In this video for the trading community, learn how to use the past, similar trading events to the present, to improve your trading. A proprietary trader from our firm breaks down a Breaking News trade, spurred by a research piece, that spotlights how studying the past – similar trading events – can help us make winning trades.
View Video Transcriptin this video for the trading community
learn how to use the past by that I mean
similar trading events to the present to
make winning trades hi Mike bellafiore
co-founder of SMB capital we’re
proprietary trading firm located in
midtown Manhattan and all mostly off of
the trading classic one good trade and
the PlayBook in this video lesson a
proprietary trader from our firm breaks
down a breaking news trade spurred by a
research piece that spotlights how
studying the past similar trading events
can help us make winning trades
[Music]
this trade was made this past Tuesday in
L ope I was a breaking news event and it
was a short piece that came out for
citron research and it was a scalp to
the downside so this type of breaking
news event is a short seller hit piece
which is basically when a font who is
know primarily for short positions it’s
a friend who is very active in taking
the short side they believe maybe a
company is overstating financials where
something shady is going on and so
they’ll release valuations and the
release opinions on why they have a
short bias and why they should be short
in this stock some other prominent
shorts activist firms are in the big
research spruce point capital good best
practice to be following some of these
short research activists who can move
stocks so I got together a few other
examples I wanted to see how this chart
that I’ll show later in this playbook
compared to other short hit pieces when
they were released so this is fleet Corp
from citron research they put out a
piece calling this the biggest Clean
Energy fraud in the United States
history you can see that volume bar that
came in when that news was released and
how the stock reacted so similarly
citron also posted a short piece on
pellets arm this was back in December of
this past year they said a five dollar
price target they released this midday
and there’s a similar reaction to the
downside where we have this huge uptick
in volume but there’s some indecision
right off of right off the news whether
this triggers action on the other side
there’s some indecision that’s repeated
in this past one and in the next example
small direct club this one was not so
strong Hindenburg wouldn’t released an
evaluation on this company they said
that the market value was about there
was room for an 85 percent downside and
this was released at 9:44 on this day
you can see the volume bar right as that
piece was released and what happened to
the stock so a similar pattern we can
see is that
is a little bit of indecision right as
the news is released there’s an uptick
of volume and throughout the rest of the
day there’s there’s a opportunity to
catch a bounce at some point or another
so yeah go back to that I really like
what you’re doing here
this is a terrific best practice so
we’re trading citron hippies well great
question to be asking yourself is hey
let me go back and look at the last
three or the last five occurrences when
a citron hit piece came out let me go
back and look at the last three or five
of them because that is what’s happened
most recently we don’t want to go back
and look at the last hundred we want to
know hey what are the last three or five
how has the market reacted to a hit
piece from citron and get a sense as to
what this potential hit piece can do so
and and you want to and you want to be
doing that and keep that in mind when
something like this comes out now you
know for something like spruce point
he’s gonna tee that up
I don’t think citron tees them up as
much as Bruce Point does but or you know
so so Ben’s gonna send out an email
tweet out hey I’ve got something coming
and if he does you certainly want to go
back and say hey the last time spruce
point had a hit piece on stocks let me
go look at the last three to five
occurrences what happened and take a
look at that and what happens changes if
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online education so there’s periods when
these guys get really hot and they’re
hit pieces come out and the stocks trade
weekly and they continue weekly lower
and then there’s periods when they get
hit on the market market sells it off a
little bit but then there’s a bounce
opportunity max I think you might have
mentioned this and and I remember you
talking about this in training at one
point if I’m if I’m correct but you’ll
see that pattern I mean this is a trade
the trade is there is a particular short
activist that’s putting out a hit piece
how has the market reacted recently and
it’s it’s not necessarily just about
whether or not this person is right or
not it’s not even necessarily about
whether his eye his analysis is
particularly persuasive or not it’s
housing market reacting how are the
bigger players reacting when something
like this comes out so just like we had
a meeting in here just before and there
are some traders that are doing some
historical studies to give them some
edge for how the market is going to
finish on a particular intraday so if we
gap down and we’re near the lows on an
intraday what is the likelihood that
we’ll finish at the lows they’ll ask a
question they’ll query and they’ll get
an answer for it and they’ll they’ll get
a reading and sometimes the readings are
e if we gap down and the markets been
really strong of late there’s good odds
that that’s going to finish high of day
and so they’re asking questions they’re
getting answers and they’re using it to
give themselves a better
to make better decisions and so you’re
taking that and you’re applying that to
this and so you know it seems like I’m
taking a quick look back that there’s
that quick move down which is a good
opportunity and then and then and then
there’s a good bounce opportunity and so
knowing that gives yourself more data
and and and you’re better you’re better
planning you’re better prepared to think
about how this might rate if you didn’t
do that maybe you would just say maybe
we would just think to yourself oh I
said sure on hit peace comes out that
makes sense
this stocks up a bunch let me just short
it and not perhaps think about the
potential for a bounce but that’s good
that’s a very good best practice what
has the history the recent history shown
me about a hip piece like this and how a
stock has traded that I can use going
forward big picture the overall market
over the past few weeks we just
continued to hit new highs solid ating
near 230 at the end of last week until
this news came out the coronavirus and
we had a really sharp reaction to the
downside the market traded a little bit
lower and gapped down Monday morning
hitting a low of 322 and investor
sentiment is still somewhat negative so
there’s no systemic push higher that
could have caused a low p/e the short
position to maybe bounce back quicker
than otherwise
lopa also on a longer term timeframe
they had been above their 50-day moving
average and just the day prior Monday
afternoon at the close they closed
before are they closed I’m sorry
underneath of this 50-day moving average
for the first time in well over a month
so some intraday fundamentals
I see the ATR provides enough liquidity
a stock can’t move or I’m sorry the ATR
provides enough volatility the stock can
move the average daily volume is not
above 1 million which
not something that I would love to trade
but in this scenario where there is a
short piece that comes out that news
would be reacted to much much greater
because there isn’t as much volume
coming in and out of the stock there are
less buyers and sellers that are pinning
the price to one it’s one specific spot
they are vol 6 that there’s a ton of
people that just came in and and was
reacting to this news and showing that
the news was significant the short float
wasn’t anywhere where it would be an
issue and the institutional ownership
and 99.5 percent shows that they have a
significant holding in this company
institutions too and that if they make a
decision they can tend to move the price
in one direction and potentially say in
this example if they saw this and they
agreed they wanted to exit they could
potentially hit a sell order and just
sell incrementally throughout the rest
of the day all right good and so the
other way to think about this trade is
after the news is released what is the
reaction in the marketplace so if
there’s a lot of volume that comes in on
the sell side we can use that pattern as
a way to trade going forward maybe we
recognize patterns that are oversold
maybe we recognize patterns that T up
continued selling going forward but if
you hadn’t done the research prior what
has happened in the last five citron hit
pieces you could look at the reaction
the immediate reaction and start to
study patterns from immediate reaction
after a news event like this and build
strategies off of that long-term just to
reiterate the stock had been hovering
around a consolidation area for a little
bit and this is a weekly chart right
here so it’s a little bit more condensed
but the stock moves and the bar that
closed just below their 50-day moving
average may be initiating some
longer-term so
to begin with so shorter-term time frame
we see that the stock traded down about
six percent from the highs of the prior
week and having this longer-term
consolidation and then break down and
then especially this five-day chart
where it shows the downtrend is pretty
clear to the downside without too much
retracement back I it’s showing that
there is both long term and short term
technical support for a short thesis or
a short trade in the stock so intraday
you can see what happens here this
volume bar is a hundred times greater
than the one prior the stock was already
trading somewhat negative in the morning
and again it was down on short term and
long term timeframe so not only is it
down not only as a trading right around
view op but is the moment that this
price that the short piece comes out and
price starts to fall it can’t really
retrace towards view up and fails to
hold above it for the next you know
immediate term there’s lower highs lower
lows throughout the rest of the morning
session until mid day showing that that
bounce that we were expecting the bounce
that we were talking about through the
11 o’clock meeting that that may not
occur right away and that we should you
know wait to see how this turns out and
it’s throughout the day there was just a
continuous failure to retrace up towards
you up so the trade management the news
hits you know to be clear right here is
a hundred thirty three tick chart this
was just default I didn’t choose 133 it
was just the tick chart that I could
pull up we see what happens between 9:30
and 10:00 there’s only two bars here
there’s not a lot of action going on
between 10 and 10 55 it’s a little bit
more movement but between 10 55 and 1056
just the amount of volume and the amount
of change in price is so exaggerated and
we can see what happens is there’s some
indecision the news hits and price is
moving right around before as I
mentioned earlier the sellers win that
fight on the tape and stock tries to
trace retraced towards view op fails and
just trades down for a little
so where does the news hits I get
alerted to it and I get this alert
fairly quickly there’s really not that
much latency so I knew that I wasn’t
late as the volume was starting to come
in but it had a really amazing
significant move to to define my entry
it’s too late so because of that and
because I saw that the sellers and the
outflow was just coming in at a much
greater rate I wanted to take the short
position and especially it’s a short
piece of course I’m gonna take the short
position on it and I got short for a
scalp now the reason I wanted to do a
scalp on this was because of the prior
