2nd day play presentation - The PlayBook Webinar Series

2nd day play presentation - The PlayBook Webinar Series



The PlayBook Webinar Series - http://www.smbtraining.com/blog

The PlayBook Webinar Series - http://www.smbtraining.com/blog



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2nd day play presentation - The PlayBook Webinar Series 2nd day play presentation - The PlayBook Webinar Series Presentation Transcript

  • 2nd Day Play – Trend-Trend Short - EDU Steven Menking July 18, 2012
  • 1. SMB TRAINING is NOT a Broker Dealer. SMB Training engages in trader education and training. SMB TRAINING offers a number of products and services, both electronical (over the internet through smbtraining.com) and in person. Through smbtraining.com, SMB TRAINING offers the “Virtual Trading Floor”, a community through which independent traders (subscribers), as well as T3 Trading Group, LLC traders, observe a virtual trading floor environment (as described below) for educational purposes. SMB TRAINING also offers web- based, interactive training courses on demand.2. T3 Trading Group, LLC is a Registered SEC Broker-Dealer and Member of the CBOE Stock Exchange (CBSX www.CBOE.com). All Trading conducted by SMB Training is done through T3 Trading Group, LLC.3. The seminars given by SMB TRAINING are for educational purposes only. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities. You shall be fully responsible for any investment decision you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.4. This material is being provided to you for educational purposes only. No information presented constitutes a recommendation by SMB TRAINING or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy. The content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities. You are fully responsible for any investment decisions you make. Such decisions should be based solely on your evaluation of your financial circumstances. Such decisions should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance and liquidity needs.5. SMB Training and SMB Capital Management, LLC are separate but affiliated companies.6. No relevant positions
  • 2 Day Play – Fundamentals nd• In order to find the best profit opportunities on an intraday basis, we focus on stocks that are In Play. These stocks have fresh news or some other catalyst that will likely draw the attention of the market. On a day when a stock is In Play we look for it to trade at least twice it’s average daily volume and to move at least twice as much intraday as it does on a normal day.• Because a stock is In Play there will be more market participants focusing on the stock than usual. One consequence of this is that the stock is less likely to trade with a consistent, readable pattern. Also, the stock is less likely to be clean at technical levels.• Watching the tape and finding important levels on the day a stock is In Play is extremely important, because those levels can be used the following day. This is particularly true of the intraday high and low. These can be used for a powerful 2nd Day Play setup on either the long or the short side.
  • 2nd Day Play – Fundamentals• This setup is powerful because on the 2nd day not as many market participants are focused on the stock, so the technical levels are likely to be cleaner. Additionally, finding the important levels when a stock is In Play gives us a price edge. There may be longer-term investors or other participants who weren’t following the intraday action closely enough to know where the key levels are.• Once the technical levels from the previous day have been breached it’s game on. The strongest pattern we are looking for is a Trend- Trend trade, where a stock is trending on both long and short term time frames.• It should be noted that 2nd Day Plays don’t have to occur exclusively on the 2nd day. In some cases the stock can consolidate for several days before the key levels are finally taken out. If the proper setup doesn’t develop on the 2nd day, set alerts that don’t expire in front of the important levels, wait for the levels to be tested, and reevaluate when the stock returns to those important prices.• What follows is an example of a Trend-Trend 2nd Day Play in EDU from July 18, 2012.
  • SPY – Big Picture • Knowing the trends and levels in the overall market is crucial to executing 2nd Day Plays properly. They can be used to get more or less aggressive depending on the direction of the market relative to the direction of the 2nd Day Play setup. When the trend in the market lines up with the trend in the individual stock trading these types of setups can present a great deal of opportunity. • After closing above the 136.00 resistance level on July 17th, the day when EDU was first In Play, SPY opened on July 18th at that level and trended upward through the morning before flattening out and consolidating between 137.00 and 137.60. • The market was unable to test the next resistance at 137.80, but closing above 137.00 was a bullish sign. • Holding below 137.00 could put 136.50 and 136.00 back into play, and holding above 137.00 the recent high of 137.80 could be tested. • Above 137.80 it looks like 140.00 is the next target.
  • Intraday Fundamentals• EDU, which has been in a downtrend since mid June, had a significant gap down to new lows on the In Play day on the bad news below: • July 17th: 10:28 AM Shares of New Oriental Education & Technology (EDU -27.2%) crater after a SEC investigation into the company is announced on an earnings CC. • An investigation by the SEC is a very severe piece of bad news.• This was a 2nd Day Play, but on the day in question there was an additional piece of bad news: • July 18th: 1:42 PM New Oriental Education (EDU -19.1%) slumps again after Goldman Sachs suspends its rating due to a previously- announced SEC investigation and Muddy Water sets it short-selling sights on the financials of the company.
