Quote from Shanb:
So anybody have any input to this type of scenario and how to trade this type of action? I've attached a screenshot of PEP on Thursday. I played it after the first ten minutes and the inside bar was taken out, but It seems to me that there was some good opportunity if the above scenario had played out in PEP
It really depends on the earnings and the significance of the level.
Did the company's earnings shock to the downside? Was it a slight miss? How bad is the guidance? I feel that to have edge off the open, you need to know more about the company. When there are so many companies out there, it is tough, unless the numbers are clearly going to cause people to bail from positions.
If the level is a major level on the daily chart, it can absolutely cause some bigger players to bail out. However, if it is just one bad quarter, and the larger players are holding for a longer term thesis, you may not get the panic you expect, and in fact the dip can be aggressively bought.
I've seen, time and time again, aggressive selling off the open as weaker hands bail, and shorts attack, only to have the price quickly reverse and squeeze the hell out of everyone.
I personally feel if you are going to get involved off the open, you need to have some type of edge in the company's fundamentals. You almost always have people on the wrong side of the trade, you'll enter, get a snap against you, stop out, and then the trade works. Price can jig around violently off the open.
I tend to ONLY enter trades in the first few minutes if I see some sort of price stability in the level 2. Perhaps a huge offer / bid, or refreshers holding the price.
Never, short lows or buy highs, don't chase, wait for the pull-in, or for the consolidation.
I feel trading off the open requires risk that is simply too much for new traders. It takes conviction.
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Take a look at NCR on July 22.
It closed above 20, a significant level. The gap was immediately sold into. Once the morning profit takers finished, and the gap fillers lost momentum, those buying the news took over, and the stock trended higher all day long.
It is nothing but chance. NCR could have easily blasted higher from the open. There is no way of knowing. If NCR would have traded above 20.50 off the open, it probably would have squeezed all the gap fillers and began the trend higher, as those looking to buy the NCR news would now have to chase the price to get better fills.
However, even larger players may be looking to take profits at 21, as that is their price target from the buys down at 18.
You never know for sure. This is why I stress the importance of box reading. It is the only way to gauge the strength and power behind price movement. If you see very little resistance at 20.50, it tells you no one is looking to sell here, the stock is going higher. The chart does not tell you anything about resistance. There could have been huge size at 20.50, and NCR may have blasted right through, putting no consolidation on the chart. You could look at volume bars, but that tells you little about what actually took place.
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On the 2 min in PEP, you start with a red candle, and unless the box shows something, you have no tells as to where the thing can bounce. If you wait just a while longer, the price bounce from 66.11 to 66.49, which is great. It found resistance as the half dollar, typical of in-play stocks. You can immediately enter as it fails at the 66.50 level, with a stop above 66.50. Your next entry is consolidation at 66, with a stop above consolidation.
If you had shorted the open, lets say you got filled at 66.30 on the first red candle. What if it broke 66.50? Where is your stop. Are you risking to the open price? In my opinion, you need to know where buyers / sellers exist in order to day trade. Guys who trade opens using nothing but hope and probability are nothing but gamblers in my opinion. Guys who trade the open with good fundamental knowledge of the company and proper analysis of the earnings are the winners, and they are also often the ones with the most money, they're the guys I want to join, so I wait to see they're move.
People do it, but it's not my game. I wait for the chaos to settle down unless something in the level 2 tells me its safe to enter.
I was able to trade SWKS the other day because the level 2 gave me a cushion.
However, even an edgeless proprietary day trader can make a good decision. It is often not too difficult to predict whether the circumstances involved will create a gap n go situation, or a gap fill. ACN gapped up one day because it was being added to an index, not any actual news related to the business. You immediately expect some profit taking on the gap. It happened. In SWKS the other day, they beat earnings, and the stock had been sold for some time. You break the downtrend, and you know shorts will cover and legit buyers will chase price to get filled before it takes off. Classic gap n go scenario.
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The real crazy game begins when the stock gaps down 10% or more. Then, due to the new rules, shorts can't attack the bid. It adds a whole new level of analysis. I was very successful when the change first happened, but now things are changing, I haven't been doing well in the +10% gap downs.
However, I've noticed that stocks that gap down like 6-7% are often sold hard off the open. I think a lot more shorts pound the bids in order to get filled before the 10% mark.
I've seen these things gap at 7%, trade to 10%, and find support, for that reason alone lol. Then the question becomes, are there enough buyers to pay all the shorts waiting on the offers.
Lately, I've seen selling dry up at the 10% mark, buyers gain temporary control. Shorts sellers get filled on the offer. Later, volume comes back in and drives the stock price down, putting all the shorts in the money.
I am very weary of all this. I don't like the new rule one bit. I get the feeling / speculate the big shorts are working in tandem with stock holders. Perhaps the same people shorting, have stock to sell in order to later force price in their direction. I don't know, I'm probably dead wrong, but I have my eye on these bastards.
I suppose those looking to sell could easily anticipate a price bounce once the bids can not be hit. They wait for price to bounce, and bids to follow, so that they can slam them again in the afternoon. They create a fake "all-clear" signal. This could only be the case where there are less players selling, and there are less shares to sell. If there are a grip of shares looking to get dumped by many players, they are going to have to chase price, eventually causing price capitulation, and buyers get stopped out. Eventually price gets so low, so fast that NO ONE wants those prices.
