We talk a lot of about trading press releases and earnings releases to the long side. In fact, stocks with momentum from a fundamental catalyst are our bread and butter. We use a lot of different setups – flags, ORBs, quick pullback buys, etc – to trade them, but most of our trades have some sort of catalyst underlying them.
But sometimes, a catalyst sets up a powerful short trade. Last week, $NVDA provided an example of that. It had been climbing solidly from the $20s a year ago to almost $120 recently. I was watching the daily chart closely and had noted a level of resistance at $121 that the stock appeared to have trouble breaking through. As a quick aside, if you aren’t looking at stocks on multiple timeframes you’ll get yourself in trouble – it’s important to be aware of both long and short term levels of support and resistance, trends, etc.
To break through a level like that takes some serious momentum. With earnings reports, it’s all about expectations. If a stock exceeds expectations, you usually get a big surge of positive momentum. If earnings are positive – even incredibly so – but still less than expectations, you often get a drop. In $NVDA’s case, the stock dropped to $107 after hours, once the earnings numbers had been released. This told me a lot. Though the earnings number had been great, and fluff pieces started to roll out, pushing it up again, I was skeptical that it had the power to make it through resistance after such a long run.
The next morning, it gapped up right into the resistance level and I shorted it at $119, with a stop right above, once we got a red candle. It almost immediately dumped and I covered some. It then popped up again, into its VWAP, and I shorted again. I covered partial positions from $113 – $115. I closed the trade out entirely with almost $1,000 in profits – not bad for half an hour, right? If you want to watch me trade and learn while you are doing it, check out my Bulls Vision service. I’m live on there every day, sharing my screen and walking through my trades.