As a short term trader I scan the market each day for stocks that will be “In Play”. These are stocks that have fresh catalysts which can lead either to a lot of people trying to enter or exit positions at the same time. If I can identify the best opportunities and the likelihood of a strong trend then at the end of the day my results should be pretty good.

On January 8th GWPH announced that a drug they were testing failed to meet its “primary endpoint”, which in biotech speak means the drug is no good and it is time to go back to the drawing board! When a stock has news like this it SHOULD go down. After the news was announced GWPH immediately crumbled.

But then something very unusual happened. It was bid up over $5. And the bids didn’t drop. By the time we began our AM Meeting it had been bid up another $3 and the bids weren’t dropping. This is very unusual behavior! And when something unusual happens traders must pay close attention.

Occasionally, a stock that has already sold off significantly from its high, 30%+, will be bought when bad new is released. Perhaps the bad news had been anticipated and some large investors will use this opportunity to buy as there will be greater supply from those who are fearful. Regardless of the reasons behind the buying the most important thing to understand is attempting to short a stock that behaves like this is a very risk proposition. (look for a future post to discuss gap downs that are better risk/reward shorts i.e. BBBY)

Watch the video below as I discussed in real time prior to the market’s open my thoughts on how to approach GWPH for the day. I apologize in advance if I seem a bit groggy in the video as I had a rough night! 😉

If you find a stock that is likely to trend intraday and you stay on the side of the trend occasionally you will be rewarded with an even larger move than you expect. In the case of GWPH once it took out its multi-day resistance at 72 it continued all the way to $80. And certainly there were many shorts dragged kicking and screaming along the way.

We identify good risk/reward setups like this every day and discuss them in our AM Meeting and in SMB Real Time where you can track all of our current positions.

Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, options, forex and futures. He has traded professionally for 18 years. His email address is: [email protected].

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