Stock Selection and Game Planning

03/16/2015 6:00 am EST

Focus: STRATEGIES

Steven Spencer

Partner, SMB Capital

Steven Spencer, of SMB Capital, maps out every step he consistently follows as part of his morning game plan and he cites examples of several key trades that proved beneficial and rewarding specifically as a result of these steps he takes every day no matter what.

My morning game plan has helped me navigate some tricky situations over the years. Some days my energy isn't great due to a poor night's sleep or maybe I'm just a bit under the weather. Having a clear repeatable methodology each morning allows me to be a bit off but still pull some money out of the market (or avoid larger losses). On last Monday, March 9, I woke up and felt miserable.

When I arrived at the office I felt a little better and began my morning routine. There weren't too many stocks with significant catalysts but WLL was the clear front runner having put itself up for sale. After observing its pre-market trading action and longer-term chart, I developed a thesis and I inputted key price levels from which I would base my initial trades (see below).

Table

Table

Table

If you look at the support and resistance areas mentioned in the game plan, you can see there was about a $2.50 range to work with for potential trades. As a rule of thumb, I will risk up to 20% of my estimated range on a trade. So, in this case, when I got long as the market opened slightly lower than the support area mentioned, I entered a stop 40 cents lower in my trading platform. My stop never got hit, and over the next few hours, WLL traded up to the resistance range from the game plan. I exited my long and got short as it moved closer to 40 (average. I placed my stop above 40 and covered the short as it traded back down below 39.

The process is what allowed me to make money in this setup. Several traders in the SMB chat were making comments about WLL not trading well and you could sense their frustration. I probably would have been frustrated as well if I hadn't game planned the entire trade out before the Opening Bell.

My second area of focus for “fresh ideas” was Apple. In the past eight years, there has been a large statistical advantage on the short side when AAPL releases major new products. So my focus was to short at the key resistance levels from the game plan understanding there could be unusual volatility as many traders and funds would jockey for position. As part of my planning process, I had reviewed the 30-minute chart for AAPL and it had failed several times the past few days around 129.50, so that was chosen as my last resistance level.

It ran up during the Apple event, eventually topping out almost to the exact penny at 129.50. In the next 45 minutes, it dropped $4.50 slicing through my bottom support level before eventually closing in the middle of my top support and bottom resistance levels. The price action was pretty insane, and honestly, having written down the key levels in the game plan really kept me from making any sort of major blunders.

chart
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The second part of the game plan deals with Second Day Plays and other technical setups. ABBV was my favorite idea in this group. It had been a short idea the prior two days as they were involved in a merger and therefore would have strong selling pressure from risk-arb funds. In my view the third day presented an opportunity to get long as the funds putting on the risk-arb trade should have completed most or all of their selling at that point. The key level was 55.50. I bought there a few times getting stopped out once (see chart). It never really trended as I expected, but identifying the key level prior to the Open allowed me to still make some money in the stock.

chart
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Finally my SPY trade, which was based on the Big Picture comments from the top of the game plan was a swing short. Friday's sell off following the jobs report was price action that has led to further downside over 75% of the time in the next five trading days going back to 2010. Because the market was up on Monday more than $1.50 from Friday's low, it presented a very good risk/reward short for the following day. I was rewarded Tuesday morning with a gap below 207.

chart
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Monday could have been a very rough day but instead was profitable.

By Steven Spencer, Co-Founder, SMB Capital

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