As a pro trader my bias in a stock is largely a result of the price action. As I observe the price action I start to ask myself questions like what are the other players in the stock doing? What are the big institutions doing? Are swing traders buying or selling now? Are intraday momo traders trying to play the short side or long side? Asking these questions allows my brain to build a road map of how a stock may trade.
Yesterday, FNSR released their earnings report. The initial reaction was a strong drive down to long term support of 18. This morning in the pre-market it was trading around 18.50. Not much of a bounce. The first trade I considered making was a short against 19 for a move back down to the 18 level. But a funny thing happened when the market opened. Traders bought. FNSR drove from 18.80 to 20.20. It pulled back to 19.40 and then consolidated in a 30 cent range for about an hour.
As FNSR began to hold above 19.50 I initiated a long position. I eventually caught a move up to 20.70. I was stopped out on the remainder of my position on a wick below 20.30. As I was already off the desk at that point I had no chance to re-establish for the third leg up to 21.50.
My original trade idea was completely wrong! I was certain that other short term traders would be looking to get short as well, and each time FNSR held higher I was more confident it would eventually get positive and cause some more pain to those trying to short. We have seen this recently on a lot earnings plays. Stocks that have initially gapped lower and reversed powerfully to the upside. The key on these plays is to not predict that the bounce will occur but actually wait until it does occur. Then trade the stock long.
Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.
No relevant positions
*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer
