Massive OE & Divergence From Underlying (BTC)
The PA on indexes is almost completely irrelevant for this trade; what matters is BTC:
The move began with the $73.8k b/o and BTC accelerated from there. Gained $20k in basically a straight line without once breaking daily PBL. The first shallow p/b was followed by a second leg through $94.4k and everything points towards this going for $100k before a meaningful reversal.
MSTR Key Figures
- Market cap $110B (at HOD)
- 162.92M share float
- 47.34% institutional ownership
- 17.39% short interest
- ADV 19.1M shares
- ATR(10) $47
MSTR Long-Term TA
Blue skies above $333 which were the highs during the dotcom bubble when the market first discovered the BM is more than questionable.
$200 was the big b/o level. After clearing that MSTR stair-stepped higher while surfing short-term KMAs. Got really extended for the first time after breaking above $300 and continued higher over the next two days, trading significantly above the UBB. Pulled back ~$50 but the p/b got bought and MSTR traded back in the $380s just a day later.
Would consider 11/19 day one of this move. Once again extended significantly above the UBB, pulled in sharply during the last 30m on 11/20 but gapped up huge today on BTC strength, following the three-day pattern of gap up, extension, exhaustion. Over those three days MSTR gained an incredible ~42%.
The volume profile is another thing worth mentioning: what you generally want to see on these capitulations is the highest vol being done on the reversal day. On 11/20, MSTR traded HVY and actually came close to doing HVE but volume declined during the long consolidation below $500.
On every single one of the major reversals this year (think SMCI, NVDA, TSLA) we could observe the stocks doing the highest volume of the move on the reversal day (by a significant margin). While MSTR traded the highest vol of the rally on 11/20 it didn’t exceed 11/19 in a major way which pointed towards this potentially not being the day. In a perfect world it should’ve done 2-3x the prior day’s volume on the day it capitulates (was only 40% more).
The (Evolving) Catalyst
Same old really – MSTR offers convertible notes and instantly reinvests that money into BTC. Admittedly, I haven’t done detailed research on this but the basic gist why this is trading at such an absurd premium (>250%) to the BTC it’s holding despite its BM not contributing meaningfully to its valuation is MSTR’s “yield strategy” whereby they can issue new shares/debt at a massive premium and reinvest that money into more Bitcoin. As long as that premium exists, they can keep issuing debt and cycle the money into more BTC. Does that sound like a Ponzi? Kinda…
It should be noted that the premium at which MSTR has traded compared to BTC has really gotten out of whack on this last leg higher. Such meaningful decoupling was another argument in favor of a/the top being close.
MSTR Intraday Chart
Gapped up almost 14% and opened near PMH. Super choppy first 10m with MSTR whipping around VWAP in a very wide range with a big spread.
Broke $520 ORL and quickly traded almost $10 lower but reclaimed with the 2m bar closing above VWAP and looking like it wanted to threaten HOD. Instead, dropped back below VWAP and slowly rolled over again before accelerating and breaking LOD on the highest vol since the opening bar.
What I thought was very interesting was the divergence to BTC at this time: while MSTR rejected VWAP, BTC was bouncing strongly.
This was a clear change in character and very different from what we’d seen during the prior days when MSTR was not only following BTC higher but made gains at an elevated pace.
Sped up and traded almost $50 lower before breaking 2m PBH for the first time. The first p/b was shallow, MSTR rolled over again, took out PDL, and traded into the SSR trigger on highly elevated volume. Turned and retested VWAP.
How I Traded It
What a mess!
The worst permutation for my style would’ve been MSTR selling straight out of the gates and not looking back. I’m not an ORB trader by any means but I thought I had to be involved if it played out that way. I rarely trade the 1m chart but I took a half-sized position on the break of 1m ORB. Was there some FOMO involved in that decision? Maybe but I felt I could justify it as sort of an insurance policy against the worst case scenario.
I quickly stopped out on the reclaim and then just got too micro about it, trying it again through lows. Didn’t get filled initially and should’ve instantly cancelled my order when it reclaimed; instead, got filled ~$5 above lows and gave it room to the LH where I had to cut it for an $11/share loss on full size; this one stung and in hindsight I believe this was the trade I had to avoid.
Broke the LH but rejected and flushed below VWAP. Tried it again here (full size at $531) and had planned on holding the whole thing for a bigger move. Was up close to $20/share at lows but with the bigger picture in mind covering there would’ve been a major mistake. Reclaimed and stopped me out for a $6/share gain.
This reclaim threw me off; it really should’ve went there and I remembered that SMCI, NVDA, TSLA had all not looked back after taking out their lows on the reversal day. Wasn’t down that much but had exhausted a lot of mental capital and struggled with finding a way back into the trade. Given the size of the reclaim bar, the vol it did, and the close above VWAP I was now convinced MSTR would make an attempt at highs.
I saw the RW to BTC I had mentioned in the prior section but ignored it and watched it break lows without me.
How I Should’ve Traded it
While I can somewhat justify a small position on the break of ORL, in hindsight, there were only two obvious spots for a trade: 1) the LOD break at $520; we had built a little structure, MSTR had rejected VWAP, and confirmed weakness, and 2) the following LOD break at $510 after rejecting VWAP and showing RW to BTC with a stop at either m5 highs or above VWAP. Fairly wide but this is the spot where you have to be involved for a chance to participate in the bigger picture idea. Cover a piece into/through PDC and 2m PBH but hold at least half through the first p/b. Honestly, these covers wouldn’t have been great since these big unwinds never end after just one leg but I would’ve probably had to cover some for piece of mind.
MSTR followed it up with another strong momentum leg, breaking PDL and filling the $450 gap. On these LC names the SSR trigger is often a level where a reversal can be expected so it would make sense to cover more there and stop on the rest on the break of 2m PBH.
Could’ve even considered flipping long there with a LOD stop speculating on a more sizable bounce. The base case assumption on this would be a 50% retracement/VWAP.
Options weren’t “an option” – the premium was ~10x higher than it was on SMCI, the call/put skew wasn’t anywhere close to those opps earlier this year…the EV just wasn’t there.
Lessons Learned
Not being too micro and keeping the bigger picture context in mind. These huge capitulation trades rarely set up in ‘no brainer’ fashion – the odds for a clean capitulation move higher after the open allowing for a short through PBL were very slim but with how much meat there’s on the bone if this is “the day”, one doesn’t need an entry with a tight stop near highs; shorting LOD is perfectly feasible.
Additionally, I tend to talk myself out of trades like this when the stock appears to be extended into lows because I don’t put enough emphasis on the bigger picture context. This isn’t a trade I’d ever take on an average setup but the context on MSTR clearly was anything but average, justifying both an entry on a technical setup that wasn’t ideal and a wider stop.