The Sector Move is Back

Had a decent day today, primarily on the back of $ORPN. I saw the morning volume and caught the move from $5 to $8 for about a dollar. I'm OK with missing out on an additional $2 of upside since the intraday range on the stock was so extended already.

Too bad it faded back so high from the high of the day, since it would have made a good short candidate tomorrow. It reduces the amount of potential profits for an unchanged or gap down open tomorrow. Still a good short candidate if the stock gaps up at all overnight, the bigger the better. My ideal scenario is for the stock to gap up to $5 or higher and then dump off the whole day.

I didn't see anything else interesting out there with volume so I sat on my hands most of the day, until after the Fed meeting when I was surprised at the sudden spike in $X. I saw that it was confirmed with the rest of the commodities/materials stocks and took a position, netting about 35 cents in 30 minutes.

Here's the sector move I was looking for. It didn't come from the hot-rolled ITA decision like I expected, but that shouldn't change much. $X is still clearly leading and will probably be the easiest to trade out of the bunch. Some of the lower priced commodities stocks like $FCX, $TCK, $VALE, etc may give overall decent returns on a percentage basis, but as laggards will probably be tougher to trade with choppier price action.

I do expect a gap up in these stocks tomorrow, after which the plan is to wait for a bit and let them pull back in a bit before looking to get aggressive.


I'll probably also take a look at anything with volume as well, although that will take less of a focus than usual with the potential of a commodities sector move out there.

Bios In-Play

I got a bit too excited on Friday morning and bought $X off the open without waiting and observing the price action. I was up a couple grand at one point, but I noticed $AKS was selling off... next thing I know, someone sells a huge block of shares and crushes the stock 70 cents lower. Dumped everything out for a small loss. Luckily my Thursday afternoon cheat buy was able to bring down my average cost and keep my overall loss minimal. I think I lost around $300 overall, which is pretty good considering how much size I had on.

I got a little too excited because the volume bars in the first 10-15 minutes were insane. I definitely thought it would be a big volume day,

I'll probably wait the extra 3-5 minutes off the open from now on rather than get in at the open. The hot-rolled decision will probably be a catalyst tomorrow, but I'll settle for a smaller, more predictable profit by waiting for $AKS to be above $4.20 to confirm the move.

I had a decent up day today playing a couple earnings winners in $DDD and $KNDI. Missed the move in $ZYNE though since the volume was still a bit low in that morning consolidation. Will definitely be watching it tomorrow to see if the volume is there.

$CPXX is on my watchlist. Big move in the afterhours on the back of the unexpectedly great phase III results. It's a low float stock, so it could really move tomorrow.

The Steel Sector Move and the Easiest 5% You'll Ever Make

So some of the Oil stocks have finally cracked lower, including the soon-to-be bankrupt $LNCO and $LINE. This is why I mostly avoid buying stocks that are  range-bound - it's generally hard to predict what a stock will do when it's range bound. There's temporarily an equal amount of buyers and sellers, and you usually will not have enough information to predict the next event that will bring in enough buyers or sellers to tip the scales.

Some of the oil-correlated commodity stocks do look like they are setting up for higher though, like $PBR and $BTU. $BTU showed impressive volume today as a follow-up day to yesterday's earnings release. It wasn't bad for a day 2 move, and my ATR/3 formula would have helped you safely score 60 cents without overstaying your welcome if you bought it any price under $6.52, which is awesome considering the almost-parabolic move off the lows in the morning. Speaking of that, Nate Michaud bought into $BTU on that morning washout and crushed the stock for $1.25 a share on some of his sells, which comes out to like 20% on one trade. I don't trade the morning washouts myself, but I definitely want to track the setup going forward. I think I might demotrade it or use small size until I can figure out the factors that further increase the probability of that setup.

Now onto the main focus of today's post: the sector move in steel.

I suspected this would happen when $X held up really well in the decline of the last few days. The stock is now surging upward, almost breaking out of the multi-day high at $14.54.

$AKS followed as well, almost breaking out of $4.20.

You can see the extreme imbalance of buyers versus sellers. In one day these two stocks moved all the way from the bottom of their range to the top. The price action was so strong that I couldn't help but start accumulating (my initial buy on $X was 13.75) before the breakout even occurred (gasp!) for an overnight hold.

