The “Game Has Changed” trade

• Posted by chicagosean
• on October 21st, 2011

A trade in my playbook that I used to use with frequency and with good success I termed the “Game Has Changed” trade. This trade was one I used when I was away from watching every tick of the market for whatever reason: job, travel… whatever. For some reason or another I had gotten away from it. But recent market action in stocks like $NFLX and $GMCR have reminded me of it’s efficacy so I thought I’d revist it today.

This trade appeals to me an multiple levels:

1. It’s easy to identify
2. It’s easy to manage
3. It has had a higher than average success rate (in my experience)
4. It benefits from people panicking because their whole perception of the situation has changed on a dime.

Let me explain:

I have this personal theory, particularly of popular momentum stocks, that when a sudden and high volume sell-off happens – for whatever reason – the perceptions of everyone in the trade and/or watching the stock has changed.

The investors who have been along for the ride are suddenly scared and are looking for the exits. Opportunistic traders who have been successfully buying every dip and then flipping them out for easy scalps or swing trades suddenly find themselves in a trade that isn’t working the way they used too. And the sideliners who have been watching for a reason or an opportunity to get in see the sudden sell off and say to themselves: “hmmm, something doesn’t look right. I think I’ll look for a different opportunity.”

Thus, the stock really has no catalyst in the near term to recoup it’s rapid and significant loss. And that leaves the remaining newly nervous and increasingly weak hands to begin to sell their positions. As this snowballs, the larger funds who’ve been happily touting their holdings in this darling momo stock now find themselves having to start unwinding their positions as well. And as we know, this doesn’t happen with one trade. Rather it takes several days, often weeks to unload everything.

I noticed in Green Mountain Coffee Roasters ($GMCR) an opportunity to try this trade again. Check out this daily chart:

 

It had a huge volume, big sell off two days ago. It was all over the news, but for these trades I don’t care about the reason. Typically when I enter into this trade, I like to enter short on the open following the big down day and set the stop at the closing price of the previous day before it’s huge selloff. But in this case, I still felt there was a valid entry today, and today’s high price provides a good place to set my stop just above.

So, I entered my short at 69.92 as I posted on StockTwits:

UPDATE:

Got stopped out the next day (yesterday) at my stop price. It happens. What sucks is about 60 minutes after entering the trade, the stock had a rapid 4 point selloff. Hindsight is 20-20, but man I shoulda at least taken a little off.  My thinking at the time was that this was just the beginning and I never intended it to be a day trade. Coulda. Woulda. Shoulda….. next.

UP

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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