The Trade They Won’t Teach You

in today's video we're going to talk about a trading edge that exists in the market that very few people are aware of and as far as i know no one else teaches i'm stephen spencer i'm a partner at smb capital we're a proprietary trading firm in new york city where we trade stocks futures and options good short-term traders spend time looking for stocks that have a strong catalyst the reason is quite simple a strong catalyst will cause a lot of people to either buy or sell a stock when that happens traders can book profits from the increased volatility but also control risk as liquidity is higher allow me to explain a catalyst is a piece of news that will cause very large market participants to either buy or sell a stock when i say large i mean firms with hundreds of millions or billions of dollars in the market the essence of all short-term trading is attempting to identify what these participants are going to do and how it may impact price if you can do this you can develop a trading strategy with a great risk reward and the only way to succeed as a trader is to make hundreds of great risk reward trades then over time you'll become the casino that is your edge part of our trader's morning routine is scanning for these catalysts the tool we use is called the smb scanner it identifies the stocks that have catalysts and have already begun to trade before the market officially opens for business we develop a short list of stocks to focus on and then outline a plan of attack if you want to find out more about how we identify these stocks and develop our plan of attacking check out the two free hour workshop at tradingworkshop.com i spend 30 minutes teaching this process today's example is home depot the reported earnings for q4 and something stood out that was unusual despite reporting strong revenue their earnings per shares were below estimates for those who of you who aren't familiar with income statements this is a potential red flag for every dollar of revenue a company receives a certain percentage covers their costs and a certain percentage is profit for example a business like home depot may make a ten dollar profit for every hundred dollars in revenue if their report is a hundred dollars of revenue and only five dollars of profit this can make investors very nervous now to the technicals let's take a look at our am game plan notes each one of these levels are based on our prior support resistance areas established by buyers and sellers and with a short bias we will look for the stock to trade down to the support levels in the game plan sheet if the stock shows momentum below our support levels then we will stay short for a swing trade now here is the part that no one will teach you about this setup home depot released earnings before the market opened and then they held a conference call before the market opened there is not enough time between the earnings release and the trading day for many large funds to do their analysis and decide whether to sell some or all of their positions so what may happen quite often is on the second day once those large funds have done their analysis met with the portfolio managers they may decide to sell their positions or at least some of their positions because of this huge red flag that we saw and that's something that you can take advantage of and so we'll go through we'll take a look at the longer term chart we'll look at when they reported two quarters ago last quarter in this quarter see how things set up technically because ultimately even though we have this red flag in the earnings report and we know that the stock there's a good chance that some large institutions will sell we want to understand what the important price levels are to give us a further edge rather than blindly shorting the stock first chart we're looking at here is a daily chart and what we can see is that home depot actually went up quite a bit last year it traded up from about 180 to a share and since that time has had two earnings releases just before the most recent one a few days ago the first time they reported you can see there wasn't a lot of price action um towards the upper part of this consolidation we're looking at the next time they reported it was at the top of the range sold off pretty hard that's something we want to keep in mind because we know that stocks tend to have a muscle memory they will repeat themselves in terms of patterns and if you have a similar setup where a stock gaps up again and you see a red flag type of news that perhaps you can have a wide range day and it can sell off pretty hard the other thing we want to make an important note of here is this is a very large trading range and when the earnings report comes out it is still inside of that large trading range and if it's showing weakness we have a we basically that bottom of the range is a target it's basically you the analogy i was gonna say is it it's like something with a target it's on its back the target for when the stock gaps down is that bottom blue line there where it's supported over the last i don't know seven or eight months or so going all the way back to august of 2020 and so if we have a decent amount of room between that support and where it's opening on day one we can trade it on the short side and remember this video is about being short on day two this doesn't mean when i see a red flag and the margins don't look good that i'm not going to short it on day one but i'm very mindful that i want to be shorted on day two if there's going to be large funds where they're going to basically start to hit the bids and the third thing is if it then closes below the bottom of this consolidation area i am going to just stick with it on the short side because we know that anytime you have a long period of consolidation and a stock moves outside of that range it can attract more sellers or buyers depending on which way it breaks on the upside obviously they attract more buyers you can have another huge move to the upside and if it breaks to the downside it'll attract more sellers people who are technically inclined um and then it adds more fuel to the fire and it can be the beginning of a larger downtrend and we'll see how this unfolds over the next couple of weeks so here's the intraday chart so this is day one and what you can see