This market is so wild it seems like stocks are just rising on air…
All it takes for a stock to soar is for a company to put out a press release — regardless of what’s in that press release.
Does that mean you should just throw your rules out the window and buy any stock with news in a hot market like this?
No.
We don’t want to get caught up in analysis paralysis wondering which news will move a stock and which won’t…
There’s more to the big moves we’ve seen lately besides the news.
I’m going to share three critical components of any trade and why they trump any news catalyst…
What to Focus On In a Hot Market
If you only traded strong catalysts like earnings — then you wouldn’t trade a stock like Polished.com Inc. (AMEX: POL).
And you’d miss out on incredible runs like this 923% gainer on Wednesday…
POL chart: 1-day, 5-minute candle — courtesy of StocksToTrade.com
The company had an SEC filing by a shareholder who wanted to collaborate with other investors.
Not exactly earth-shattering news.
And let’s be real … The stock didn’t soar from around $1 to almost $11 in one day because of the news…
Just like Mullen Automotive, Inc. (NASDAQ: MULN) didn’t soar on news that it delivered a measly 38 vehicles (the company did a reverse split and pumped out a press release the same day — they know how to play the game)…
MULN chart: 1-day, 5-minute candle — courtesy of StocksToTrade.com
Both of these wild moves were caused by short sellers.
They get overaggressive thinking the news doesn’t matter … Then they get smoked when the price reverses due to buyers and shorts wanting to buy to cover to exit.
So these moves aren’t about the news…
It doesn’t do any good to try to dissect news and determine what is important news and what isn’t…
Just like we don’t try to dissect earnings reports and revenue — we watch for the stock’s reaction and focus on three important components…
Price Action
When dealing with a hot market, price action is all that matters.
You want to see a strong stock that can break resistance levels, and make higher highs and higher lows.
Quick upward moves through resistance or short seller risk points can create big squeezes.
As short sellers rush to cover their short positions, it can trigger a cascade of buying, pushing the stock’s price higher.
Next, we focus on…
Chart Patterns
Chart patterns are what give us higher odds that a trade will work. If you don’t have a pattern or certain criteria you look for before you trade — you’re gambling.
I don’t play guessing games. I look for patterns.
Look for a dip and rip or weak open red-to-green moves in the morning. And look for VWAP hold, high of day breaks in the afternoon.
We want the stock to have strong price action and a pattern so we can make a strong trading plan.
We also want to see lots of…
Volume
Volume is the number of shares traded and it’s a critical market indicator.
In a hot market, increased volume can be a precursor to a short squeeze.
That’s why even though we don’t try to dissect news headlines and stories, we want the press release to bring in more volume.
Uneducated traders just chase press releases — they think any kind of news will push a stock higher.
But they don’t take into account these three factors that are crucial for a stock to have a big upside move.
MULN and POL both had midday dip and rips, strong price action, and high volume (although I don’t like first day reverse splits like MULN).
The news is just the spark — the other three components are the fuel on the fire.
Today is Friday before a holiday and more shorts could be looking to cover positions…
Are you ready to trade a short squeeze?
If not, join our free live training sessions to prepare for the trading day.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade