In this video, learn The Cathie Wood Trade. See a firm prop trader and Mike Bellafiore recap in step by step detail a straightforward, profitable, and recurring trading strategy that you can use to help grow your trading account.
View Video Transcriptin this video learn the kathy wood trade
hi i’m mike bellfiore co-founder of smb
capital
and we’re a proprietary trading firm
located in midtown manhattan and i’m
also the author of the trading classic
one good trade
and the playbook in this video see a
firm prop trader and may
recap in step-by-step detail a
straightforward
profitable and recurring trading
strategy that you can use
to help grow your trading account
[Music]
so this is a playbook on a flag after a
steep market sell-off
a lot of people call it a reversal set
up we’ll go over why it’s kind of a flag
it’s
you know consolidating near lowe’s it
took place on ark
this is an etf kathy woods etf
it actually took place today as well um
but it took place on 226
2021 so last week this is a newer setup
that is in my playbook that i don’t get
to use all that often
the market needs to be selling off
pretty aggressively for it to take place
um i really like this setup it can offer
some of the best our opportunities you
know risk to reward opportunities
um this was the second time this week
that i was able to take this setup
and it was the second time of the month
and as we sold off in the market
i used ark as my vehicle and i was
actually able to again take this setup
today as well
all right so we’re going to have to do a
little bit of a back story here
so that people who are listening will
understand
so who is ark
and why are you focused on them
when the market is going to go down yeah
so
arc um is cat one of kathy woods etfs
and it has
some very speculative names in it more
the momentum names right
the speculative momentum the momentum
names
stocks that and momentum stocks tend to
go
higher because they’re going higher
and so when they start to go down
because they’re going down they go down
as well
so uh we’ll try and we’ll try and add
that
and kathy wood is one of the stars
one of the media stars right now in the
market today
and so she’s garnering a lot of
attention and she has
garnered a tremendous amount of assets
that have flown to
her company and this etf
and that is why we’re potentially
looking at it that it’s too hot
this etf is too hot
these momentum names have gone up too
much because this etf is too hot
and they’re doing too much buying and so
and i don’t want to put words in your
mouth and please correct me if i’m wrong
but
is the thesis that if the market starts
to go down the ones that are going to
hit the most
more so than even spy or qqq
are the momentum names and the momentum
names
are in the etf ark
by a large predominance and so that’s
why you’re looking at this
that’s correct but i should make this
more clear from from the start that
this is actually a long setup after we
had that initial sell-off
so i just need to clear that up
so just do just just do the opposite of
what i said
well this did sell off you know
pretty aggressively with the market and
there was some sort of
you know correction that was needed some
sort of reversal after that sell-off and
that’s what i was playing
gotcha all right good so this was
something that was super in play
and it got oversold and we’re looking
for
some support i guess correct um so as we
begin to sell off in the market
i know i have this one setup within my
playbook that can offer some really good
risk reward opportunities again it’s a
reversal setup
but what i really first need to see is a
load to be established as i need a level
to play against
and base my risk off of i need some type
of consolidation pattern and then a
breakout to get involved
it’s usually taking place on the one
minute time frame
um some people will buy on the way down
and you know i’ve certainly
tested the waters with that in the past
and it’s just not really that good of a
fit for me you know some people will
as some of these names in this case arc
is selling off you know some people buy
maybe tier one and then a few bucks
lower by another tier
that’s just not really a comfort level
for me um i like to see a low
established and then
build some higher lows and then a
breakout to get involved
um so we could just see the risk to
reward on this position i was getting
involved at
there’s a breakout at 126.78 or 77
that’s where i was getting involved
verse 126 10 and this really had the
possibility to get back towards high of
day i thought
and that would have been you know a nine
hour opportunity of course for scaling
out along the way
but there’s room for this to really pay
for itself
if it wants to work if you want to learn
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than from years of online education so
just some market commentary um you know
