CMT DAY TRADE SETUP – STOP AND GO FOR 2.19 : 1 MAX REWARD RATIO
Core Molding Technologies, Inc (CMT) announced earnings today. The company had an increase in year over year net income but a decrease in year over year sales. Its stock price saw extreme volatility during the first 30 minutes of trading, rising sharply then dropping sharply. There was a Stop and Go setup during the rise that provided a maximum reward-risk ratio of 2.19 to 1. See my analysis below.
ACCOUNT OF EVENTS
The markets had a bearish open, with the Dow at -0.87 percent when I checked at 6:30 AM PT.
CNBC’s main headline read “Dow futures drop 200 points, following gains last week, on jitters about reopening the economy.” There was nothing fundamentally alarming about this headline, nor did it give me any clues for a sector play.
The morning’s top gainers were dominated by biotechnology stocks and healthcare related stocks.
APOP held the #1 spot. It was up on news that positive data regarding the use of its ApoGraft technology was published in Bone Marrow Transplantation, a peer reviewed journal.
MYOK was also interesting because it was up on positive news that it had met all endpoints in a Phase 3 study that it was conducting. I’ve traded successfully on positive news regarding Phase 2 studies, so I felt that this was similar enough for a good trade.
AMC was up on news that Amazon was considering buying the company. I decided to skip over this one because although I’ve seen AMC in the top gainers a number of times in recent months, the setups never came together. Plus, trading stocks on acquisition news is a hit or miss for me.
I also liked CYTK because it was up on news that one of its products had been given a Fast Track designation by the FDA.
I’ve seen AVYA make amazing, albeit slow runs up in the past so that immediately interested me. Unfortunately it had mixed news on it, with an earnings miss and a sales beat. Nevertheless, I put it on the back burner to trade if only if a really good setup developed.
I like to trade biotechnology stocks because of the strong price movements they tend to make. The problem this morning was there were so many interesting ones to choose from, that it was hard to narrow down my selection. When this happens I just go with the first one that caught my attention.
So I decided to focus on APOP.
Unfortunately it fell sharply below the VWAP right at the open. CYTK fell below the VWAP soon after. MYOK was already trading below the VWAP during pre-market and remained there. I missed a high of day breakout on AVYA.
At 6:39 AM PT I refreshed my view on Finviz as I normally do and I saw that CMT had risen to #3 from #9, up over 39 percent and with over 40,000 shares traded.
Since the news was mixed, I knew the trade would be riskier than usual. But I didn’t see any mention of exceeding or failing analyst expectations so that gave me a bit more confidence.
6:39 AM PT
6:35 AM PT
It made a strong run up and closed above $4.00, at $4.16.
I anticipated a Stop and Go or Bull Flag setup to form. I normally like to see the price push right below the whole dollar level, then place a buy stop market order at 1 cent above the whole dollar. Since the price was a little bit above that level, I needed to watch the next minute candle closely.
At 6:40 AM PT CMT opened higher at $4.24 but started pulling back. I reasoned that if it could close near $4.00, then $3.99 would be a good stop loss price. Had the price closed at a lower price, then I would have needed to re-evaluate the setup or move on to a different stock.
As the minute started coming to a close, I saw the price had touched down to $3.76, but was back up and about to close near $4.00. So I placed my buy stop market order. The newly established high was $4.24, so my entry price would be 1 cent above the nearest 5 cent interval, at $4.26 ($4.25 + $.01).
I was going for a reward-risk ratio of 2 to 1, so my target limit price was $4.80 [ (($4.26 – $3.99) x 2) + $4.26 ].
By the close of the minute CMT was at $4.05.
At 6:41 AM PT, CMT made a strong break upward, filling my buy order. I quickly went over to my open position and added my stop loss and limit orders with an OCO (Order Cancels Order) condition.
The price had blew past the 1 to 1 reward-risk ratio price of $4.53 [ (($4.26 – $3.99) x 1) + $4.26 ]. Normally, I would move my stop loss to break even at this point, but I saw the price swing so rapidly that I decided to wait for the next minute or two before doing so. I didn’t want to get whipsawed if the trade would turn out successful. I guess that could be a good reason why a 2 to 1 reward-risk ratio is widely recommended.
At 6:43 AM PT CMT made a strong push up, hitting a high at $4.77. Near the close of the minute I moved my stop loss to break even.
At 6:44 AM PT my limit order was filled, and CMT hit a high at $4.86 before dropping sharply.
NOTABLE DATA POINTS
Day of week: Monday
Approximate market performance at open: Dow -0.87%, S&P 500 -0.79%, Nasdaq -0.66%
Company name: Core Molding Technologies, Inc
Industry: Specialty Chemicals
Recent news date: 05-11-2020
Approximate performance before buy signal: +39.78%
Approximate volume before buy signal: 40,151
Float: 7.36 million shares
Setup: Stop and Go
Buy signal time: 6:40 AM PT
Entry time: 6:41 AM PT
Maximum exit time: 6:44 AM PT
Entry wait time: 1 minutes
Maximum exit wait time: 3 minutes
Order type: buy stop market
Entry price: $4.26
Stop loss price: $3.99
Maximum exit price: $4.85
Maximum reward-risk ratio: 2.19 to 1
Did I trade this setup? Yes