(This blog was written on 1/25/11. But I’m lazy so didn’t post it until tonight)

When a stock has fresh news and huge volume it is a great trading candidate for me.  My experience tells me that there will be more trading opportunities intraday in these situations and the risk/reward will be more favorable than most other trading scenarios.  In these scenarios I have a very strong bias towards taking a position with the direction of the trend.  If the trend intraday, multi-day and longer term line up it will be very difficult to get me to take a position in the opposite direction.

One such opportunity arose this morning in MNTA.  The stock was trading down severely on some fresh news.  I’m not sure what the news was specifically but people wanted to get out.  The stock had been trending down for the past two weeks so perhaps some already had a heads up on the news that was released (this is my acknowledgment to our readers and my many friends who believe everyone except them has some unfair informational edge in the market), and was trading below key support for the prior six months.

The pre-market action gave me a very well defined short entry around 13.90.  There was a very well defined downside target to 12 based on the crazy move that occurred back in July, which I assume was on some other piece of news.  So when MNTA traded up to 13.90 and then had trouble holding the bid above this level I got short.  I knew my risk was at most 10 cents and my initial downside target was around 70 cents away.  I knew if the trade worked in my favor quickly I would be in a position of strength to either short more if it popped up again, or better yet short below the opening low.

This brings me to my next point.  There are a lot of people in the market who would trade this situation completely differently than me.  I don’t believe I have a monopoly on the “correct” way to trade this or any other setup.  An experienced trader on our desk actually asked me why I was shorting at 13.92 as he had been long since 13.20.  I assume he was fading because when stocks drop or rise very quickly their natural tendency is to retrace some of their move.  He may have also been thinking in a strong market stocks that gap down have a better chance of bouncing.

I also know there are entire firms built around the trading setup of stocks reverting to their intraday mean.  They will scan the market for things a few standard deviations away from their mean and take counter-trend positions.  That trading style doesn’t work for me.  But I’m sure there are many making a great living doing just that.  If that style suits your personality and you can figure out how to make money consistently then you should embrace that trading philosophy.  It just won’t be me.

Back to MNTA.  So my thought process is get short into the initial opening pop and then be in a position of strength as the stock trends down and makes a series of lower lows.  I will continue to follow up on this stock until it breaks the low from the initial gap down and finds lower ground.