the last few weeks it seems like every
bounce seems to be getting weaker and
weaker and there seems to be some panic
in the air
um you know i do have the luxury along
with all of us
speaking with a few market veterans who
have a lot more experience than me
and they seem to you know be speaking
extensively about how the bonds don’t
look so great and how heavy we seem to
be
i’m no expert in that field but there
seems to be you know
some people who are maybe over levered
and attempting to lighten up
and maybe rebalance a bit you know this
is kind of all
just my thoughts and what i’m you know
seeing in the market
but what is important to me is that we
continue to see these sell-offs in the
market and we put in a lower high on the
daily as we can see here
this is spy and you know we’re below the
90ma and that’s something i reference
and we can see that vix you know the
volatility index is
from low to high on this day it was 25
to 30
so you know volatility is definitely
picking up as we can see you know
volume is pretty high in the market i’m
curious
who are you talking to um so
i’m listening in to andy and shark and
some of those people
and they’ve been speaking quite a bit
about the bonds and like tlt
okay great awesome so the fundamentals
on air kkk again it’s
kathy woods innovation etf the top
holdings are tesla roku square
tdog baidu et cetera we’ll get into that
a little bit more
so there was a lower high below the 90ma
on the daily on elevated volume
on ark as well it was pretty weak
and in one of our emails it states that
you know ark
is one of the hottest etfs of 2020 in
2021
has massive inflows into it that has
resulted in kathy wood
you know this is of course all public
information running after all kinds of
stocks that will revolutionize the world
the problem with this is many of the
stocks they’re involved in are pretty
illiquid and have tiny market caps
ark and many of these you know small
market cap names they make up 14 to 18
percent of the outstanding shares
it’s a pretty big deal um they hold many
small cap biotechs in this portfolio you
know it’s not going to be easy for them
to get out of these names
if they want to get out because you know
they’re owning
14 to 18 a little bit more on you know
some of these names and that’s a pretty
big deal
but tesla roku square tdoc baidu spot
zillow shop are not examples
of stocks that are illiquid correct 100
um so the daily volume at the time was
7.84 million or the
average daily volume arvol again was
five today it was a lot lower and that’s
something i didn’t know
um and at the time of this was actually
higher i believe it was around seven
the time i got involved atr was six
dollars so there’s definitely room for
this to
work if i can get involved there’s a
possibility that hey maybe we move
six bucks from the low or so um
performance for the week 14 you know
down 14 performance for the month
down five percent year-to-date up four
percent
um so doing a little bit better than the
market
but you know there are some fees that
come with holding this thing long term
so top 20 of arc holdings with tesla
making up 10
of it it’s been selling off since 2 9
21. for me
arc is a perfect vehicle as it’s very
liquid and it offers some incredible
risk to reward opportunities
a lot of people including myself at
times um
you know when the market is selling off
you don’t always know where to go
and you know where to find that reversal
you
you know you don’t know if you should be
in some of these momentum names or you
don’t know
if you should be at least this is me
personally you know so many things are
selling off and you could get a little
bit overwhelmed
and eat and this etf this has kind of
been the perfect
vehicle for me to use and i see there
i’m a big fan of kathy wood
yeah definitely help me to understand
why you are
i don’t know i just i i mean she had
that nice tesla call and i just
i don’t know i just follow her pretty
closely and i think she’s
somewhat revolutionizing you know what’s
going on in the market and
i think it’s pretty cool uh okay it does
seem like
maybe she’s buying the top on some of
these names at least short term but
we’ll just have to see okay fair enough
um so you can see on ark we’re finding
some buyers at this prior breakout level
um you see here and we could kind of see
we’ve been getting bought up into that
level
it was kind of a spot i had in mind that
we could start to find some sort of low
but again i’m not somebody who just you
know finds a level and then starts
buying on the way down or buying into it
it’s not me i
i don’t find any success with that i’m
not comfortable with it
but we can see this pretty big volume on
223 and we actually leaked below that
but then we did get bought right back up
pretty big liquidation that we saw
taking place
so this is a one minute and a five
minute and we can see you know we sell
