A couple of days ago I received this inquiry via email from DH, one of our blog readers. It is a very interesting question so I thought I would share with all of you. Below is DH’s email:<\/p>\n
“I read the SMB blog and watch the videos every chance I get and I\u00a0really enjoy them. Thanks for sharing!<\/p>\n
“I’m a fairly new trader and just started trying to learn how to read\u00a0the tape recently. I was looking at AIG today and the stock traded\u00a0above the important $35.00 level during the open. I went long at 35.05\u00a0as I saw the 35.00 level being hit but it was holding, and I was\u00a0hoping to ride a big move up. However, when 35.00 broke, I didn’t exit because I didn’t want to get shaken out. My stop loss was at\u00a0$34.85 but before I could get out, the stock moved fast and I was down about 30 cents on my trade.<\/p>\n
“My question is: When you are leaning on an important level for your\u00a0trade (35.00 in this case) and it gets broken, do you exit immediately\u00a0or do you wait and see? If you decide to wait and see, how do you\u00a0determine how much room to give the stock to move against you (5\u00a0cents, 10 cents, etc…)?”<\/p>\n
Gman’s comments:<\/p>\n
The reader is referring to the trading in AIG from last Monday. First, let’s just put the play into context. AIG had failed to get above $35 a couple of times in the last few days. The first time the stock failed there after a $5 point run in 20 minutes; $35 held the offer nicely. The second time the stock failed because there was serious selling at 34.95 and 35. so it was not like the buyers weren’t ready to buy above it; clearly the supply at that level was much greater than the demand. So $35 was setting up as the level to watch for another possible huge break. So great job by DH at identifying an excellent level in AIG.<\/p>\n
Now, when we prepare for a stock to break through an important level we consider a few possibilities on how the stock may break. One the stock could just drive up on the open, lift through $35 and not stop until $36+. Clearly the best and easiest way for people to be in it for the big move. You pay $35 and sell it when it stops up ticking a point higher. Can’t get easier than that. Chop.<\/p>\n
But then what if the break is not clean? ideally we would like to see a few things for the breakout play to work:<\/p>\n
1. We would like to see serious buying interest near $35. Say anywhere in the 34.60-.90 area.
\n2. When it gets near $35 you should see the bids getting hit for some size, dropping and see the stock not go down.
\n3. Once it starts to take $35 it should have a clean break and powerful break through it.
\n4. If the $35 gets tested after popping above it, it should not drop more than a few cents through to shake the weak-hand longs. It is better if it just holds for size and never drops though.
\n5. It would be even better if when $35 lifts and pops that we see buying interest above it. Say 35.10 and higher.<\/p>\n
Now coming into the open AIG was starting to hold 34.60 but the volume really wasn’t there yet. When the stock opened it popped through it without much of a fight. To me there was no buying on the bid, it was going up by people paying the offer; so it was starting to look like just a drive through the level. But the stock stopped printing aggressively on the offer near 35.3 and the last noticeable buyer was 70 cents away…uh oh…danger, danger, danger. And When the stock tested $35 on the way down it went powerfully through it into the 80s. Ripper.<\/p>\n
So not only did it not drive just straight up a point but it also seemed like a huge fake break. The stock wasn’t showing signs of buying interest on the bid below, at or above the level; so we were skeptical. When the stock failed to drive up and it slowed we sold. Then the next and only place to buy the stock back was in front of $35 but you had to be out if $35 broke. You do so because you have not seen confirmation clues as the ones described above. Had we seen a few of those clues then we can restructure our trading plan to allow for a little wiggle room. But this just wasn’t the case for the way the stock traded last Monday. So there isn’t a magic number for how much room you can give the stock. It really does depend on how the play develops and where you are noticing clear buying near the level. Had we seen noticeable buying around 34.90 before lifting $35 then we would give the stock some room until we saw selling below 24.90. I hope that makes sense.<\/p>\n
Will be watching this dopey stock tomorrow as it decided to pop in the last 10 minutes of the trading day today without me. Strictly going to be momentum trading this sucker so really have no levels to share at this time. But will tweet if we spot any.<\/p>\n","protected":false},"excerpt":{"rendered":"