Super Micro Computer (SMCI) - Jan 31st 2024
Using low-beta names to profit on FOMC days
Higher timeframe context
First time we go back-to-back with the same name, but this happens a lot more often than it may seem. When a name has a lot of attention it's not uncommon to keep trading it. SMCI has been offering truly amazing volatility lately and has surely been worth our attention.
If you missed yesterday's post, make sure to give it a read, as I'll avoid repeating myself for the dedicated reader.
It's good to note that the first FOMC announcement of the year was scheduled for 2pm EST on this day, with the subsequent conference of Chairman Powell. These days are usually choppy as markets await the FED's statements on the labor market, inflation, and key updates on their interest rate policy. I usually avoid taking directional trades on high beta names.
Weekly chart
Once again, the first thing we see on this weekly is that $500 level. If yesterday we talked about how important these psychological round number levels are, today it's no different. The difference is that we're above the level now, so we can expect it to act as support if it hits.
Daily chart
The daily chart shows us yesterday's post-earnings gap fill, which we went over thoroughly. It's interesting to note that we closed above. Buyers held the $500 area during market hours.
Hourly chart
Our hourly chart gives us a few levels of reference that may come in handy. We can appreciate with further detail how buyers kicked in as soon as price approached the $500 area, confirming their interest at these prices.
Pre-market action
I plotted some annotations on the chart that I deem relevant. But what I really want us to focus on is how once the $500 was reclaimed early in the pre-market session, it held all the way to the open. This is what we were expecting, right? When whatever we are expecting happens, the pieces of our puzzle start aligning. So naturally, this name becomes a top watch for the day.
The trade
On this day, both GOOGL and MSFT had released their earnings for Q4.
Why not trade those instead?
Because they're both super high-beta names and your chances of getting chopped out were high due to the FOMC announcement coming later that day.
If we want to trade on FOMC, we're looking for names that are both In Play and have low correlation with the indices. SMCI had both.
Using our CPT Framework:
Cue(s)
One of the strongest stocks in the market, with recent strong earnings
Sitting above the $500 key support after a much-needed reversion move
Low-beta name, lower correlation with the overall market
Intraday cue: 3-bar play momentum setup right at a level
Plan
As we can see on the pre-market chart, SMCI is set to open right at the $505.01 level after bouncing off the $500 key psych. mark. Honestly, my plan at this time was to wait for a dip to the $500 and take the trade as price reclaimed the opening print. Exactly the opposite of yesterday.
Unfortunately, price never tested the $500 during market hours. It just opened and blasted straight up, closing a 15pt 5m candle to start the day. When this happens you have two options:
Sit there and complain, letting emotions like FOMO take control of your trading.
Use the information you have in front of you to make a new plan.
The information that's in front of us 5 minutes into the bell tells us that buyers are interested in this name. They didn't even let it dip to the $500. That's a clear sign of strength. Our new plan is to try and catch a momentum entry with the tightest stop possible to see if we can capitalize on the rest of the move.
Very conveniently, the stock sets up a continuation 3-bar play setup right at the $519.57 level we had marked.
Trigger(s)
Price trading above the 3-bar play signal bar.
5m chart
Honestly, I can't imagine a better scenario for us to get involved on this name. That rest bar right at the level is so convenient as our new signal bar. But also, look at how the following bar (trigger bar) mildly rests at the level before triggering our entry, offering further confirmation and allowing for an even tighter 2-3pt stop.
The trade works immediately and as usual, it's just a matter of holding and listening to the chart. As we get close to our target level, another potential 3-bar play sets up. This allowed us to trail our stop (T1) to the lows of the rest bar, which triggered as the 3-bar play failed and was a good opportunity to offload part of your position, as the risk-to-reward at this point is skewed against you. Price does try to pick up but the moment I see another rejection I set another trail (T2) for the rest of my position, which not surprisingly triggers pretty soon.
At this point, I'm cash but waiting to see if price sets up a second entry off a two-legged pullback. The small bars marked with the green highlight were all trying to set that play up but sellers kept stepping in, so there was no trigger. The next option was a bounce at $519.57, but it never hit, so that was it for me.
Closing notes
Once again, this name had the right combination of factors that allowed traders to make decent profits on FOMC day while avoiding the overall market chop: It's a relatively low beta name, which means it has low correlation with the overall market; it's been very In Play lately, it had a key level of interest, a fresh earnings catalyst, and the price action leading into the day gave us enough clues to position ourselves.
I'm sure many caught the opening drive. I didn't. And frankly it’s painful to watch a stock take off without you. But ultimately you chose how to react to that. You can either let emotions take over and start whining, or you can go back to the drawing board and plan for the next opportunity using the new information price is offering.
I am posting one trade writeup every day throughout 2024. I focus on large caps using levels and price action. The subscription is absolutely free and will always be. I will strive to provide value by offering clues and ideas for you to enhance your edge. Let’s grow together!
You can either let emotions take over and start whining ☠️