What did I see in the Retractable Technologies (RVP) end of day move to join trend on Monday?
This post was inspired by a question from TraderIsaac via Twitter. It feels worthy of a detailed response versus a 280 character limit. It is written so hopefully anyone can learn.
Key points of this post:
1) Be familiar with end of day (EOD) squeezes.
2) Volume is everything.
3) Timeframes matter.
4) How to create a risk guide on the fly.
5) Penny stocks are not for everyone.
First, let's look at the daily chart. RVP had previously broke out of a long-term consolidation pattern on the daily chart last month on slightly increasing volume. It had been trending higher and consolidated again before Monday's breakout over 3.25ish on huge volume.
To be honest with you, this never hit my scan until Monday morning. I'll never buy a penny stock on a volume surge/pop at open. Wait for it to consolidate higher. Very similar to CREX last week. We'll get there below.
Be familiar with EOD squeezes. They happen somewhere every day in this stock market game. You can make a living just focusing on end of day moves once you learn to scan for them and correctly identify which ones to scale into. I trade a lot of things, but it doesn't mean you have too especially if new to this game.
I refer to them as squeezes because many times in the penny stock/low float names large traders have been trying to short-sell it all day in hopes it fades back down to where it came from after an early morning pop. This helps fuel an EOD run over the level they've been selling at all day (the resistance level) as they buy it back to minimize losses.
Sometimes these end of day runs are caused by other things though. News finds a bidder, a hedge fund decided to take a position, a chat room is pumping it, or an algo designed to flip these types of stocks is playing games on the bid and ask to move it up.
But does it really matter? Hell no. Price action pays. Unless you're trading with 9+ figures you aren't going to beat them, so best to learn to read the action and join them.
Below are the intra-day charts RVP, SHOP, & TSLA from Monday 5/4 as well as CREX from last Tuesday, April 28th.
SHOP - Notice volume increases again after consolidating mid-day and breaking through the range for a 13 point move into the close.
Volume is everything.
TSLA - 15 point end of day run after breaking through the consolidation range highs.
Okay, back to the penny stock RVP. Notice the consolidation and the rip through the resistance towards the EOD on volume. Their 8-k posted with some revenue projection to spark it. I don't really care who, what, why as mentioned above. Again, all I care about is price action for day-trades. Thus once I saw it break through the resistance on volume I joined trend, first using the b/o level as risk guide move it up as the stock goes.
They stole from the CREX playbook last week. Same damn thing. This is the one minute chart, but you get the point.
But stocks are random right? On a short enough time frame, hopefully, you can see it is possible to identify supply and demand levels that move pricing in any market. On a long-enough time frame, they appear random due to variable change. But are they?
Timeframes matter: If we can merge a daily chart and intra-day chart resistance level it is known as a multiple time frame alignment; the breakouts can be much more powerful. Does that mean I hold forever? No, it's still a short-term breakout trade because variables such as a pandemic or earnings change. But it could lead to a swing trade versus a day-trade. The example here is SHOP from above. The 5-minute chart resistance level aligned with the daily chart to not only draw day-traders but also swing traders and earnings run-up chasers into the party. Thus volume increased and demand overtook supply for the end of day push.
Earnings are random? Maybe. Data scientists are working on this. That said, earnings implied moves (as study through options pricing) can vary from 1% to 15% in some cases. I am to trade price action that can be read through supply and demand between earnings reports. Which is why my list for Monday was filled with stocks that had earnings last week plus breakout setups. Ideally, we get a couple of months to trade new breakout trends before the next earnings report. If you're an investor, earnings gaps may not matter as much, which means the weekly chart will be more of what you're looking to study.
Note: In ThinkorSwim my lines remain on a chart whether its the daily or 5-minute chart, 1 minute, weekly, etc. In the case of SHOP I drew the line at 647 on the daily chart first, which when zoomed in shows same level on the 5-minute chart too. Therefore I will know when the daily and 5-minute resistance levels are aligning. That said, just because you drew the line at the top of the candles on the daily chart doesn't mean the 5-minute chart line will be perfect. You may also want to draw lines on your 5-minute charts. As for screen setup, you could also build the daily chart and 5-minute chart directly on top of each other so you don't have to switch views back and forth.
If you have no idea what the hell I'm talking about when I mention multiple time frames or want to learn more, check this article out.