I felt comfortable doing it since the setup is such a high EV trade. When trades like this come around, I like to cheat the breakout a bit to give me some cushion to really swing big size at the breakout. It's unique to my trading style and lets me capture huge returns on these special setups since the shares at the lower price bring down my average share price. I am never red on the position and don't get shaken out if the stock pauses and consolidates a bit above the breakout level.

My plan is to plow my entire account into $X on the breakout, which will likely happen at the open. That's another reason why I love $X and $AKS, as well as some of the other institutional commodity stocks in general. Their floats are so thick compared to their daily traded volume (which is also pretty high) that they don't gap much, if at all. It allows most of a big move get captured by day traders, as opposed to gaping up $5 overnight to reward people holding overnight. They're also so liquid when they make these moves - you could comfortably trade $2-4 million dollars worth of shares in $X alone without pushing the price around that much. Not to mention you could hold about half a million in $AKS.

Although the rest of the steel stocks like $RS, $ATI, and $NUE are moving up as a group and have better fundamentals, $X and $AKS are putting in the biggest moves. I finally figured out why today:

As of 3/1/2016
$X short interest: 52M shares
Today's volume: 29M shares

$AKS short interest: 40M shares
Today's volume: 14M shares

These short shares are only about 25-35% of each respective float. But they're massive compared to how much volume these stocks are trading, and keep in mind they both did 255% of average volume today. These short sellers are locked short. They couldn't all possibly get out of the stock in a single day, even if they wanted to.

It's like starting a fire in a crowded theater when there's only one small, narrow exit.

These stocks are likely to rip higher tomorrow, and may even put in continuation moves the following day. The price action is very similar to solars like $CSIQ and $SPWR years back, with the reward/risk heavily skewed in favor of upside. I could see $X and $AKS doubling (possibly even tripling for $AKS) before all is said and done.

I don't know if the highest EV move in the short term will be to just blind hold though. These stocks are now trading on hype and anticipation of the USDOC tariff decision on hot-rolled steel to come out on March 14. Since we're now trading in anticipation, there's no real way to predict the decision or even how the stock will react to the decision. From a logical standpoint, the hot-rolled steel decision should theoretically be less impactful than the cold-rolled steel decision. Hot-rolled steel is cheaper, lower margin steel and the case does not involve China, who made up a massive portion of the total cold-rolled market and was given a country-wide 265% import duty since none of the Chinese companies responded. If the hot-rolled steel case involved China, this would be a total no-brainer slam dunk -- why would these Chinese companies respond now when they didn't for the cold-rolled decision?

The safest, most predictable profit would be to buy the breakout and sell prior to the close. But is that the highest EV outcome? I don't know...

Trading Sector Moves

I like trading in-play "special stocks", such as earnings or contract winners (or some another powerful catalyst), as much as the next person. However, I also love trading sector moves. I'm a firm believer that sector moves are a high probability setup (which I will explain in a later post), and allow traders to reach the "next level" of trading. 

Imagine having a single in-play stock, such as a $5 tech stock doing 2 million volume. Let's say your liquidity cap is 100,000 shares, meaning you could comfortably trade $500,000 of the stock. A 10% move would be a nice $50,000 gain.

Now take a sector move. During a brief period, an entire sector of stocks becomes correlated and makes big moves. It is essentially a single trade idea, but now I can deploy capital across many stocks. That entire sector could absorb millions of shares intraday and you can swing size. 

In the last several trading sessions, the materials sector has been extremely volatile and in-play. You can see a chart of $XME below:

The last 5 trading sessions all had high relative volume, and the increasing volume shows increasing interest.

I think a big catalyst was the anti-dumping tariffs placed on Chinese steel that happened last Wednesday, leading to powerful runs in steel stocks $X and $AKS. Combined with higher commodities prices, all sorts of commodities stocks were being taken up in the run. Some of the heavily shorted oil stocks made huge runs over the span of a few days as speculative money flowed in, such as $SDRL, $LNCO, $LINE, $EPE, $DNR, etc. The junkier the company, the more it gained on percentage terms. And if the company had any kind of catalyst to bring attention to the stock, the volume was there.

Trading the sector moves allowed huge returns to be made. It was almost effortless.

This has led me to the realization that effortless trading could be found if I just sat on my hands and waited for the few times a year when a sector becomes in-play.