off pretty aggressively
and then we kind of pop up a bit we get
sold right back under
you know a lot of longs are probably
getting stopped out under this low right
here
a lot of shorts are probably hitting in
as well then we kind of find a low at
126.10
we start to build some higher lows and
this is actually where i take
my first position and we’ll go over that
a little bit later but i’m playing
against the slow
we kind of fail um we do hold that low
and then it tightens up again
and it breaks out so again i always need
to have a low to play against and to
base my risk off of
and that’s where you know 1r my full
unit of
risk is against so if i’m wrong i’m
cutting right below 126.10
of course more times than not you’re
kind of able to move out of the way
if you get a reason to sell before
eating that full one-hour loss
any thoughts on why that type of setup
works best for you based on
your unique skills obviously
there are other people who look for
capitulation patterns
uh blow off move to the downside
and fade those that’s a very effective
strategy as well
there are people that you know buy into
support levels
that’s a very effective strategy as well
spencer does that a lot
i don’t it sounds like what you’re
saying is that doesn’t work for you
something else works for you uh any
thoughts on
why you think that does work for you
better than the others
i think from my experience over the last
few years i really don’t like sitting in
positions
um and kind of being flat on them or
being down on them a whole lot i like to
wait kind of for a clear timing point
where
if it’s going to work it should kind of
work right now and i don’t have to kind
of sit through
taking a whole lot of heat and i just
like being a little bit more systematic
where i know exactly where i’m wrong if
i’m going to eat that full one hour loss
and kind of a system like this has
helped me out a bit
so some of the variables that i noted is
this is a setup within my playbooks
early longs had puked it
on the day so market was beginning to
turn you know there’s not a lot of
overhead because so many longs are
stopping out
there’s a clear level where i’m wrong
probably most important
good prices elevated arvol the risk to
reward was greater than three to one
i thought it had the possibility to
maybe get back towards high of day that
would have been nine to one
of course taking a portion of that maybe
half maybe a little bit more
um as i do peace out along the way but
there’s room
for this you know position to be
worthwhile and for me to actually want
to put on risk
it’s not one to one where maybe i’m
risking a hundred bucks to make a
hundred bucks as an example
this is an example where maybe i’m
risking again just
an example random number risking a
hundred bucks to maybe make you know six
seven eight hundred and that’s important
kyle how are you defining early lungs
had puked it intraday
you know we kind of see this oh i mean
clear selling at the open
but then we kind of see this low
established and you know this is a level
i was taking
into consideration of maybe getting long
um and there’s
you know i’m assuming that most people
are risking off this low here
so if we get back below that low there’s
a good possibility that you know
a lot of longs are puking it and moving
out of the way come on you know what i’m
asking are you measuring it based on
uh atr you you’re you’re doing it based
statistically in some way
are you doing it visually you’re doing
it visually probably more visually more
discretionary okay is there a way you
think you can do that
uh in a more systematic way
um mine if you think you’d rather do it
visually but i suspect
that you would do better if there was a
way for you to measure it
yeah i i that’s something i would like
to look into again maybe it is
based off atr okay i would encourage you
go back to that last slide
you’re being nice nice and specific here
with your variable checklist
this is all really really good so i’m
picking out
something that i see as a way that you
can make this better this is very good
and so i’m saying let’s make this
excellent
by being more systematic about how we’re
defining
puked intraday
[Music]
and i’m sure you could do that um and
then a couple more
that are pretty important to me is if
it’s going to work it should kind of
work right away at that timing point
um that’s where i do think again i can
get more specific but where i do think
you know some shorts are going to be
moving out of the way i’m covering on
the offer and some longs are going to be
hopping in including myself
so if it’s going to work it should kind
of work out that timing point
so i don’t have to take a lot of heat
ideally
um and again it’s very in play arc and
kathy wood has simply been the talk of
the town for
the last six months or so so this is the
first day we’re gonna go over both days