  • Technical Analysis – Long Term • EDU started to trend down in early June, eventually pulling into the 22.00 area which was support from the beginning of 2012 prior to its earnings announcement. • The gap down to new all time lows on earnings and the SEC investigation confirmed the weakness in the stock, and on July 17th the stock was extremely In Play. • On an average day EDU trades fewer than 2M shares and moves about 1 point. On July 17 th EDU traded over 30M shares and moved over 5 points intraday, trading up on the open to the highs before reversing all the way back to the low. • Both the intraday high and low were levels to watch the following day, but the weakness in the stock made a continuation of the downtrend more likely than a reversal. • Staying objective and flexible is important. If the stock had opened up very strong on July 18th and traded above the intraday high from the previous day a gap fill to 22.00 could have been in the cards. However, in this particular case a great deal of confirmation would be required to make a reversal play. • The best kind of 2nd Day Plays are the Trend-Trend setups. In this instance EDU was broken longer term as well as weak intraday on July 17th.
  • Technical Analysis – Short Term • Watching EDU closely is important because the stock defined several important levels that were useful for the 2nd Day Play. • 15.50, the bottom of the midday range, is a relevant level. 15.00 is also important as an inflection point from the open that tried to show support in the afternoon. • The most important level is the low at 14.00. This level was approached twice, and EDU ended up closing near the low. • EDU did open higher on the 2nd day, and offered some excellent opportunities to get short. Once the stock got below the previous low it did retrace back into the range from the prior day. This made me wait for additional confirmation of the weakness in the stock. • There were still some buyers willing to step in, but once the prior low dropped a second time there was no turning back. The selling pressure mounted and the stock made three distinct down moves with periods of horizontal consolidation in between.
  • Reading the Tape • The tape in EDU on July 18th was cleaner than it was on the 17th, which is one of the benefits of the 2nd Day Play setup. This offered some excellent entry points with controlled risk. • Once the downtrend started there were sellers on the tape that continued to step down from 14.50 to 14.00 to 13.00 to 12.95 to 12.00 to 11.40 to 10.00 and all the way into the close below 9.50. • When the sellers took a break the stock would consolidate but never retrace, and a great deal of volume was done at all these points. • Paying close attention to the tape made the pattern of the stock clear. When the first downmove from 14.50 to 11.50 was over the stock made a finishing print. This was indicated by the massive volume that occurred at 12:30pm.
  • Reading the Tape • The same pattern happened again when the 11.50 support level dropped. The tape signaled that move had stalled with massive volume printing into 10.00. • Both of these volume spikes were good chances to lighten up the short position and capture the profit, but neither give enough indication of reversal to get flat. The weakness of the stock and the power of the short setup necessitate holding a core short position with size until there is a clear signal that the downtrend has ended. • There was no reason to get flat until the close, and the price action below 10.00 was very unique on the tape. There was immense selling pressure and volume and the only thing that prevented the stock from making another measured move to prices below 9.00 was a resilient buyer who fought the sellers for every cent.
  • The Play Fails at 14.50, 14.00 slows the downmove, the really big volume starts to come in at 13.50, when that drops stock has substantial downside momentumI had an alert set for 14.00 in Below the intraday low can get shortfront of the low from yesterday one lot in front of the retest. I thinkat 13.86. 14.00 bids held on SIZE UP when 12.95 holds, new allthe tape before shaking out time low with huge volume coming inand then holding below 13.95.Aggressive to short becauseyesterday’s low untested New lows in front of If you missed the first leg, retest of 13.00 and an upmove, 11.40 low offered a narrow window to bias is still short get short. Great place to add as well Crazy action and volume into Can take some off some in the close, the sellers grind the this volume spike (this 5 buyers down another $0.50, minute bar was almost 2x trend from first entry isn’t ADTV) broken, only substantial buying prevented this from being a full third downmove Looking for spots to get shorter, 12.00 holds very cleanly with high volume Take some off on this volume spike as well, good exit in front of 10.00
  • The Real Trade2Hold• The real Trade2Hold in EDU is when the stock consolidates below the prior low and holds offers. This setup offers a high probability chance of a continuation to the downsize with well defined risk.• On the day in question, EDU traded down below the prior low of 14.00 on the open before retracing back into the prior days range. 14.50 offered an entry point on the short side, but the real Trade2Hold starts when the stock breaks through the new swing low at 13.20 and holds the offer. The offers then step down to 12.95 and briefly consolidates.• The strong downmove on heavy volume to 11.50 offers an opportunity to lighten up, there was a gigantic volume bar on this move that was easily recognizable as a finishing print
  • The Real Trade2Hold• Offers hold at 12.00 and then at 11.98 half an hour later, good opportunity to add with an out above 12.00 for the add while still holding the core• When intraday support at 11.50 drops and then holds the offer more can be added. The uptick rule was in effect so just hitting the bids below 11.50 was not allowed• Another opportunity to lighten up was on the volume spike that occurred on the downmove to 10.00. This was another clear signal that the immediate move was over and either a consolidation or a retrace was likely.• After another hour and a half of consolidation the support at 10.00 dropped. Add below at the best price possible.• A final volume spike occurred into the closing push down to 9.50. This was a final signal to lighten up before taking the entire position off at the close (low of the day)
