It was a very quiet morning in the world of “In Play” stocks. The only two tickers showing signs of life in the pre-market were DKS and GNW. After reporting earnings DKS lowered guidance which was causing a large gap to a major support area around 46.50. We were prepared for a bounce from this level given the strong underlying bid in the overall market but with lowered guidance a failure at this level could lead to a move to the next major support two points lower.

As the market opened DKS was being bought at 46.50. The buyers dropped and the sellers stepped lower and I got short. After a quick spike 40 cents lower DKS was right back at 46.50 and I covered when .50 lifted. Then it proceeded to trade above 47. It spent about 15 minutes above 47 and started to look more promising as a gap fill candidate. But it still had not consolidated for 25 minutes, which in my view is the required amount of time after 10:00AM to have a high confidence level for continuation. As it traded below 47 traders on our desk who were long got flat.

By 11:00AM it was clearly trending lower on the five minute chart and was below 46.50. Some traders initiated short positions and then waited. A point of emphasis on SMB’s desk is we want to see stocks “move away” from important prices. When we see this type of price action we have more confidence a position will work and look to add. See the five-minute chart below for some trade management ideas as the short continued to work. Some traders took the short home as DKS closed at the LOD.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is [email protected].

No relevant positions