but we could kind of see how i got a
little
i improved a little bit from the first
day to the second day i took it
um but we could see that you know i’m
taking the same setup we’re kind of
breaking out over 128 i’m getting
involved there with risk off low of day
something i like to do is kind of on
that first turn
again sometimes i can get a little bit
more specific with it and
also be a little bit more patient is
cover risk and that’s often
selling half um and then i’m kind of in
a risk-free position you can see on the
this day on 223 i really got flat here
for no apparent reason you know
i was up nicely but again it was
building higher lows
there was no reason this is a spot for
me to sell one third of my last half
and then kind of hold on to the rest for
a longer time frame move
we can see on the second day um the day
that we’re going over 226
it’s a very similar setup um you can see
that i actually take it at 127
first low of day and i note that it
really doesn’t feel ready when i got
involved we push we don’t really push
away from price on volume
we kind of pull right back in and i
noticed that i noticed there was some
selling taking place
and i really should have been able to
move out of the way for a small win
maybe flat
a small loss um because more times than
not when we do sell off like this
we’re not gonna hold this low so
perfectly like we did
and i would have ate a full one our loss
now it did end up resetting up and i was
able to get back in
on this first position i did take you
know a small quarter of an hour loss or
so it wasn’t that big of a deal
um but again more times than not it
probably will flush those lows and i
will eat a full one-hour loss this is
kind of just that one-off
opportunity where it held perfectly
and maybe i got a little bit lucky but
you know then i get back involved after
i cut it
and you know i sell half to cover risk
between these two areas and again i’m
risking off 126
10 and then after i saw that first half
i’m typically splitting
my second half into three even lots and
i saw a third here
um and then i saw a third into 132 when
we begin to stop
we get pretty heavy up here um we’ve
pushed away pretty far
you know 126 to 132 and then this final
third is often left for
a 15 minute time frame sometimes at 30
minutes sometimes an hourly it kind of
always depends on
how the stock is behaving on that day um
in this case i was using the 15 minute
and i like to use a 90ma as kind of a
reference point
if we get below that 90ma we get below a
key support
and that next candle is holding below
that 90ma
it’s often a reason for me to get flat
in this case i did exactly that
one thing to note is on this final third
again i’m
speaking about my second half i’m almost
always selling this last piece into
some sort of weakness for the
possibility to make more you know maybe
we pulled into 130
50 130 and then we started to build some
higher lows
and then you know maybe we close towards
135 or so and i still have that piece on
but more times than not you know at
least at this current
point in my career i am often selling
you know this final piece into some sort
of weakness
for the possibility to make a little bit
more i really like how you’re taking
profits
into into that first little up move
when you do that you’re going to create
a system where
you are much more consistent and
[Music]
you don’t have to be right
for the whole move you’ll be able to pay
for the trade
just with that initial up move
uh and then and then the rest will be
you know the bigger trade
i like the way you’re handling that
right there as opposed to just going for
the full home run
yeah i will say that a few months ago
and we actually spoke about this
a while back is i used to take off only
a third or a fourth into this first up
move and
what would happen is you know i a lot of
times we’d end up pulling back in and
then i’d get stopped out the rest and
all of a sudden
what could have been a free position or
a small win ends up being a loss
my win rate was a lot lower um
so yeah i’ve kind of moved to often
selling half on that first turn and
sometimes splitting it up into a couple
even lots
uh but it’s brought up my win rate quite
a bit it’s made you know the market a
lot more fun and
you know it isn’t that is important to
me that’s that’s important i like the
word i like the use of the word fun
that strikes me as the market is giving
you information about this particular
trade for you
significant information and you can
trade this bigger
the the way to make more money is not
only
to have a system where you’re holding
for
more of the meat of the move or for the
home run move
it can be to trade a lot bigger
and take profits along the way
and if you’re doing that with a system
that’s more consistent and you’re having
fun with it
that’s overall a better approach for
someone like yourself
