Thursday, October 27, 2005

On intra-day reversals

I was asked a great question today, and with that person's permission I wanted to post the question here along with my response, and anybody who has anything to add or dispute, please comment.

  • "Why does a stock rally a good amount after an earnings release that shows great earnings.. Then drop to a loss in the last hour of trading.

    I made great gains on build a bear and buffalo wild wings.. Only to have them lost in the last hour of trading. Should i have sold along with them?"

Here was my response:

  • Your observation regarding the action in the last hour of trading is a very good one.

    It has been my experience that a stock that is making lower highs and lower lows (downtrend) on the daily chart will have a tendency to close in the lower half of its price range for the day. The reverse is true for stocks making higher highs and higher lows on the daily chart (uptrend). For this reason, I make my trades almost exclusively in the direction of the trend on the daily chart when it is the same as the trend on the nasdaq composite daily chart, and refrain from making most of my buy or sell decisions until the last hour of the trading day. Most of my trading is done in the last 30 minutes of the day, but occasionally like today when there is an intra-day reversal I will make quite a few trades in different stocks I've been watching throughout the last half of the day.

    The closer you wait until the close to do your trading, the more information about the price action that day you will have, but like you pointed out, that information comes at a cost because you possibly could have had more favorable prices earlier in the day. I've told you what makes me comfortable, but it all comes down to whatever is comfortable for you.

    It is interesting that you mentioned being long BBW. I shorted that stock about a month and a half ago when it was upgraded (the gap up in September) but I took a loss on the trade, I covered my position a day before the gap up that your profits came from. You can probably see why I covered, and I suspect maybe that was your reason for going long at the same time? The problem with BBW and BWLD is that the nasdaq composite is trending down, so lower closes are more likely for those two stocks than you would otherwise expect.

    Don't worry too much about losses. Trade the charts, not your account equity. If you catch yourself trading based on your account equity, then shrink your trade size.

Here are the related charts, including my notes (click to enlarge):

Note the reversal candle today on both the nasdaq composite and BWLD. This is no coincidence.


At 1:49 AM, Anonymous Anonymous said...

Hey Jon quick question for you. I want to start using some stockcharts charts on my blog with some annotations and I am wondering how are you doing that on your blog. I have taken screen shots of some charts I have done but it just looks like shit and not as clean as on your blog. Are you a subscriber to the extra?

At 4:35 PM, Anonymous Mack said...

Re the earnings and yo-yo price question. The pro's know that earnings are already priced in at the announcement (earnings announcements are of past events not future). Thus any buying being done during amateur hour (9:30 - 10:30)is being done by the amateurs. After that the pro's step in and short the hell out of the stock. Lesson - don't buy during amateur hour.

At 3:50 AM, Blogger tomtom said...

I trade earnings every day BUT...

Mack's post is correct, in fact I see every Trading room with a Bot send that message to all members--- 10 minutes before the Open.

I mentioned a "room" because if you are in the habit of entering positions on their earnings events; you do NOT want to trade alone, nor do you want to enter just one Stock. It is NOT like trading on pure TA. So try spreading thinner over 4-10. WHY? About 15% of earnings announcements send their Stocks rapidly in the exact opposite direction that the News would indicate. They gap your stop loss, they dry up shares you can borrow, they hit the stop on your 2nd desperate DCA, and they give the big Pro his RIP on your psyche. There are too many to mention but, in those troubled 15%, lies several important rules of our discipline that help Retail Traders avoid the trap that the big Pro has laid: "Fear & Chaos when you are spread too thick." While you are at Coffee, the Pro will take everything you made on the last 4 trades.. So spread it thin over more earnings plays, and don't blink.


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