Trade of the Week for January 6, 2017
As momentum daytraders there is nothing better than to witness and trade a stock that exploded over 1500% in the first six trading days of the New Year. EnteroMedics, or ETRM is a pharmaceutical stock that had issued a 1 for 70 reverse stock split on December 28th, 2016. Often times the parabolic stocks we trade have a few things in common: Low-float, relatively large short interest (short float), recent reverse splits and chat room promotions. ETRM in particular had most of these factors which resulted in an incredible five-day run. (This fundamental information can be found on many websites including www.finviz.com, yahoo finance, and www.shortsqueeze.com).
The market is always changing and success only comes to the trader who’s ready and willing to adapt to any changing market conditions. In 2016 we witnessed dozens of parabolic low-floaters that posted triple digit gains only to come crashing down twice as fast. However, ETRM was different and its reluctance to give up its gains only led to bigger and bigger moves. When short sellers become too comfortable in their strategy, short squeezes can occur which further drives up the price. As we can see in the attached charts, each day the stock held its gains in the afternoon (not a typical pump and dump) and the next day jumped even further especially after clearing through prior highs from premarket and the day before. In situations where short sellers are caught in the wrong direction, they are trapped and unable to get out of the stock without receiving a terrible fill. In many cases, a trader caught short in a parabolic move will be issued a margin call-a mandatory cover by their broker! These factors only add to the explosive action along with most other traders chasing the stock up.
What’s especially interesting is how we noticed the action in other low float gainers (such as IDXG, GLBS, MYOS) acted similarly with strong momentum following the ETRM frenzy. Understanding psychology in the market is hugely important and its obvious all daytraders came out to play with these stocks-often times clearly jumping from stock to stock.
If this price action is an example of what we will continue to see in 2017-bring it on! We just have to remember to never be too comfortable with a strategy and be willing to switch bias when market conditions change.