yeah i agree and i i have kind of
started a shift towards that a little
bit more and
definitely prefer it yeah that strikes
me as very promising
so we’ll keep this short um this is
reading the tape i don’t actually have
the tape on hand but when i first got
involved and we
we then pulled in i noticed some big
bids 10 000 share plus
which is pretty massive for this etf
starting to step up
color coded black on my level two that’s
something i do with my level two just so
they stand out a little bit more
to me um i have big bids and big offers
stand out
to me so i can see when people are
stepping up
um and this was taking place around the
lows at 126.20 and they walked up from
126.20 to 126.50
every 10 cents and you know that’s
incredible size on this etf
um i still felt like i was gonna get
stopped out on that first portion but it
was giving me confidence that this would
soon begin to set up
as there was some solid you know support
in that area if we
if they cleared you know those bids fell
out we would like we likely would have
head lower
um and on the second position when i got
along at the timing point at 126.78 you
know that break
over 77’s we immediately pushed away
from price on volume confirming the idea
thesis
covering began to take place on the
offer and loans were willing to pay up
so that timing point
you know i do want to see a push away
from price right away
um ideally and i want to see it on
volume confirming
my thesis and that the context is people
are moving out of the way on the short
side
people on the long side are hopping in
um
and just at 7 30 when i started noticing
this this is
you know something i noted in one of the
discords that someone big on the bed on
arc
probably um someone big on the bid
you know was stepping up on arc and i
still felt like i was gonna get stopped
out on that first position but it ended
up holding
you know they ended up holding it up um
rather nicely
that’s great great share appreciate that
i i want to point out something for the
newer guys that’s particularly helpful
it’s interesting how you thought to
yourself you were going to get stopped
out on your first position
that’s actually you’re doing a lot of
stuff right there which is
you’re not just thinking you’re going to
be right you’re even preparing to be
wrong
and i think that’s a good way actually
to think
through your trades which which is all
right i’m in
i’m probably going to be long i’m going
to take my stop here
and when you think that way you are
being more open-minded to the position
and if you were to get stopped out
it’s not going to hurt as much it’s not
going to
it’s not going to send you in a into a
tailspin as as likely as if you
get in t take take
uh option b you you before the open plan
to buy the overreaction in arc
you see the overreaction and
you get in and you’ve been really
waiting for this
and when you get in you say well this is
the time where i’m going to be right the
only thing that can happen is i’m going
to be right i’ve
i’ve i’ve figured out the market i’m a
genius
i’m gonna be the next kathy wood and so
you know and there are people that start
their careers that way
and then when that person gets stopped
out
you know they need some talking to and
they get all down and
that’s distracting and and that’s that’s
not helpful
you know but you are being skeptical
and dr steenbarker says this a lot that
one of the things that he finds when he
studies the best traders
to be a commonality is not
overconfidence but that they’re
continually checking
the data that’s coming into the
marketplace as to whether they’re going
to be right or wrong in a particular
position
you know they’re not they’re not over
confident they’re
they’re skeptical and they’re
continually questioning themselves
whether or not this is going to
be right or not not that they get out of
the position or cause themselves to
lose money but they’re entering a stage
of open-mindedness
so you you did that very well and i
don’t want to just
gloss over that and i want you to know
that it’s it’s perfectly okay and
probably pretty healthy
particularly in a first position that’s
near the near the low
yeah to be thinking the way that you did
this is a final slide but
we’re just going to go over this first
position we just briefly talked about it
right there but
um i noticed again that it likely wasn’t
ready we didn’t get the push to the
upside that i wanted to see on
increasing volume
i really should have got flat when we
pulled into where i got involved and
reevaluated it
um maybe i could have made a little bit
on it maybe i could have you know been
flat on it lost a little bit on it again
i only lost like a fourth of an hour
um but i noticed that i noticed how weak
it was when we first pushed and
not taking that reason to sell um more
times than not
will cost me a full one-hour loss and
