WFR Scalp

Posted on March 7th, 2007
Written by Richard
Posted in: N/A (old archives)

A scalp like this is one of my “pay the bills” plays… little, reliable plays that I can usually find if I’m willing to look hard enough. As I get toward the end of the month, if I’m feeling the pressure to pay some bills, I get motivated to wake up on time and find these suckers. A few months back when I had a 100% win rate for 40 days or so, I was basically doing nothing but this move.

Leading Up to the Trade

If you’ve been following my Twitter feed, you know that I have been having internet connectivity issues today. I had access, but there was lots of lag which left quotetracker mostly useless. One possibliity I pointed out via twitter, was MEMC Electronic Materials Inc (NYSE: WFR) for a break of 54.50. I mentioned that I generally do not trust this shape (which you’ll see on the chart below).

I’ve seen this pattern reverse quite a bit when volume isn’t high. If a low-volume stock hasn’t broken its OR yet, chances are it’s not going to. Well, leading to the break, volume on WFR wasn’t especially high, and also I knew from reading Trader Mike’s watchlist post that the beige book would be released soon. So, I had little confidence that the move would follow through. However, there’s still a high-probability trade to make!

Why It Works

Here’s why it works: Check out the chart. When the pattern on the chart is so clear, and it’s a round number that corresponds to the opening range high, you know that a lot of other small traders have spotted this chart. And, that means that big money and the specialist will be more than happy to trap those traders by letting the level break, and then fishing for their stops. This is why I think that the cleanest-looking setups are actually more likely to fail than ugly ones. Without really high volume, little traders are bound to get hurt.

Given that logic, you might think it’s best to short these breaks. That’s one option, but I don’t trade against the trend, so I won’t do that. You never know… maybe volume will pour in that will keep the move going. So instead, I just scalp my way in and out before the move can fail. I usually target 10 cents, and if it blows past 10 cents I wait for buying to dry up. Why 10? It just seems like, no matter how cheap or expensive the stock, a level break will pop about 10 cents. At that point, it seems like buyers and sellers pause to consider whether they will keep going. Just my observation.

The Chart

Here’s the chart… my trade is in that first tiny wick that peeked above the upper blue line to 54.60.

WFR Scalp

I’ve drawn in the ascending triangle shape I spotted. Since the touches of the upper line are so infrequent before the end, it kinda also forms a rough cup-and handle type shape as well. The top of the triangle is the OR high, and it’s at round number 54.50. Both very good signs for a pop through the number. I bought in at 54.50, and got out for an average price of 54.59. Since I’m scalping, I plan to get out immediately if the pop doesn’t happen.

The stock moved exactly as I thought. Look at the surge of volume suckered into this move. As I write this, the stock has fallen all the way back to 54.23. Ouch! Poor bullish chartists. It will probably recover, but I don’t know if it will run again. And, since I’ve banked my profits, I don’t really care. :-)

For R reporting, I don’t want to report 9R (given that I planned to risk 1 cent), so for these scalps I just compare the money I made to my ‘typical’ risk amount, and report that. In this case, I made 0.5R in just a couple seconds. Not as impressive as ugly’s ATS yesterday, but at my R size, it doesn’t take many R’s per month for me to live well.

(although you can never have too many!)

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