I’d like to talk a little bit about this in the light of NLST, DRAM, SEED and GRO spikes that we’ve seen recently.
First, if you catch a spike early on and get in, great. That’s the best play. I personally almost never chase a spike. I may get in at a pullback but even that is rare. If I missed the first few percent, I don’t risk getting in. Yes, it may go up 100% from there, so be it. Most spikes are ephemeral, I can’t risk being the last fool buying a stock. I know there are great traders out there that create wonders in these plays. I’m not one of them.
What I’m good at is the other side of the game. If I missed a spike, I patiently wait for it to start fading instead. Spikes inevitably create overextended situations where traders all rush in, hoping that there’s a greater fool to buy the stock from them later on. Well at some point, there will be no more fools left and that’s where I hope to come into play.
Spikes can be irrational, that’s fine. Don’t ever think “That stock can’t go 50% on these news”. It can go anywhere. But sooner or later, if the news is not really that big, it’s bound to come back to earth. Always remember though: It’s very stupid trying to short huge buying pressure.
When I see a spike, here’s how I go about it:
- Check the reason that causes the spike and evaluate how justified it is. This will give you a clue how much of the spike is fluff. You can easily find “pump&dump”s by doing this, which will give you a great short opportunity sooner or later.
- Check how the stock behaved on prior spikes. Can it hold? How long?
- Check the float & short interest. High short interest and/or low float can make the spike go much further than you can imagine. Be prepared for this.
- Check important resistance levels and watch stock’s behavior closely around there. It will most likely go past it, but how much it struggles will tell you about the strength of the spike.
- Wait until the stock starts making lower highs & fading volume. If volume is fading in a spike, there’s not many people left to buy. Might go short on the next lower high. Even if you’re wrong, this gives you a high probability trade with simple stop above recent high.
- Watch 5 min candles for zoomed-in view of the stock and 30 min for bigger picture. They actually do work. I don’t base trading decision on candles though, they’re just supplementary.
- Preferably don’t hold overnight. I personally do hold overnight if I like the close. If you did and stock gaps up in the morning, don’t panic. Wait 15-30 minutes for the stock to settle.
- Watch out for the “second wave”, most spikes don’t just fade before they have another burst.
Now, here’s my favorite part:
Spikes also create lots of sympathy plays that you can play both ways. I look for laggards and play them, they’re low risk plays. I made a great percentage play on RMTR just because it was an NLST laggard. I did the same with CNOA today and we’ll see how that goes. Worst case I exit flat-ish. Best case they do mini-spikes.
But, if a sympathy play is spiking purely due to the main player’s spike, it’s a great short opportunity. There’s no real catalyst for this stock, it’s just being pushed by the other guy. That means it’s bound to fall even quicker. That’s what I did with DRAM (due to NLST) and that’s what I’m planning to do with GRO (due to SEED) when it starts fading.
As always, don’t gamble and make sure your stops are there. Good luck.
