very nice digs) and talked to anyone who would talk back about the set up. Finally I ran out of people to talk to and was forced to return to my seat. I made money in this stock (UPS), I actually made a chop during an Opening Drive, but this one pass on a trade just has me puzzled. So I ask: Was I correct not to make this trade?
Let me set the scene. UPS announced before the open: UPS raises Q4 guidance; streamlines domestic mgmt structure (57.41 ) : Co raises guidance for Q4 (Dec), sees EPS of $0.73-0.75 vs. $0.63 First Call consensus, up from $0.58-0.65 previously.
UPS gapped up on this news.
60.08 in the Premarket refused to lift the offer and sold enough to cause me to share, “60.08 has held the offer for size twice now in UPS.”
The market opened and UPS first decided to go find 59.50. First move bearish, but not determinative as we used to say in law school. UPS quickly rebounded and we were met with that 60.08 seller (chump?). “Come on buddy let’s get the party started. Lift.” And then finally the seller at 60.08 lifted. I was already a little long and added two lots. Mentally I was thinking Opening Drive Play.
UPS found 60.50 and I took some off on the way up. I kept my core long even when UPS failed at 57c. I was giving UPS a chance to drive higher.
And then the play that leaves me thinking and now blogging occurred. And frankly I am still not sure what I should have done. Let me explain.
UPS quickly dropped out to 60.10ish. Spencer bought. Danny bought. Dov bought. GMan bought. Noobs bought. I did not add to my position. I passed on the trade. My thoughts: this just doesn’t feel right.
When a stock breaks above an important resistance level I almost always buy the stock when it returns to this price. But here I didn’t. Was I afraid? No. I don’t think like that as a trader. Was I slow? It is hard to be faster than me making trading decisions.
I am a rule based trader. I have my playbook and when I spot a trade that makes sense to me I pull the trigger and accept the result. And buying this drop out is in my playbook generally.
But I didn’t like that UPS dropped out so quickly and found this price again, 60.10ish. I would have preferred for UPS to hold higher. I would have preferred a held bid at 60.35, 60.25, heck even 20c. I would have bought more if UPS could not trade below any of these levels and slowed without a held bid. I would have bought more if UPS did not go down and then cleared the intraday high of 60.57. I just didn’t like this drop out right back to the level.
For me this drop out is either Pattern 1) a great buying opportunity or Pattern 2) an example of buying above a level, 60.08, and then selling below a level. Lately I have found this drop out to more probably indicate that UPS was now Pattern 2. But even if it was more likely Pattern 2 couldn’t I have bought 11c, 13c, 15c and just hit UPS below the whole at 60?
If I was wrong and this was Pattern 1 I would have caught more size to the 61.13 intraday high. So on one lot I would have made $1. If UPS traded below 60 I would have lost 13c. My risk/reward was favorable. I estimated that my win rate was 1/3. It is possible with this set up that my risk would have been greater with slippage, and on the open increased volatility. It is also possible that I would not have held UPS for $1. I could have lightened up at the 50c mark. I could have found another reason to lighten up.
There was something else going on here. There was a voice in my head saying,”Don’t Bella.” It seemed to be protecting me from a trade not in my comfort zone. As a trader, even a rule based trader, you must listen to that voice in your head that seeks to protect you. Sometimes in trading you can’t exactly put a finger on why a trade doesn’t feel right. It just doesn’t based on years of trading experience and all the variables of this present trading opportunity.
I am going to think some more about this trade this weekend. I would love to hear what you think about my split second Real-Time decision not to make this trade.
Best of luck with your trading!