Creating Risk Guide Levels on the Fly
If you chase news, what's your plan? If you buy a stock because someone mentioned it on Twitter, what's your plan? A big part of short-term trading successfully (yes selling for a small loss can be considered successful) is the ability to identify risk levels on the fly. If you can identify the resistance and support level using candle peaks and lows, you can draw your lines on the fly and know the risk. I draw lines on charts for your reference. I can mentally see the lines now. I've been doing this a long time.
The only way you'll get better is to draw lines, draw more lines, and then draw even more lines. Go through 1000 charts on the weekends. Daily and 5-minute. I'm not kidding. This is a job than can pay very well if you learn how to do it. How much are you willing to work to be successful? You wouldn't get into the cockpit of a fighter jet without spending time in a classroom and simulator first right? You'll crash and burn. Trading is no different. People with far more experience will gladly take your money. After all, that's all we are doing; trading against each other, trying to take each other's dollars.
Okay, back to risk guide on the fly. As mentioned in my first tweet I embedded above RVP risk guide was 4. I determined: a) it was the clean level right above the consolidation breakout on the 5-minute chart; and b) my $$ loss amount if it fails.
Keep it simple. If it works, awesome we make money into close and get ready for the next day. If it fails, we keep losses small to also get ready for the next trade. Either way, don't put too much emphasis on one trade. There will always be new setups.
But Blaine, how will taxes affect me if I trade a lot? You only have to pay taxes if you make money. Overstaying a trade whether loser or winner because you're worried about taxes is not smart. Your goal is to pay taxes. If you're paying taxes you're doing it right. If you get a write off every year maybe its time to rethink your strategy or a least study/practice more until you understand price action. You may also overthink the wash rule. Focus on making good trades so the money flows and taxes will take care of themselves as long as you remember to wire out into a separate account at the end of the year minimum.
I wire out after good trades. Trading is just a job. If I make $5k one day guess what, I'll wire out $4k into my designated account. (Which is also re-invested into long-term assets and used to pay myself as bills/taxes come up). If you only have $1000 account and build it to $5-10k+ by year-end, then put half into a separate account for taxes and starting your wealth creation fund. If you have six or seven-figure accounts then pay yourself (wire out) after big trades. It's easy to give it right back because it felt good. I've been there. I wired out mid-day last week to avoid just this thing.
Bet you didn't think risk also involved tax planning and wealth management too eh? I'm not a tax consultant or financial advisor (anymore) though, so find one. Those are just tips that I use personally. Okay back to trading.
Scaling/ Trading Around a Core
WTF are you talking about Blaine? Okay, back to the RVP example from Monday. If you want to build a 1000 share position, do you have to buy all 1000 shares at once? Nope. Buy 100 on the 4 break, add 100 on the first dip, add 300 on the next leg up, add 200 on the next dip, and add 300 on a confirmed follow through. Then scale out on the way up. This works great for accounts under $25k minimum. As long as you don't buy between sales, scaling in and out only counts as one day-trade; as it's only one round-trip.
Or take 1000 share starter, add 4k first dip, add 5k on confirmation to get to 10k full size, and then trade 2k blocks around the 10k position on the way up. Add 2k on a dip, sell 2k on a pop, etc until ready to scale out of the core. Trading around the core is not for beginners. But it does have advantages as a swing trade strategy or for day-trading accounts with $25k+.
Penny stocks are not for everyone. You're playing with fire. They trade 'cheap' because they don't make money, have lots of shares outstanding, questionable management, questionable PR's or maybe even potentially going bankrupt. Of course, they can run hard under the right circumstances though. As mentioned above, I focus on late-day action versus early morning action on these types. I very rarely hold overnight. How many questionable PR's regarding Covid-19 have caused the SEC to step in and halt penny stocks? More than a handful have been in the past 2 weeks. Know what you own. Is it a fluff PR so insiders can sell or a debt holder can convert to shares and dump? It's best to trade the price action and let others deal with the drama. Rather than throw your hard earned money at a potential scam stock you know nothing about in the moment, why not learn about options and make trades like this? The price action of real companies is easier to read most days while the supply and demand metrics are the focus not the company drama. Options are not as complicated as they seem at first. Digging through filings and PR's in an attempt to dig up the scam or find the dilutor of a penny stock is far more time-consuming. As always, study before starting into anything new.
My next post will be on option strike and expiration date selection for day versus swing trades while still using the underlying stocks' price action to determine entry and exit.
Know the News, Trade the Action...
Price Action Pays.
But don't take it from me.
Take it from one of the BEST.
Feel free to send me your questions via Twitter.