is the top blue line is what we put on you on the morning game plan sheet you saw in flexion it's a common question we get what is this inflection steve what do you mean by inflection inflection is a price that right when the market opens on day one if the stock is below that level i will look for it to trade down to the support levels and if i have a short bias in this case i did because of the issue with the margins that red flag if it opens just below the inflection i will look to trade it on the short side and it very quickly trades down to s2 take profits and then see what happens from there now in this case it actually traded all the way down below s3 that means that there's strong downside momentum so this in a sense you know despite the fact that many funds are not going to do anything until day two day three not on day one there's people selling this when it gaps lower conference call nothing was said in the conference call to make anyone feel any better so the market opens and there's some selling and the momentum is to the downside and we know the momentum's to the downside because it's taken all of the three support levels we've identified in the morning meeting and again as i said if you want to understand how we develop support levels how we pick the stocks just go to tradingworkshop.com this is all covered in the two hour workshop so after it goes below s3 and starts to turn back to the upside the most common thing that i'll do is well the first thing i'll do is i'll look to see if it fails at s2 if it gets above s2 then i would look to shorten test one but it's very unusual for a stock to have that much downside momentum in the morning retrace all the way back up to s1 and not be a pretty good short entry and so in this case i've circled that that's the first spot i circled as it retraces back up to s1 and the great thing about it is it actually moves sideways as traders what we like is sideways action which we call consolidation because it's the easiest way for us to control our risk so anytime something retraces all the way back up to s1 and then starts to move sideways that allows you to put on a large position the reason it allows you to put on a large position is it's very easy to identify where to put your stop your stop is going to be above you know about 15 percent of an atr above that consolidation range that we've identified and i'm talking about an intraday trading perspective if you shorted this right on the open for a swing trade and you're just going to be shorted as long as it closes below the inflection for the day um that's not what we're talking about right now we're talking about a retracement trade intraday short entry um at s1 when it comes back down to s2 maybe cover a quarter position it comes back down to s3 cover another quarter then you would be have half the position left as a swing in this case it didn't do that it rolled over back below s2 started to retrace back up to s1 and they're still selling it there sell it again short it again s1 can't hold above it short it and we'll see what happens starts to roll over but it actually goes up that's unfortunate right but this is trading we want to make this trade every time we see this setup where it goes down momentum on the open negative piece of news retraces back up they're selling at the key level short it comes back up to the key level again short it again in this case it actually moved higher from an intraday perspective you're going to have to cover most of that position if you were thinking about holding it giving it some more room you could hold the last 25 of that position until it takes out the morning high um just so you have some on day two because remember this video is about day two so let's go over to the right side of that chart there that's day two remember what we talked about we saw some negative news big funds they're gonna the analysts gonna look at it they're gonna they're gonna take notes during the conference call they're going to discuss it in their morning meeting the next morning before the market opens and they'll say they didn't say anything good on the conference call margins were weak even though the revenues were good the stock ran up 100 in the last eight months or last year we don't see that much more upside if their margins are deteriorating despite sales being strong and the next day they're going to come in and hit the bids and the reason why we know that funds on day two were hitting the bids if you look at what the market did on this particular day on day two the market basically was extremely strong and went up um i think a couple of percent um and so if you see a stock that on day two is going on going down and the market's going up that you know institutions are dumping this stock um and so when you come in same spot that we were looking to shorten on the retracement on day one is where you want to short it on day two and that's right below s1 in summary company reports before the market opens conference call happens large fund is not going to be able to put together their notes the analyst who covers the stock for the fund until day one is over so we have an edge coming into day two we want to use our levels from day one to inform our trade and in this case we knew where it was sold on day one in the area that was circled twice on day one when we come in the next morning if it drops below that level get short with a stop above the morning high and if it then continues lower and consolidates below s3 we can look to add to the position and in this case it just went straight down so strongly there really was no place ever to add to the position but if it had gone down to s3 moved sideways for 30 minutes or more we could add to the position with a tight stop the same way where we entered at s1 on day one and on the open on day two and that's how you would attack this trade so when you see it when the stock reports in the pre-market you notice something there unusual strong unusual week on day two use the level from day one and jump in with confidence as long as the first move is in the direction of your bias

Channel: SMB Capital

Views: 57,426

Rating: 4.9290586 out of 5

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, trading strategy, day trading strategy

Id: Yvn94NlTpew

Length: 12min 4sec (724 seconds)

Published: Sat Feb 27 2021