Trade Example: Handling an Unusual Open

07/27/2012 8:15 am EST

Focus: STOCKS

Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

Mike Bellafiore explains this recent opening drive and how traders should look at similar opens going forward.

One of our traders on the floor of SMB Capital recently e-mailed me about a trade he made on the open. It’s instructive to read his thoughts and I provided a few of my own.

“I was watching Under Armour (UA) on the open, and I wanted to write about this opening drive because it’s a great example of trading the slower setups in a trending environment.

On the open, the timing windows are shorter, the price movements are more whippy, and at the moment it’s generally more difficult for me to control my risk confidently as a novice trader. The result is me not touching the keys until a trend play emerges after 10 a.m. to 10:15 a.m.

However, there are some fantastic opportunities that arise out of the open, and if I’m going to be successful I need to develop the tools to trade it properly. With that in mind, I had a couple questions about the opening drive in UA today.

For the first five minutes after the open, the volume in UA was surprisingly low before it picked up suddenly at 9:36 a.m. This was strange to me, because I haven’t seen that volume pattern occur before. How frequently does this lull happen for In Play stocks? Also, does it indicate anything specific we can use?

With the market showing weakness, I waited for confirmation on the range breakout to the long side as opposed to trying to get long against the retest of 52.20 or the brief holding pattern above VWAP. I waited despite the recent strength of the stock and the presence of good news, and I was hoping to find a proper risk-reward opportunity with 53.93 (the all-time high) as a target. Was this an appropriate judgment of the market or are the other factors contributing to my overall long bias enough to justify a more aggressive entry point here?

Last, is it reasonable to hold all the way through the 75-cent pullback after the steep move touching 53.93? I still had a long bias, but with the steepness of the pullback along with the weakness in the market I was having a hard time justifying holding on through the retracement.”

Great questions.

Take a look at the image below. I’ve marked the chart with a few levels and what my thoughts are about this stock during that time.

chart
Click to Enlarge

In summary:

  1. Generally when there is going to be a good opening drive, it happens right away. Right on the open. It is unusual for there to be a delay of five to six minutes.

  2. In a case like this, I considered not buying until UA broke above the range because the market was very weak.

  3. With an Opening Drive Play, we do not let the stock trade back down against you. This is a subset of a Momentum Play. When the stock shows any weakness, we exit and wait for the next set-up. Stocks do not trend in the first 30 minutes. This is a period of price discovery. So just because UA had a sharp up-move close to the open does not mean it will follow through. There is danger that UA will return back to where it started or reverse. So you lock in the profit and wait for another excellent risk-reward set up.

I hope my answers helped the trader and you as well! Keep working on your trading game!

Read more from Mike Bellafiore at his SMB Capital blog.

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