In this video, Steve Spencer discusses a trading edge that exists in the market that very few people are aware of. You may be surprised at how you can take advantage of this trading edge.
View Video Transcriptin today’s video we’re going to talk
about a trading edge that exists in the
market
that very few people are aware of and as
far as i know
no one else teaches
i’m stephen spencer i’m a partner at smb
capital we’re a proprietary trading firm
in new york city where we trade stocks
futures
and options good short-term traders
spend time
looking for stocks that have a strong
catalyst the reason is quite simple
a strong catalyst will cause a lot of
people to either buy or sell a stock
when that happens traders can book
profits from the increased volatility
but also control risk as liquidity is
higher
allow me to explain a catalyst is a
piece of news that will cause
very large market participants to either
buy
or sell a stock when i say large i mean
firms with hundreds of millions or
billions of dollars in the market
the essence of all short-term trading is
attempting to identify
what these participants are going to do
and how it may impact price
if you can do this you can develop a
trading strategy
with a great risk reward and the only
way
to succeed as a trader is to make
hundreds of great risk reward trades
then over time you’ll become the casino
that is your edge
part of our trader’s morning routine is
scanning for these catalysts
the tool we use is called the smb
scanner it identifies the stocks that
have catalysts
and have already begun to trade before
the market officially opens for business
we develop a short list of stocks to
focus on and then outline a plan of
attack
if you want to find out more about how
we identify these stocks and develop our
plan of attacking
check out the two free hour workshop at
tradingworkshop.com
i spend 30 minutes teaching this process
today’s example is home depot
the reported earnings for q4 and
something stood out that was unusual
despite reporting strong revenue their
earnings per shares were below
estimates for those who of you who
aren’t familiar with income statements
this is a potential red flag for every
dollar of revenue a company receives
a certain percentage covers their costs
and a certain percentage is profit
for example a business like home depot
may make a ten dollar profit for every
hundred dollars in revenue
if their report is a hundred dollars of
revenue and only five dollars of profit
this can make investors very nervous
now to the technicals let’s take a look
at our am game plan notes
each one of these levels are based on
our prior support resistance areas
established by buyers and sellers
and with a short bias we will look for
the stock to trade down to the support
levels
in the game plan sheet if the stock
shows momentum below our support levels
then we will stay short for a swing
trade now here is the part that no one
will teach you about this setup
home depot released earnings before the
market opened and then they held a
conference call before the market opened
there is not enough time between the
earnings release
and the trading day for many large funds
to do their analysis
and decide whether to sell some or all
of their positions
so what may happen quite often is on the
second day
once those large funds have done their
analysis
met with the portfolio managers they may
decide
to sell their positions or at least some
of their positions because of this huge
red flag that we saw
and that’s something that you can take
advantage of
and so we’ll go through we’ll take a
look at the longer term chart we’ll look
at when they reported
two quarters ago last quarter in this
quarter see how things set up
technically
because ultimately even though we have
this red flag in the earnings report
and we know that the stock there’s a
good chance that some large
institutions will sell we want to
understand what the important price
levels are
to give us a further edge rather than
blindly shorting the stock
first chart we’re looking at here is a
daily chart and what we can see
is that home depot actually went up
quite a bit last year
it traded up from about 180 to a share
and since that time has had two earnings
releases just before the most recent one
a few days ago
the first time they reported you can see
there wasn’t a lot of price action
um towards the upper part of this
consolidation we’re looking at
the next time they reported it was at
the top of the range sold off pretty
hard
that’s something we want to keep in mind
because we know
that stocks tend to have a muscle memory
they will repeat themselves in terms of
patterns
and if you have a similar setup where a
stock gaps up again
and you see a red flag type of news that
perhaps you can have a wide range day
and it can sell off pretty hard the
other thing we want to make an important
note of here
is this is a very large trading range
and
when the earnings report comes out it is
still inside of that large trading range
and if it’s showing weakness we have a
we basically that bottom of the range is
a target it’s basically you the
analogy i was gonna say is it it’s like
something with a target it’s on its back
the target for when the stock gaps down
is that
bottom blue line there where it’s
supported over the last
i don’t know seven or eight months or so
going all the way back to august of 2020
and so if we have a decent amount of
room between that support and where it’s
opening
on day one we can trade it on the short
side and remember
this video is about being short on day
two this doesn’t mean
when i see a red flag and the margins
don’t look good that i’m not going to
short it on day one
but i’m very mindful that i want to be
shorted on day two
if there’s going to be large funds where
they’re going to basically
start to hit the bids and the third
thing is if it then
closes below the bottom of this
consolidation area
i am going to just stick with it on the
short side because we know
that anytime you have a long period of
consolidation and a stock moves outside
of that range
it can attract more sellers or buyers
depending on which way it breaks
on the upside obviously they attract
more buyers you can have another
huge move to the upside and if it breaks
to the downside
it’ll attract more sellers people who
are technically inclined
