Wednesday Trading Review and Trading Plan for Thursday March 12
Mar 11, 2020 Trading Blog
These are the weeks that I live for a as trader. They aren’t always profitable, but the market action is fascinating when it moves at this kind of speed and volatility. You could go another 8-10 years and never see what we’ve seen this week. And I expect that we are just getting warmed up. If you are just here for tomorrow’s trading plan, it’s at the bottom of the page.
But before I get started, I want to apologize if any of my Twitter posts ever offend anyone. If you have followed me for any length of time, you’ve probably figured out that I’m just one of those people who says exactly what’s on my mind (sometimes that isn’t always the best thing). I love people who are thinkers and speak their mind. If I ever offend or if you disagree with anything I’ve posted, then definitely let me know and call me out, I don’t mind. I’m wrong a lot and sometimes people have better ideas than I do, which I love to hear. Nothing is better than calmly discussing opposing ideas. I just try to put my thoughts out there, you guys get the good and the bad, without much of a filter. I promise, I won’t take it personally if you disagree with me.
Ok, couple trading things that crossed my mind today that may help someone out there. I read a few posts today that reminded me of three biases that I continually fight with in my own trading and I’m seeing these a lot this week in other traders. First one is recency bias. There’s many traders out there that only see back in the past about as far as Monday. On XOP for example, their anchor price is 10 and that’s what they are trading around. The problem with this bias is that you blindly exclude the fact that we were just at 20 about a month ago. Sometimes the recent action can blind you to where you are in the larger picture. I see guys wanting to short here in the 9-10 range without giving any thought to the fact that there’s about 8-10 points of gap that price could rocket straight through if things turned around or if there’s a geopolitical event. They are so anchored to the recent $10 price that they are trading to make a dollar but risking $3-5, but they don’t see the risk as being that high because of the recency bias. Don’t anchor all of your thinking to recent price action, always take a step back and know where you are in the big picture.
The next bias is representation bias. Everyone on EFT is an expert in the fundamentals of the shale business (except me, I probably know next to zero about how they actually dig oil out of the ground). Sometimes I see people get so wrapped up in the fundamentals of the energy sector, the management teams, OPEC and the company fundamentals, etc, that they lose sight of the fact that we trade stocks, we don’t trade companies. The stock and the company are two different things. You can know everything there is to know about the current company situation, but sometimes stocks aren’t about the current situation. The representation bias generally says that a thing actually is what it represents itself to be. Sometimes stocks AREN’T what they represent. If you think a stock represents the underlying company at a specific point in time, well, sometimes it doesn’t. It depends on what group is buying that stock. A company usually represents the same thing to all fundamentalists, however the stock can represent different things to different groups of technical traders. Some traders see the stock with a view of a week to a month out, some traders see the stock with a view of a year in the future, some investors see the stock with a view of twenty years out. Point is, the stock and the company are not always the same thing, keep this in mind when you are buying a stock based on your fundamental outlook about the sector or individual company. The stock doesn’t always represent the current company.
The last bias is confirmation bias. I see this in the bears a lot lately. There are many shorts out there and they are constantly willing to spout bearish thoughts all day, but many of them do so because they are short. All the news and information they consume is bearish and it supports their short position. You never see these guys say anything positive about the sector or any of the companies. This is perfectly fine right now because the market is trending down, but at some point the tide will turn, however these guys won’t be able to see it because they will be blinded by their confirmation bias. They ignore anything positive about the sector because it doesn’t confirm their position. I also see this a lot surrounding this coronavirus issue. Some people are so emotionally invested in their position, that they won’t consider an alternate view, even if you prove that view to them with rock solid evidence. They only see what confirms their political or emotional ego position. Take in all facts, both the ones that agree with your trade position and ones that are against it. If you don’t see both sides, you will get blindsided when the turn comes.
Anyway, those were just a few ideas that popped in my head and were things that I’ve definitely had problems with earlier in my trading career. I don’t have all the answers on how to fix these, but the first step is simply being aware that they exist.
Trading Plan for Thursday – Well, I had a great swing trade setup, but the after hours action has pretty much killed that idea. XOP is already bid 9.35 with huge size on the bid, especially for an after hours trader. That’s about 3% up from the closing price.
My thinking on the setup went something like this: I think we are nearing a short term bottom in the SPY. I’ve been posting 271 as the spot I’ve been watching for the market to make a bottom and we hit it today. It tested that 273 area of the weekly low and broke through, and it had every chance to totally collapse, yet it climbed right back above 273 and closed 274.36. That’s a bullish sign that a bottom could be forming. I’m looking for a gap down to 270 on Thursday and then a reversal back into Wednesday’s range at 270.88. Once it reclaims that 270.88 Wednesday range, it should run hard for about 10 points to somewhere around 279-280. The trade is a favorite of Scott Redler (@RedDogT3) and is called a red-dog reversal. It’s a great trade setup which is found in an oversold market. Knowing that this setup was there, I would then look to$XOP to execute a very similar setup with a test of Wednesday’s low somewhere in the 8.75 area. The SPY and the XOP should reverse almost at the same time so you get momentum in the individual name (XOP) supported by the overall market (SPY).
The action in XOP was giving me the feeling that it is making a bottom. It took out that 8.88 low and was able to reclaim in and close above 9. There was huge buying at the close that popped price to about 9.35. That buy order was about 5 million shares and whoever did it didn’t care what price they were getting. That became obvious after the close because price ran from 9.05 to where it now sits bid 9.35. We may have found a very tradable bottom here in the 8.75 area.
Even though the setup is pretty much ruined, I’m still hoping the SPY can gap down and at least pull XOP back under 9 for a solid swing long trade. I’m thinking about a 2-5 day run, which includes holding over the weekend. There is a good bit of chatter out there about the shale bailout and I think we get some concrete details over the weekend. If we do, Monday could be a big up day for shale. If OPEC or Russia could contribute any decent news, the pop could be huge. I wouldn’t put it past Trump to try something with Russia and/or OPEC at the same time as any bailout package is released. He has a habit of sometimes making things seem more likely than they are and sometimes kind of puts words in other peoples mouth. There’s no telling what kind of angle he could take on this, but almost any angle is going to be positive and cause a pop in stock price.
So, we will see where things open tomorrow. I apologize, I know there are probably a ton of errors in this post and it’s a little scattered, but my brain is tired and it’s almost time to eat. I’ll be back at the computer for the open at 4am. Best case scenario is we get a big gap down in SPY and XOP for an attempt at a red-dog reversal trade and a good entry point into a nice 2-5 day swing trade with some help over the weekend in the form of good news. Good luck tomorrow, and if you are anything like me, get some sleep.