  • Reasons2Cover• The primary Reasons2Cover for EDU that manifested on the day in question were the volume spikes / finishing prints indicating that the immediate downward pressure on the stock was exhausted and that a consolidation or retracement was likely to follow.• The final Reason2Cover all of the remaining position was a finishing print into the close.• Buyers stepping up and pushing the bids up breaking the trendline would have been a Reason2Cover. For instance, if EDU had been able to consolidate above 12.00 midday and was able to hold a bid above 12.00 that would be a spot to cover.
  • Reasons2Cover• However, in this case because of the strength of the catalyst the core should be held through that price action and only taken off if for an unusual hold, a more convincing retracement breaking the trendline, or some other external catalyst in the stock or the market (e.g. new breaking news).• Additionally, the pattern of the stock was to make a 2 point downmove followed by a consolidation, so if a strong reversal pushed the stock back above 10.50 with a good deal of buying power then the pattern of the stock would have changed and the trendline would have been broken. Both of those are good Reasons2Cover in this case.
  • Trade Review• This trade is an excellent example of a 2nd day play using levels established on a first day gap. The price action was a bit cleaner, but the exceptional volume stood out to me. EDU typically trades under 2M shares a day, but on July 18 it did over 50M. The longer term view on the Technical Analysis slide puts the relative volume into perspective• The word ‘long’ shouldn’t even be a consideration when trading such a weak stock. The only relevant questions are where to get short and where to get shorter• Getting short immediately when the new low drops the first time makes sense on momentum, but I was waiting for a consolidation at a new low as a spot to get involved, which is a conservative approach. I used the previous day’s trading pattern as a clue, since it wasn’t really good to trade before noon. When the volume came in on a holding offer at a new low, that was a powerful indication that the stock was about to go lower.• Lightening up on the massive volume spikes made sense. Both times this was confirmed by a subsequent horizontal consolidation without any real retrace, which is a bearish sign.
  • Trade Review• Adding at 12.00 made sense to me because the tape was clean and my risk was defined. One of the benefits of the 2nd Day Play is that the intraday levels are likely to be cleaner and more well defined.• Adding at the retest of the latest low at 11.40 makes sense to me as well, but the timing window to get that trade in was very small.• The price and volume action into the close was like nothing I’d ever seen before. It looked as if there was a buyer or a couple buyers that was the only thing stopping the stock from going down another point and a half. This is a unique 2nd Day Play in that this stock was exceptionally weak and actually did more volume on the 2nd day than the prior day when it was first In Play, but it was a clean, powerful downtrend once the stock held an offer below the intraday low from the prior day• If I am not max size in this setup I am leaving money on the table. Look for this weakness to continue, the same pattern and approach could work the subsequent day as well
  • 2 Day Primernd • Each day on the desk we focus on stocks that are In Play. These make the best candidates for 2nd Day Plays, although there are setups that can take longer to develop. • Each day we look at what was In Play and figure out if any of the stocks offer an opportunity for a 2nd Day Play. We use these to create a 2nd Day Primer. • This primer includes a snapshot of relevant information on the stock, giving traders a resource to go to that will let them evaluate the trading opportunity and set alerts for the appropriate levels. • Vital stats on the stock (short interest, ATR, beta, and average daily trading volume) are also included so that individual traders can select the opportunities that best fit their personal trading style. • We also include continuation plays and other technical setups in the primer so that we can still be aware of a stock if it is In Play and then needs a day (or several) of consolidation before breaking out and trending again.
  • Finding Levels• The key to trading 2nd Day Plays is to find the key decision levels and set alerts. Every day we look at the stocks that are In Play for that given day, but 2nd Day Plays can do nothing the following day, so unless there is something special about the situation it is typically a more efficient use of mental capital to set alerts and wait for those plays to develop instead of watching them tick for tick.• This way we can focus on the In Play stocks while allowing ourselves to be prepared to capture profits from a 2nd Day Play if one materializes.• Levels are important price points and can be found visually on charts. Psychologically, if a stock cannot get above or below a certain price for a period of time and then breaks the level something is clearly different and that difference could be actionable.
  • Finding Levels• Every level that a trader looks at should have an importance factor based on how significant the level is. In general a level lets more important if: more volume is done at the level, more time is spent at the level, more time frames the level captures, the longer term the level is, and the more clean trading is at the level.• As a rule of thumb one-sided levels (support / resistance) are more important than two-sided levels (inflection points).• For our purposes of finding 2nd Day Plays, the In Play high and low are relevant levels (especially if they correspond to 52-week or all-time highs / lows). However, based on the In Play action other levels could be more important enough to initiate trades. Based on watching the tape and the price action of an In Play stock we can find the key levels from that day and take note of them in case they can be used for a 2nd Day Play opportunity. This is a key edge of our intraday style, since longer term investors may not be focused on the intraday action and may not have the information that the level is important.