Trade Review: Two Tough Trading Days

06/29/2012 9:00 am EST


Steven Spencer

Partner, SMB Capital

Steve Spencer of SMB Capital outlines two specific trades he made (or didn’t make) recently, and the thought process behind both.

I lost money trading Apollo Group (APOL) a few days ago. During my routine post-trade review, it became apparent to me that even with a few tweaks, I still would have lost money daytrading it.

Sometimes stocks do not behave well. Perhaps APOL is better suited for swing and position trading? It has a history of trading erratically intraday. During the past few years I have passed on it many times when it has been in play for this very reason. But today, with very few names in play, I was tempted to get long after its positive earnings number and confirmatory price action.

I thought I set some fairly stringent criteria for myself before getting involved to avoid an unnecessary rip. I waited for it to trade above the top of yesterday’s range—34.50. I then waited to see more buying above 35. I initiated a very small long on its first pullback to 35. The trade worked, spiking quickly up to 35.40. I got out.

On the second pullback to 35, I bought again with a little more size. When it traded up to the pre-market high of 35.70, I got flat. I spotted a repeating seller at 35.70 and decided to take a quick scalp short. I covered half when it dropped quickly below 35.50. I was stopped out for the rest when it made a new high. My focus returned to being long again.

I started buying on a 50-cent pullback to 35.30. Just nibbled. I got more aggressive as it traded closer to 35 again. It whooshed down to 34.68 and I took a large loss, selling most of the position.

When a large seller emerged at 35, I sold the rest of my long and got short. This tick chart illustrates the seller who was dumping stock at 35 for about 15 minutes.

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When the seller lifted, I covered and got long as APOL quickly traded to 35.30. At this point, I thought I was in the driver’s seat. I thought that maybe it would pull back to 35 again, but it would most likely resume its uptrend and then head for $36-plus.

I was wrong. It went right back down to $34.68.

I was done for the day and off the desk. I am fairly confident APOL trades up to $37.30. Maybe even as high as $39. This is a beaten down name that is finally reporting some good numbers, and you can see there are many willing to get involved down here. By the time the media start talking about it, you will see a short-term top and it will be time to exit the swing trade.

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Then, yesterday morning, I was reviewing Tuesday’s price action in APOL again, and found a long setup that I liked. On Tuesday while trading APOL, I became somewhat enamored with the 35 level, as it worked twice for me during the first 15 minutes of trading.

But the truth is after 9:45, 34.80 established itself as a much more important level for support on the tape. Each time APOL traded to the 34.80s, there was a significant amount of buying. So today, I planned to get long APOL as it approached 34.80 and not before.

I set an alert for 34.90 and it was triggered after APOL sold off hard from 36. It appeared 34.80 would be hit shortly. I entered my bid at 34.82 fairly confident I would be long in the next few minutes.

APOL traded down to 34.86 and stopped. My bid was not executed. When I looked at APOL again it was at 35.20. Why did I not just pay the offer at 34.90 when I noticed it stopping at 34.86?

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This was not the trade I had planned, and was an adjustment I was unwilling to make. Yesterday, there was a ton of buying in the 34.80s, but twice it spiked lower to the 34.60s. Even though it was clear buyers were accumulating into the 34.80 level, the level itself was violated multiple times. My trade was to get long into 34.80, with the expectation that it would trade lower (but hopefully not through my stops).

I often chastise our traders for not paying the offer or hitting the bids to enter a position when they cannot get the “perfect entry.” The situations I am referring to are in stocks that have shown great strength or weakness and have traded cleanly.

APOL was a “whippy” mess yesterday. However, it did show me a price where I was willing to take some risk again for a move back up to 36 intraday and possibly a swing higher. But I was not willing to “pay up” for shares after the whippiness I had seen in the stock.

So the trade that day never happened. It trended up for about 1.50 from 34.86 without me. And I am fine with that.

Steve Spencer is a trader and co-founder of SMB Capital.

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