Last Thursday, if you were with me during the 9:30 a.m. ET hour, where I trade and teach LIVE every day…
Then you learned about the Bed Bath and Beyond (BBBY) after earnings play.
BBBY earnings reversal
*Hint – You can’t do it, nor should you be so arrogant.
We don’t pick the bottoms, the bottoms pick themselves.
BUT- you can pick up on some of the clues that a bottom may be in.
Today, I’m going to share the insights into playing the “bottom” on BBBY Thursday morning, and how to potentially trade the setup.
BOTTOM PICKING BBBY
Last Thursday, BBBY was at the top of the list for an earnings reversal trade, with the stock trading down in the pre market after reporting earnings.
What am I looking for when a stock opens lower after earnings?
It’s pretty simple really – A move back above VWAP.
That’s the simple version of course.
I also look at pre market and previous day’s levels of significance.
But in the case of BBBY, while the play on a break above VWAP had potential… This stock was in another realm.
It was looking ugly.
After reporting earnings that morning, BBBY tanked from nearly 23 to below 16.
- No way am I looking to short a stock down 30% either.
- But I’m not looking to catch a falling knife either.
By that, I simply mean that I’m not trying to think I can outsmart the market by picking the bottom on a stock that is in free fall.
It’s like if a knife falls off the counter and you try to grab it while it’s falling.
Chances are, you’re gonna get cut.
A little common sense tells you to let the knife hit the floor and settle before you pick it up.
Same goes for the markets.
You can’t pick bottoms – bottoms pick themselves.
As VWAPians, we don’t guess… We simply do what the stock is telling us.
In this case, BBBY was in free fall during the pre market.
And then it hit 15.75, then 15.75, then 15.75… you get the picture.
Do we have a bottom?
Not so fast.
After hitting 15.75 over and over, we get a little blip to 15.70 and back up.
This is enough to get people thinking the bottom is in at 15.70.
The bottom pickers grab shares on the move back above 15.75, and likely put stops right at or under 15.70.
Chart: courtesy of thinkorswim
Well, not so fast…
Next up – The Algos Kick In…
And they know exactly what these bottom pickers are thinking.
All it takes is a quick push through 15.70 down to 15.54 to swipe all the stops, and BBBY is immediately back up.
What looked like a bottom at 15.70, gets targeted by the algos… and the stops at 15.70 get whipsawed out.
For us, VWAPians – one person’s disaster is our opportunity.
I almost feel bad saying that… but then I don’t.
Algos swipe the stops
It was a quick move on the stops… one candle down, the next back up.
This move created a double bottom just above the half number on a stock down 30% after reporting earnings earlier that morning.
This is our opportunity to play these levels.
The quick move back to 15.70 proved the significance of the level.
So a buy at 15.70 – 15.75, depending on one’s reaction to the move, gives us a decent risk to reward with a stop below the low of 15.54.
You can risk .20 for a move back to VWAP and potential a cross above for .40 – $1 plus.
Setting up a potential bottom
- Stop catching falling knives. And start paying attention to the clues.
And by midday, the stock hit a whole number at $18… to the penny.
I can’t make this stuff up.
The significance of the whole and half numbers when trading IS real.
$18 to the penny, The algos are alive and well
For one, the move back to the 15.70 range, after the open, gave us a great opportunity for the earrings reversal play during regular market hours.
It hit the area multiple times, and held, before moving back up to VWAP and beyond.
Now let’s get to it…
Join me LIVE at 9:30 a.m. ET for another great day of trading.
It’s going to be a fun one as always…
Kenny “The Warlock” Glick
October 04 2021