I Deserved To Lose More

(post originally written February 10th 2012)

We identified FSLR as an In Play stock this morning (link to story from Benzinga Pro). It was gapping lower in the pre-market to a recent support level. As a trader part of my job is to figure out what other traders and investors will do in any given situation. In the case of FSLR it has been on a pretty nice run recently. Its uptrend had begun to accelerate with the strength in the market and the solar sector in particular.

As stocks gain more momentum, meaning their short term moves are accelerating, they tend to attract short-term traders who seek to ride the recent momentum wave until it is over. They are much quicker to exit their positions than longer term traders/investors. So it is important to pay attention to how a stock behaves when it gaps on fresh news in the opposite direction of recent momentum. Questions I asked myself prior to trading FSLR:

Will momo traders sell immediately on a gap down?
What price action would they need to see in order to run for the exits?
- Here are two things they might consider:
  - Is the stock below their initial entry
  - Is the stock trading below a key S/R level from the prior few trading days
If the stock fails to fill the gap where can it go?

During our discussion in the AM Meeting we talked about the possibility that some traders would sell on the Open if FSLR failed to get above the 47 level. The next support level was around 45.50 and presented a reasonable initial short target. If it got below there then several more points of downside as more traders might rush for the exits.

So I was armed with my key inflection points and ready to trade FSLR on the Open in either direction based on how it behaved at the 47 inflection point. If it failed to rally above quickly I would focus on being short as more longs would be likely to exit to avoid further losses.

In order to trade FSLR on the short side I would need to first “locate” shares. FSLR has been classified by the NASDAQ as “hard to borrow” and therefore it is required that traders ask their clearing firm to identify shares that could be borrowed and then sold short in the marketplace. I put in that request via email (don’t ask me why in 2012 my platform still can’t perform this function electronically) but did not receive a locate prior to the market’s Open. This put me in the position of only being able to trade FSLR on the long side.

Often I will not trade a stock unless I have the ability to trade it long or short. It is a matter of opportunity cost. A stocks price action can change at any time causing me to change my bias. Why would I want to be in a stock that would only allow me to trade it on the long side? This time I decided to trade it anyway.

My initial position was long close to the 45.50 support I had identified during the AM Meeting. I then made a series of several other long trades that really made no sense and I lost some money. Finally I saw the stock bottom around 10:00AM and caught a one point up move. When I got flat for the final time I was slightly negative in the stock. I should have been down a lot more. The easier trades and the better risk/reward trades were on the short side based on the price action and the Intraday Fundamentals for the stock. Live and learn 🙂