the historical occurrences where a short
piece comes out is there is going to be
some indecision and in the case that the
buyers potentially disagree with citron
I didn’t want to be stuck in having the
you know the volatility just wake me out
and get stopped so I’m taking in a short
position and there is a low put in here
tested three times before it again tries
to retrace and it fails a few up and
while it’s in this movement right here I
place a bid so I’m placing an order to
get flat out of my short position so
rebuy the stock somewhere below here so
this low put in right here was 88 27 and
I’m thinking okay if it breaks the
radiate 27 there’s a ton of volume went
more than usual our vol was six
throughout the day and much greater at
this point in time and because of the
volatility in the movement went from
about ninety one down to low 88 that the
stock could take out the 88 and
somewhere in 87 was where it would end
up so I placed an order at 87 91 hoping
to get filled if the price wick below 88
and then potentially reevaluate for an
entry later on okay go back so trade
number one for a breaking news trade is
the news hits you connect the dots you
feel you have an edge with speed and
with connecting the dots quickly that
this should trade lower you hit the beds
because of your
because of how these hid pieces have
traded in the past it’s just you’re
thinking it’s a scalp so you play the
momentum to the downside when the
selling pressure subsides you cover
that’s trade number one first in quick
in quickly in connect the dots quickly
scalp it you could have a nice move that
way don’t mess around with price just
hit the bids you may not get you may
miss it and trade it then after that
you’re thinking as the stock goes back
up to be wop and and kind of fails up
there potential short of a lower high
okay that’s trade opportunity number two
trade after opportunity number three is
it gets below the lows from the first
initial down move okay that’s another
really good trade opportunity another
trade opportunity is they’re trying to
push the lower they’re trying to push it
lower they’re trying to push it lower it
can’t go lower bounce trade or
capitulation blow-off bottom too steep
huge volume play for a bottoming action
play for a reversal you need to see
these as specific trades and develop a
way you’re going to attack each one of
them and think that way okay so and you
can put that together to build separate
playbook trades separate subsets for a
breaking news trade in your playbook
okay and you’re all different alright so
some people are not gonna feel
comfortable hitting right away hitting
the bids right away on a particular
breaking news trades that’s just not
gonna fit your personality some people
are some people are gonna need to sort
of be first in their aggressive some
people are going to need to wait for a
lower high you know clear lower high
after hit peace comes out to shore and
play for potentially a lower day you
know some people are gonna develop
systems where they’re looking for the
capitulation blow up to play for a
reversal some people are gonna need to
see it not going down not going down
unable to make a new low start to show
the strength for a swing reversal trade
a swing reversion back to where it came
from trade and and all of those are
different personalities you know the the
hit at first is the quick thinking
aggressive person have you been
successful in the past as a
quick-thinking aggressive I like to take
risk person if that is your path hit it
that’s are you playing To Your Strengths
if you are the more deliberate safe
conservative logical more analytical
thinker you may need to see the lower hi
clearly put in with a hit piece that
makes a lot of sense and something that
is broken on a longer-term chart with a
clear area where you can get out and
something you feel confident based on
the hippies that this can finish low a
day and then short it may be something
like a peloton maybe the peloton piece
made more sense to you and short that
lower high and so you know what we
talked about this is which is you know
my sense is you probably would do pretty
well putting the dots together quickly
and reacting maybe I have misread you
but I could see you being good at that I
can see you being good at this trade
that this trip you know as we get to
know each other a little bit better I
can see you being really good at this
trade I can see you connecting the dots
quickly I can see you very quickly being
able to keep track of what happened the
last three to five times in a citron hit
peace and be able to see the patterns
that you want to trade for you quickly
which is what you need to do
and good so I encourage you to keep
working at this and then obviously the
results are the results if you if you
think you’re gonna be really good
connecting the dots and hitting this
quickly and being aggressive you tag and
measure those trades and your results
come back
crappy either we need to work on that
particular strategy or you know maybe it
isn’t if it isn’t the best for you you
know the measurement will will tell us
or maybe you’re you’re making a breaking
news scalp trade and you’re making a
lower high follow through trade
breaking news fall through trade and
you’re noticing that you’re breaking
news follow-through trades are just
scoring much better those are the ones
that are really capturing P&L; for you
that that will inform you as to what to
do think about that this is a great
trade we’ve talked about this a lot in
the past worthy of study there are great
active traders deploying this strategy
with incredible Sharpe ratios with
incredible return on investment who make
tons of money you could just trade this
one particular strategy and have a
career it’s that effective of the
strategy when you master it now it’s
your turn
do you study the past similar trading
events to the present to help make
winning trades if so how do you do so
let us know by leaving a comment below
right now
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