um and then it adds more fuel to the
fire and it can be the beginning of a
larger downtrend and we’ll see how this
unfolds over the next couple of weeks so
here’s the intraday chart
so this is day one and what you can see
is
the top blue line is what we put on you
on the morning game plan sheet you saw
in flexion it’s a common question we get
what is this inflection steve what do
you mean by inflection inflection is a
price
that right when the market opens on day
one if the stock is below that level
i will look for it to trade down to the
support levels and if i have a short
bias
in this case i did because of the issue
with the margins
that red flag if it opens just below the
inflection
i will look to trade it on the short
side and it very quickly trades down to
s2
take profits and then see what happens
from there now in this case it actually
traded all the way down
below s3 that means that there’s strong
downside momentum
so this in a sense you know despite the
fact that many funds are not going to do
anything until day two
day three not on day one there’s people
selling this
when it gaps lower conference call
nothing was said in the conference call
to make
anyone feel any better so the market
opens and there’s some selling
and the momentum is to the downside and
we know the momentum’s to the downside
because it’s taken all of the three
support levels we’ve identified in the
morning meeting
and again as i said if you want to
understand how we develop support levels
how we pick the stocks
just go to tradingworkshop.com this is
all covered in the two hour workshop
so after it goes below s3 and starts to
turn back to the upside
the most common thing that i’ll do is
well the first thing i’ll do is i’ll
look to see if it fails at s2
if it gets above s2 then i would look to
shorten test one but
it’s very unusual for a stock to have
that much downside momentum in the
morning
retrace all the way back up to s1 and
not be a pretty good short entry
and so in this case i’ve circled that
that’s the first spot i circled as it
retraces back up to s1
and the great thing about it is it
actually moves sideways
as traders what we like is sideways
action which we call consolidation
because it’s the easiest way for us to
control our risk so anytime something
retraces all the way back up to s1 and
then starts to move sideways
that allows you to put on a large
position the reason it allows you to put
on a large position is
it’s very easy to identify where to put
your stop
your stop is going to be above
you know about 15 percent of an atr
above that
consolidation range that we’ve
identified and i’m talking about an
intraday trading perspective
if you shorted this right on the open
for a swing trade and you’re just going
to be shorted as long as it closes below
the inflection for the day
um that’s not what we’re talking about
right now we’re talking about a
retracement trade
intraday short entry um
at s1 when it comes back down to s2
maybe cover a quarter position
it comes back down to s3 cover another
quarter then you would be have half the
position left as a swing in this case it
didn’t do that
it rolled over back below s2 started to
retrace back up to s1
and they’re still selling it there sell
it again short it again
s1 can’t hold above it short it
and we’ll see what happens starts to
roll over but it actually goes up
that’s unfortunate right but this is
trading we want to make this trade
every time we see this setup where it
goes down momentum on the open
negative piece of news retraces back up
they’re selling at the key level
short it comes back up to the key level
again short it again
in this case it actually moved higher
from an intraday perspective you’re
going to have to
cover most of that position if you were
thinking about
holding it giving it some more room you
could hold the last 25
of that position until it takes out the
morning high um just so you have some on
day two because remember
this video is about day two so let’s go
over to the right side of that chart
there that’s day two
remember what we talked about we saw
some negative news
big funds they’re gonna the analysts
gonna look at it they’re gonna they’re
gonna take notes
during the conference call they’re going
to discuss it in their morning meeting
the next morning
before the market opens and they’ll say
they didn’t say anything good on the
conference call
margins were weak even though the
revenues were good the stock ran up 100
in the last eight months or last year we
don’t see that much more upside if their
margins are deteriorating despite sales
being strong
and the next day they’re going to come
in and hit the bids and the reason why
we know
that funds on day two were hitting the
bids if you look at what the market did
on this particular day on day two
the market basically was extremely
strong and went up
um i think a couple of percent um and so
if you see a stock
that on day two is going on going down
and the market’s going up
that you know institutions are dumping
this stock um and so when you come
in same spot that we were looking to
shorten on the retracement on day one is
where you want to short it on day two
and that’s right below s1 in summary
company reports before the market opens
conference call happens large fund is
not going to be able to put together
their notes the analyst who covers the
stock for the fund
until day one is over so we have an edge
coming into day two
we want to use our levels from day one
to inform our trade
and in this case we knew where it was
sold on day one in the area that was
circled twice on day one
when we come in the next morning if it
drops below that level get short
with a stop above the morning high and
if it then continues lower and
consolidates below s3
we can look to add to the position and
in this case it just went straight down
so strongly
there really was no place ever to add to
the position but if it had gone down to
s3
moved sideways for 30 minutes or more we
could add to the position with a tight
stop the same way where we entered at s1
on day one
and on the open on day two and that’s
how you would attack this trade
so when you see it when the stock
reports in the pre-market you notice
something there
unusual strong unusual week on day two
use the level from day one
and jump in with confidence as long as
the first move is in the direction of
your bias
