Happy Sunday, Traders!
As I mentioned in the blog last week, I will be traveling until the end of October, so the posts will be shorter than usual until I return.
Last week’s action kept day traders and, more specifically, small-cap traders extremely busy and on their toes, with several stocks throughout the week doubling, tripling, or even going up as much as 4000% (TPST).
For newer traders, risk management is the key takeaway from this action. All it takes is for one outsized move to occur to wipe out an account. Therefore, before entering a position, always ask yourself: Do I have an edge in this, and do I know where I am wrong in this position, i.e., where I will place my stop?
Sometimes, even if I have an edge, but the stock is too illiquid / ‘spready,’ I will avoid it because it isn’t worth the risk!
Before entering a position, I always ensure that I have a predetermined amount I am okay risking, along with having an edge present in the trade and a positive risk: reward.
Now, for this week, I am interested in going short several small-cap stocks that surged higher last week before failing dramatically. Now that supply overhead exists, and there are levels to risk against (backside), I would be interested in shorting bounces.
Earnings season is also well underway, and one stock that has set up interestingly ahead of earnings is Tesla.
So, let’s get into it.
Backside Short-Term Short Swings, The Dead Cat Bounce Setup
Several small-cap stocks that ran last week gave back an enormous amount of the move into the end of the week. Such a move now paves the way for a brief liquidity trap / dead cat bounce higher, bringing a secondary opportunity to get short on a lower high.
For this particular setup and opportunity, I am looking at a basket of names from last week: OPGN, TPST, SECO, MTNB.
To better explain my thinking for this opportunity, let’s look at one of these stocks, OPGN.
*Please note that the prices and other statistics on this page are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity, slippage and commissions.
As you can see, the stock, like many others last week, surged exceptionally high and then, after topping out near $4 on Thursday, gave back almost the entire move.
So, going forward, I will have alerts set in OPGN in case it pops into possible supply zones. Supply zones? If I were stuck long, I would sell my shares if the stock bounced back a bit. Then, you also have potential dilution and shorts looking to enter. This all creates an overhead supply.
I would look to get short into $1.50 if the stock confirmed resistance and gave an intraday level to risk against. Although I don’t think the stock can reach them, the next potential supply levels are $2 and $2.50.
With such a setup, the goal for me is to wait for intraday confirmation before putting on any risk/size against the high of the day. My timeframe on such a swing trade would be 1 – 2 days, looking for a $0.50 – $0.75 target.
Tesla to Report Earnings on Wednesday, Stock is Coiled
With Tesla set to report earnings on Wednesday, a swing position ahead of earnings does not make sense to me, as I could not manage risk effectively.
However, with the stock coiling on a higher time frame, a momentum swing trade opportunity might present itself AFTER the company reports.
*Please note that the prices and other statistics on this page are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity, slippage and commissions.
So, if Tesla gaps above resistance on a bullish report and successfully hold the extended hour’s support levels, I will look for the stock to confirm a higher low. I would look to buy the stock more carefully. For example, I want to see a brief pullback be met with buyers and a VWAP reclaim. Such price action indicates buyers have stepped up, and multi-day momentum might occur.
Similarly, I would look for the same price action to confirm before going short if Tesla gaps below the wedge’s support and holds extended hours lows.
Now, how would I manage risk for such a position? Once a trend develops and I enter the position upon receiving confirmation, I place my stop at the low of the day if I am long.
I would be looking for just over 1 ATR for my target, as the range should widen post earnings. However, with that being said, If I am unable to achieve at least a 1:3 risk-reward, then I will not enter the position.
Key levels to be aware of in Tesla:
Breakout level: $260
Breakdown level: $240
Potential Target / Resistance: $280
Potential Target / Support $220
Remember, as I mentioned at the beginning of this post, risk management is everything in this game.