Yesterday we started looking at SUNE as a good bounce candidate. Since issuing a profit warning the stock had sold off over 50% in a matter of days. We had been receiving pretty good news flow that large buyers began accumulating the stock around $16 and as it approached its 52 week low our expectation was that it would bounce $2-$3.
One of the more interesting things about working on a trading desk is the chatter that goes on as traders are swapping ideas and discussing what they are seeing in the market. Many of the traders on our desk had SUNE marked as a good bounce candidate and when the market opened today SUNE quickly spike up from $13 and many traders jumped in. Almost as quickly as it spiked higher it dropped to $13 and proceeded to trade much lower. An experienced trader who sits directly across from me said “This stock is going to zero” as sellers continued to aggressively press it below $12.
Finally, SUNE appeared to have bottomed below $12 as it quickly reversed trading above $12.50. The same trader who a few minutes earlier who had suggested perhaps the company was going out of business “but just didn’t know it” was loading up on 5K shares with the expectation that it would trade much higher. One of the hallmarks of top traders is their mental flexibility. In the case of SUNE as soon as the price action changed this trader committed to getting long and holding the stock for the rest of the day or until it had a significant bounce. In this chart you can see the “reversal candle” that caught the trader’s attention and caused them to get long above $12.50. They scaled out of the position between $14-$15 several hours later.
One of the toughest things for young traders or non professionals to understand is the difference between looking for a bounce and actually playing a bounce. This trader waited for something to change in the price action and then committed to the trade. That can be the difference between a large losing trade and a large winning trade.
Steven Spencer is the co-founder of SMB Capital and SMB University which provides trading education in stocks, and options. He has traded professionally for 19 years. His email address is: [email protected].
Steven Spencer is currently short SUNE puts