you know that is completely unnecessary
um but i was okay with it you know if i
did take that full one-hour loss i saw
those big bids stepping up
um that this would soon set up down the
road if it wasn’t ready at this
current time um we so happen to hold the
low but
but we sh you know should have gotten
out for flat and reevaluate it more
times than not again we flush under
save yourself the possibility of taking
that full one-hour loss
um but that’s about it for this setup
within my playbook you know i was able
to take the same setup
today on ark and hopefully it keeps
you know setting up yeah and i’ll just
fill in
some of the details for context so there
are some people
on the street who feel like these
momentum names are over owned
and that kathy wood and ark is
susceptible
to a large
move to the downside if if some people
start to lean on her
on the short side so that if
if the shorts start to lean on her
momentum names which are already up a
lot
and cause them to go down that’s going
to cause
some outflows at her etf
and that those outflows are going to
cause
more selling and so and i think this is
true
both for the momentum names and as you
mentioned sadly
uh also with savvy also for
the less liquid names that that she’s
particularly long so there’s there’s a
thesis there’s some whisper going around
the street that
arc is susceptible for a big down move
the momentum names are susceptible for a
big down move
because there’s just too much money
that’s gone into arc
and she’s bought at prices that are not
sustainable
and if they lean on her they can get
outflows and outflows cause more selling
and we could see a pretty big down move
in this in these particular names
on top of the fact that they’re already
up so much i don’t know if that thesis
is right
i’m not suggesting it’s right but it’s
something that you need to know about
and we’re seeing a little bit more of
some verification of that thesis having
a little bit more weight
on a day like today one more thing i
will say is that you connect
you could go to their website and sign
up to get
daily updates with what they’re buying
and selling and i look at that at the
end of the day almost every day and i’m
i’m looking at it and a lot of the stuff
that she is buying just makes
absolutely no sense to me at the prices
that she’s buying
um so yeah i kind of see that um
thesis as well possibly you know playing
out
yeah and i think one of the other things
that would be good to know to note is
inflows and outflows for her fund uh
when you can find them
the the question i want to ask for you
though and the takeaway i want you to be
thinking about for this particular trade
is
i hope that you don’t see this as just a
trade that you make in ark
and to me this is reminiscent of
conversations i had with graham when he
was doing particularly well
trading riot and mara
in sympathy to bitcoin
and he was seeing himself doing really
well
playing sympathy names in
bitcoin just playing the bitcoin stocks
and my feedback to him was
you’re not just good
as a sympathy trader in bitcoin but what
you’re doing
is much more important than perhaps you
recognize which is
you are you are in in sympathy
trader you are ha you have developed
edge
in sympathy names so for instance when
gme exploded to the upside and was
followed by
bbby and amc
and pltr and
uh space and you know all those other
names
and uh cos
looking at gma as the head of the snake
and then watching the sympathy plays
like he was doing with bitcoin like he
was doing with bitcoin like he was doing
with bitcoin like he was doing bitcoin
is the same trade it’s just in a
different
sector now true
you need something super in play
bitcoin’s super in play that that’s why
it’s working
but your trade is a lot broader and for
you while i
i see that you’re doing well looking for
a bounce in
an arc what you’re doing here
is bigger than hey i’m looking to
play a bounce in arc and that’s why i
asked you
can you quantify
what a blow off oversold condition
is in ark and if you can quantify that
you can apply it to other stocks you can
apply it to other setups
and when you apply that to other setups
you’re going to move from you know just
an arc bounce trader to
a you can call this a lot of things and
and
a fade trader uh a bounce offer an
overreaction trader
call it whatever you want but but this
will open up your trading world to a lot
more opportunities
probably even better opportunities than
arc because i don’t know that that’s i
don’t know the volume and liquidity in
that particular name
as as good as other opportunities
so think about tightening up
how you’re defining something that gets
oversold
and i hope that you walk away from this
seeing yourself as
able to do this in other types of
products yeah totally all right thanks
talking to you go kathy wood
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