Here’s How One Of My Best Trades In Recent Memory Played Out
Yesterday you will
recall I was pounding the table on the virtues of tape reading as the
ultimate edge in HVT. No sooner had the ink
dried on that column, and there was another classic example in today’s trading.
In fact, today’s example is without a doubt one of the most obvious and best
examples of tape reading.
Fannie Mae
(FNM), that mysterious mortgage company that will likely trade in
single digits some day, had some news on it late in the day. If you look at the
S&P’s on a 5-minute chart, it is obvious when the news came out. Supposedly
they were going to restate earnings, this was later clarified and the
clarification was less ominous. Nonetheless, the stock got pounded.
The above chart shows the relentless selling that
occurred. Someone who is not familiar with stochastics could have made the
decision to go long when they were oversold 3-5 minutes earlier prior to the
bounce. That would have been quite costly. Again, tape reading is what allowed
me to time the entry perfectly. There were no down-ticks after I got filled at
70.75, none. So how did I know that that was the right time to strike?
Those in my
Trading Room listened to me walk everyone through the trade prior to
entering (most important) and after I got filled. For me it was really a matter
of watching to see when the selling pressure abated. Nine times out of ten a
stock that gets pummeled that much that quickly, will rebound. Just like a
Fade the Gap trade. In this instance it was a
matter of identifying how the specialist was handling the onslaught of sell
orders. I picked up very quickly that he was simply walking it down with large
offers and no bid and keeping a wide market. The wide market is a sure sign
that he is overwhelmed. There were even times when he was 1 x 1, another sign
that he does not have a market, he is doing everything possible to manage the
orders.
Then it happened, an up-tick, but it was
short-lived, and it came on a relatively small share size, a few thousand
shares. Another big offer showed up again and the stock went lower. It was not
until he hit 70.50 that he tightened up his market and began to trade on the bid
AND on the offer. To me that was a sign that equilibrium had been
restored. I was ready.
A larger trade went off at 70.60 if memory serves
me, then his market was: 70.50 x 70.75 with a bid/ask of 500 x 1. I never
flinched. My limit order went in at 70.80, I though I might not have paid up
enough, but I was filled at 70.75. Within moments he was 71 x 71.25, I knew I
had nailed it. The market continued to reflect an upside air pocket now, 71 x
71.50 then 71 x 73, then 71 x 75. I stood to make a chunk of change on this
trade. Any trade significantly above 71 and I was ready to unload my shares at
market. What was unsettling though is that since the trade at 71, nothing had
traded, nothing. Only the adjustments to the market. Normally this is a
positive, however, this one went on a bit too long. Then it happened, HALT. My
stomach dropped. “What happens if the news truly is bad, they could re-open
this stock down $10-15.?” My only insight to what may happen was Freddie Mac
(FRE), they traded in tandem the whole way down and now on the way back up.
FRE held firm so I was relieved.
Eventually FNM
re-opened, 15-minutes later and I sold all the shares at market, my fill was at
73.15. Two dollars and 40 cents and some nail biting, but I had bagged one of
the best HVT set-ups in recent memory.
I share this experience with you to once again
show how incredibly important focus and tape reading is. The charts would never
have gotten you into that trade. Only the tape.
Today should prove to be interesting on two
fronts:
1. Stocks
2. Currencies
The GDP report (already out by the time you read
this) should help the market find its way, unless of course it is in-line with
expectations.
Currencies however should be active. Treasury
Secretary Snow will once again be pounding the table on a strong dollar policy
(he must think we are all idiots) and other comments regarding policies and
exchange rates. This can only be seen to further strengthen some of the
currencies I have mentioned as good longer-term longs in recent weeks here in
the column. Recall the comments I made on the AUD,
NZD, CAD
and the EUR/JPY. Also, keep an eye on the
Pound (GBP), the Bank of England may well
raise rates next week, putting upward pressure on the
GBP and weaken the EUR/GBP. They
are not quick trades by any stretch. A colleague of mine who heads up an FX
desk in Boston told me that the best way to tackle FX is by letting the trend
carry you along.
| Support/Resistance Numbers for S&P and Nasdaq Futures |
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As always, feel free to send me your comments and
questions.