When I was younger I played a lot of pickup basketball.  Many times I was matched up against players who were either bigger, stronger or quicker than me.  Well maybe not stronger 🙂  I found playing “up” to my competition was much more enjoyable than playing “down”.  Playing better competition tends to heighten your focus and forces you to improve as a player.  I would make mental notes about various opponents so if I faced them in the future I was better prepared to take away their strengths and exploit their weaknesses.

In trading you don’t necessarily want to find the toughest competition.  It is not necessary nor desirable to pick the most erratic and illiquid stocks to trade each day.  Nor should you focus on the most convoluted set ups that require mind bending analysis to figure out how to best trade your position.  Where trading most closely matches up to my basketball analogy above is with respect to learning about your competition.

I have always been a fan of trading momentum stocks for this reason.  Momentum hedgies flock to these names as quickly as zero hedge flocks to a governmental default rumor.  As a trader it is important to understand which setups the hedgies like best.  One such setup began to unfold earlier this week in CRM.  If I had to give it a name I would call it a Secondary Earnings Momentum Play.  After a large runup on good earnings hedgies will accumulate the stock on any weakness in the days following the runup.  This accumulation creates a clearly defined range, which if it breaks can lead to a sizable multi-day move.

On August 20th CRM gapped up on better-than-expected earnings.  It closed near its high on huge volume.  During the next week it consolidated in a fairly tight range.  By the time I returned from vacation on Monday it appeared ready to begin its next up leg.  Based on observing the recent price action I determined that if CRM got above 113.40 on good volume that it was beginning to make its next up move that should take it to 118 or higher.

Why does this play work so well?  In addition to all of the momentum hedge funds who are watching CRM you have a ton of other market participants who are keeping tabs on the momentum names.  There are the retail traders who are checking all of the top IBD stocks on a daily basis.  Professional traders are scanning the highest beta names for good technical setups each day as well.  Momentum stocks are also all over the Stocktwits recommended stream being  pushed by heavily followed traders such as @Traderflorida.

One thing in particular caught my attention on the weekly chart when I was preparing to write this blog.  There was a ton of volume done in CRM in the week it consolidated after the big move from earnings.  I drew a couple of conclusions from seeing such heavy volume following earnings.  One, a lot of people who wanted to exit were able to do so and would therefore not be a hindrance to the next up leg.  And two, there were some seriously committed buyers in this stock after earnings for it not to have had a steeper retracement after such a large up move.

My 113.40 price alert was triggered on Wednesday, which also happened to be the day the market had broken its most recent downtrend.  Strong stock and strong market generally are a good combo for a successful breakout.