$GDC was an A+ Mean Reversion opportunity on Friday.
Let’s look at some of the key variables:
- It ran for two days on news that it opened a Tik Tok account to talk about AI
- On third day, capitulation day, it announced new AI technology in the premarket resulting in yet another gap up
- 3 gap days into a major extension
- Ran over 600% in just 3 days
- Volume exploded exponentially
- RSI hit mid 90s before reversing
- High probability for dilution with active Shelf and Warrants
- History of extreme runs and reversals
- Rate of Change (ROC) almost hit 400
Now, in case you didn’t already gather this, those news releases were pure fluff. Garbage headlines that are doing little to nothing for their bottom line. They do this in order to bait in buyers. That way they can use the liquidity to dilute shares in order to raise more funds for the company to use for operations. Pretty standard procedure in penny stock land.
This move quickly became parabolic and after putting in 3 gap days in a row and running over 600%, it setup for an excellent mean reversion opportunity.
This particular play was a bit tricky given the volatility and lack of liquidity at the open on capitulation day. Looking back there were 3 main ways to play it as you can see in the image below. I always try to play out scenarios in my mind of what I would like to see in order to get involved. What needs to happen and where does it need to happen are two good questions to answer before trading starts.
For me, on these parabolic daily mean reversion setups, I have a few scenarios I like to see in order to get involved:
- If it sells out of the gates, then I am looking to short the ORB through the 2min low of day with a stop at hod.
- If it runs out of the gates, then I am looking to short on the first candle to break a prior bar low with stop at hod.
- If it chops around VWAP or opening print, then I will wait for a low of day break to short through.
After going back and reviewing the chart, I marked off some of the best entries and graded them.
Entry 1 – A+: This was the first entry of the day and would of been the best one given the Expected Value (EV) or R/R profile. $GDC ran out of the gates at the open with 4 green candles in a row before reversing and breaking a prior bar low at $10.80. This would have been your entry with a stop at high of day $12.18. I graded this an A+ because of the risk/reward. You were risking about $1.38 to gain about 2 to 3x that and maybe even more depending how you managed the trade. Keep in mind, it was a volatile name so there would have likely been slippage on both entries and stops. But given the volume spike into this move, the wide range reversal candle and the bigger context of a parabolic run on daily, this was likely the top with a ton of downside potential. Now this one happened to work out perfectly, the bid completely fell out once it broke down and didn’t stop till around the $7.50 level. A very quick +$3 in your favor.
Entry 2 – B+: The break through low of day at $9. This was another option if you missed the first one. However, I don’t think I would have taken it for a couple reasons. First, the bar to break lod was very stretched and was the largest bar of the day. If I used the high of that bar as a stop I would have a hard time justifying the risk/reward given how far it just fell and how quickly it fell. Secondly, it’s hard to chase price that extended through a lod, as they are often bought up. If it would have closed just above lod and then broke, I could use that closer stop price for a better risk/reward profile and given this entry a better grade.
Entry 3 – B-: This was a low of day break or Bouncey Ball setup. These setups can be potent when they line up, the only problem with this one is the stock was already down 40% on the day so it’s hard to imagine there is a ton more downside. This one did break down and you could have scalped off some profits before ultimately stopping out when it broke back above the entry spot. However, given how clean the move was, I do think it was worth of a trade, just with lower risk.
I know it’s easy to go back and cherry pick all the best entries but by doing this you can formulate plans for future setups. This is how you build consistency in your trading.
How I Traded It
Unfortunately, I didn’t trade any of those. I broke one of my rules on this setup and started my position in the premarket. I was eventually stopped out and took a fat L before trading even started. So right off the bat I was down and now in a mindset not favorable for trading. I then proceeded to jump the gun on a ORB through lod before it even happened and was stopped out again. At this point I was borderline on tilt, down my daily max loss before 9:45 and just annoyed with everything I did wrong on such a great opportunity only to see it completely unwind after I called it quits.
But with every mistake in trading there is a lesson to be learned. I have been on a solid win streak for all of August and was a little too comfortable jumping into this trade and I let my guard down and made some sloppy mistakes.
So lessons going forward – I need to stay more disciplined and obey my rules. No trading in the premarket!