Shaken Out in the Morning

It’s a scenario much too familiar to me — I’ve bought a stock breaking out to new highs, into market close, betting on overnight upgrades and a gap-up the next morning. The idea is to sell into a morning spike, taking my 30-50 cents / share profit. I wake up, 5:15am Pacific time, and much to my chagrin, the stock is unchanged, or down by a few cents even. The stock is light in pre-market volume, and the Level 2 bid/ask swings make my blood pressure rise each time it looks like I might be sitting on a loss. As the market open nears, the bid starts to firm, and I relax as it looks like I was right in my thesis, that the stock will spike after all.

Then at the open, the stock hesitates — my spike thesis suddenly in peril, as it deliberates, doing nothing, taking no stance neither bullish nor bearish. The level 2 starts to look weak, the bids thin out — the buyers are no longer there, were never there to begin with, or are not confident at the moment. Just then, the stock starts dropping — I was wrong, no one cared about the news overnight, about the big earnings win, and all the big buyers yesterday will realize the error of their ways, turn about-face, and become sellers.

…but the stock has support only a few cents lower, at a big round number, a psychologically important level, and surely support will hold — if only I don’t panic and sell at the day low, I should be fine, right?

Support is tested, once, twice, three times, and fails — and now the stock is breaking down, with former support now resistance. I’m quick to cut losses when a position goes against me — It’s part of the reason why I don’t have many big losses — and so, with my finger on the trigger, I sell my position, losing only a few cents / share on the trade.

As I congratulate myself in my 6:35am-half-asleep-delirium for being a disciplined trader, the stock suddenly breaks above support (now resistance), and holds — the bid firms, and it continues to hold, just above support, once again deliberating. “Oh sh*t, this thing could spike”, I say to myself, now devoid of position. At that exact moment, the bid gets strong, volume kicks in, and the stock starts to spike. I’m left watching hopeless, on my couch, as my thesis plays out exactly as planned and the stock breaks to new day highs. With fists clenched, I see the stock hit my target sell, do a quick mental calculation of how much money I could have made, had I simply held, and go back to bed, minus the cost of commission.

This scenario has played out too many times, and I was determined to change whatever I was doing to avoid making that mistake again in the future.

Here’s an example of where I was shaken — although the stock didn’t break support to the downside, it did drop 16 cents at the open after looking pretty bearish on Level 2.

Screen Shot 2017-05-28 at 11.31.28 AM.png

I bought $GNC after it held $9 into close on a big earnings win. The idea was to sell into a spike to $9.30-9.50 the next morning. Pre-market it looked like the stock could spike, but just into open, the Level 2 started looking bearish and at open the selling started. Keep in mind that I was also a bit influenced by the failed $9 breakout the previous morning, when the stock broke $9, ran to the $9.40’s, but failed and dropped back below $9.

Since I was sitting on a few cents / share profit still, and it looked like my spike thesis was about to be wrong, I cut my position quickly. Just then, the stock found $9 support, deliberated, and started to spike, hitting my $9.50 sell target.

Here’s an example of when I traded the shake-out well:

Screen Shot 2017-05-28 at 11.49.40 AM.png

I bought some $TCS into close on the $5.50 break after the stock reported good earnings. My idea was to sell into a re-test of $6 resistance the next morning.

In the morning the stock was hovering just above & below my buy at $5.51 (I think my cost basis was actually $5.48, although my order was submitted for $5.51). Just before open the stock was looking fairly strong, but then, at the open, the bids weakened on Level 2 and the stock started to drop. Note that I was also influenced by another failed spike (the failed $6 run, and subsequent drop the previous morning).

Screen Shot 2017-05-27 at 7.38.51 PM.png

This time however, I decided to set my mental stop for one cent below previous support at $5.45 (so stop at $5.44), as I wanted to give this one time to see if I was right, even though $5.50 was the stronger level.

$5.50 broke, but $5.45 held, and it deliberated, hanging just below $5.50 for a few minutes. “If $5.50 breaks to the upside this could really spike” I said to myself. Just then the stock broke through $5.50 and started to spike with volume.

I sold into resistance at $5.60 because of huge sellers on Level 2, because the chart wasn’t an ideal setup to begin with (see above re: failed $6 test), and because I’m naturally biased against NYSE stocks — also, there was significant long term resistance at $5.60 and I didn’t think the buying action was enough to overcome that level.

This time I went back to bed satisfied that I had read the tape right, didn’t panic and sell at the low of day, and gave my thesis more breathing room to play out.

In my postmortem analysis, I believe that I need to realize that all stocks trade differently (e.g. not ALL OTC or Nasdaq stocks will trade the same way), and to look at a specific stock’s historic price action for clues as to how it will trade. Examine how it tested, broke, and held previous levels, examine it’s previous spikability. Consider also the exchange, the float, market cap, techincals both short and long-term, the industry, and what’s hot now in the stock market, amongst many other factors.

Maybe this trade did nothing to solve my problem, maybe it’s a one-off, but at the very least I have a micro-change to apply going forward, and perhaps more significantly, It’s a psychological victory — mental blocks in trading are incredibly costly, and removing them can lead to enormous results.

I’m a bit frustrated that I didn’t hammer this out a few years ago,  that it’s taken this many years to learn, but stock trading is a journey — a marathon not a sprint — and I would rather build a strong foundation for consistent profits than get lucky once, make a pile of money, and be finished.

If I were a more advanced trader, I’d even add to my position on a dip to support in the morning — but I’ll work on that skill later.

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