My basic trading philosophy can be summed up by one simple quote:

"Trade the ticker, not the company" - Nate Michaud

Saturday, July 5, 2014

6/27/14 WSTI Short Trade Recap

As some of you may have noticed, recently I've been taking some time off from blogging, in part due to the OTC market being so slow. However, I've received a few questions about my WSTI short and thought that it might be beneficial to do a trade recap.

The Setup:

Let's begin by examining the daily chart entering the day:

When examining this chart, here were my initial observations:

     - 6/19/14 was the first day of significant volume; therefore, I consider that the start of the promotion. The chart action prior to that is irrelevant to me due to the low volume.

     - Every single day since the beginning of the promotion, the stock closed green; therefore, I consider this an overextended stock that should collapse hard when it finally cracks. It helps that it is a known promotion.

     - 6/23/14 the stock went significantly red, yet it managed to recover and close near highs. The next day it broke out past $1.55.

     - Every day following the breakout, the stock has gone red, yet it recovered to close green. This tells me that a g/r move may not be what triggers a total collapse.

Normally when I'm looking at an overextended daily chart, I'm looking for large morning spikes to short into or a g/r move to signal a trend break and impending collapse. As noted above, in this case I believed that g/r would not trigger the collapse, that it would take a different sort of trend break. During the previous trading day, WSTI had a very strong open before a negative seeking alpha article was published, causing the stock to pull back.

WSTI pulled back to about $1.80 because of the negative article before quickly recovering. Since the daily chart had produced higher lows every day since the breakout, and $1.80ish had acted as the bottom of the panic after the negative article, my theory was that $1.80 could act as the trend break that would lead to total collapse.

Morning Action:

Unfortunately, WSTI shares to short were very difficult to come by. Up until the previous day, they had been impossible to find. My favorite broker for OTC stocks, Centerpoint, briefly had shares to locate of WSTI the morning of the 27th. I decided to pay the locate fee of $.05/share for 10,000 shares, because I knew there was massive downside potential if the stock collapsed, and I didn't want to be without shares if a shorting opportunity presented itself. 

WSTI gapped up to $2.17, and after a quick pullback to $2.12, it managed to spike up to $2.25 before running into resistance. I was definitely watching the spike for a short opportunity, but ultimately I decided that it hadn't spiked high enough for me to short into the strength. After a brief period of consolidation, WSTI began to crack its $2.12 low of the day. I decided to take this opportunity to initiate my short position and wound up with roughly a $2.11 average. But why did I short here? It wasn't into a spike, and it wasn't on the $1.80 breakdown level I thought might be key. There were a couple of reasons:

  1. The low-of-day crack was still a very bearish move. I expected there to be SOME pullback at least, and if the stock looked like it would hold up, I could just close my position for a small gain or loss.
  2. 10,000 shares is not a large position size for me. If I were to stay patient/stubborn with my position, I knew I could always locate additional shares the next morning and look for a spike to add into short.
I watched the stock bounce slightly after the pullback to $2.00 and knew that ultimately I wanted to use the morning high of $2.25 as my risk level. If WSTI had started to perk up and look like it might break past that high, I would have probably cut my loss and tried again later into a spike. The $2.12 support level began to act as resistance instead, though, and after failing to break through WSTI faded back again.

The rest of the day, WSTI turned into a slow and steady fader. While there were small bounces along the way, there was never any action to indicate that the trend was reversing. Once WSTI broke below $1.80, I knew the stock was toast and should continue to fade. The chart was broken. I would have added to my short on the $1.80 crack, however, I was unable to find additional shares. I considered covering some of my short into the fade, but since it was going to be the first red day for WSTI, I thought there were decent odds that there would be additional washout the next morning.

The Cover:

Monday morning WSTI had a pretty large gap down, from $1.35 to $1.14. I already thought this was a rather large move down, and upon reading the level 2 I thought I saw bottoming action right out of the gate so I quickly covered up my position at $1.11. The level 2 action turned out to be a fake bottom, but I had no regrets locking in my profits as I had played it safe and hadn't opened myself up to potentially getting caught short into a large bounce. 

WSTI had fallen 50% off of its highs in one trading day, which was more than good enough for me. Had there been a large bounce at some point, I would have definitely considered a reshort. I never quite got the price action I was looking for though, so I simply moved on to a new stock because the play was over!