On Monday I was flipping through my list of earnings stocks trying to find what to trade on the open. While scanning through my overnight winners/losers I came across this stock. I noticed it was up $6 and change in premarket on some dopey news about a phase III on their drug. A considerable gap up for a stock that closed below $4 the previous day. By 7:45am the stock had traded a bit more than 1MM shares so I knew the stock was going to be heavily in play. I watched the tape intensively for a few minutes and noticed some buying in front of the $10 premarket support level so I got long. The stock started to show signs of strength so I developed a long bias as long as it was above $10. The buying stepped up to 10.80, 10.85, 10.9 and then 11. I was insanely long with 2 mins to the open…and then the market opened and the stock tanked. Huh?.

Normally a stock that gaps up a lot on some dopey news and doesn’t trade lower immediately in premarket is not a good candidate for a short NO matter how big the gap up is. If the stock happens to establish a descent support level then you have a nice inflection point to work with. For HGSI $10 was such a level. I wanted to be long above and short below. The price action in premarket in the high $10s indicated some serious buying, so buying a pullback close to $10 seemed like an easy play right on the open, that was assuming that the stock wouldn’t just drive straight up.

The stock opens and ticks down aggressively from $11 to $10 and I load the boat, except that the level doesn’t hold. I take my rip but keep watching for an opportunity to develop. The stock trades to the low 9.30s and back through 10.5 where the bid had held on the way down aggressively. Then something unusual happened, there was a lot of selling above $10 where as before I had seen a ton of buying. I started a small short on the unusual selling near $10.5. Then HGSI held 10.20 and then below $10 so I was mad short. But gman, what happened with the plan of staying long above $10? Great question. The tape was not confirming my original plan, so I had to change it. I knew I could start a SMALL short here, but really wanted to lay into the position once it started to hold below $10.

And mad short I was below $10 and I was licking my chops when the stock was trading towards $9. But then some unusual buying came in below $10. In fact the buying started around $9.5, then the bid held 9.65. That was weird. I wanted to see crazy selling below $10 for the stock to come off with fury, I didn’t want to see unusual buying; so I covered my short. Then the bid held aggressively at $9.75 so that got me to change my bias and I got pretty long with initial targets 10.2 and 10.5. The stock held higher throughout the day a few more times, and in fact closed at its high in the mid 12s. Chop gmonkey.

Look, trading is no longer as easy as looking at a chart and developing a bias based on where it is trading in relation to some important premarket level. HGSI was a clear example of a stock that provided sick opportunities for the trader with an agile mind and flexible bias. Technically I shorted it above its support and then got long below it, but it was all just based on reading the tape. And no I was not fighting the trend, in both occasions the stock changed dramatically. I was never more than a couple cents out of the money in both positions. Being able to read the tape gave me some much more conviction that it helped me stay long for 70-80% of the up move off those lows. And trust me I was chirping the dopey stock around our desk while below $11 saying that it could go to $15.

Now two days later I wouldn’t be shocked if the stock drives powerfully through $15 on the open, and then gets killed the rest of the day. Holds below $14 and $13.5 are not good and the stock may retrace down to 11.80ish.

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