AXLA DAY TRADE SETUP – STOP AND GO, VWAP BOUNCE FOR 1.24 : 1 MAX REWARD RATIO
Axcella Health Inc (AXLA) announced positive results from a clinical study of two of its products, AXA1125 and AXA1957, for the treatment non-alcoholic fatty liver disease (NAFLD). Its stock price traded in a channel with high volatility, then made a sharp bounce off the VWAP during the first 45 minutes of trading. The setup provided a maximum reward-risk ratio of 1.24 to 1. See my analysis below.
ACCOUNT OF EVENTS
The markets opened with an upward bias, with the Dow at +0.64 percent when I checked at 6:30 AM PT.
CNBC’s main headline read “Stock futures rise as investors bet on the economy reopening.” I personally think that even if businesses start to re-open, it will be a while before consumers start to feel that it is safe enough to go out, spend and circulate money. So, I didn’t find anything fundamental about this.
The morning’s top gainers on Finviz was dominated by biotechnology and medical device stocks.
MDGS held the #1 spot. I recorded a winning setup for this stock in the past so I was immediately interested. Volume looked great on it and there was positive news regarding a patent. Unfortunately it was already trading far below the VWAP, so I skipped it.
ISEE held the #2 spot. Volume was could have been better but I’ve seen stocks trade well on lower volume. News was mixed on it. It had an earnings beat, but it also had to pause enrollment for a clinical trial due to the Covid-19 situation. It was also trading far below the VWAP, so I skipped it as well.
AXLA held the #3 spot, up over 31 percent and with over 100,000 shares traded. It had decent volume. I felt the positive news regarding the clinical study was a strong enough catalyst. It had a strong opening. I put this on my mental short list, but was still interested to see if other setups would develop.
In fact, I made a losing trade of SDC. For some reason, I thought I had traded it successfully in the past, but looking at my confirmations, it turned out I had not. I also normally don’t trade the first 5-10 minutes, but I guess impulse got the best of me. At any rate, I’ve logged that trade in my data tracker for future reference.
I did a refresh of Finviz at 6:39 AM PT. Apparently I missed the fact that MGNX jumped to the #2 spot out of nowhere. That ended up making a much better move than AXLA. As you can tell, I’ve had better days.
It had fallen a bit in percent gain but still maintained the #3 spot and it had doubled in volume, so I was still interested.
At 6:42 AM PT, AXLA popped back up above the VWAP after having dipped below it during the few previous minutes. It stopped just short of $6.40, with a high at $6.39 and a close at $6.35.
I anticipated a bounce off the VWAP, so I waited for the next minute candle to develop for confirmation. At 6:43 AM PT, the stock touched $6.40, trading very narrowly and closing at $6.35. I quickly put in a buy stop market order at $6.41. I saw that there was support at $6.00, well below the VWAP, so I had an intended stop loss at $5.99. I was going for a 2 to 1 reward-risk ratio, so I had an intended target limit order at $7.25 [ (($6.41 – $5.99) x 2) + $6.41 ].
My order got filled at 6:45 AM PT when AXLA made a quick pop to $6.62. But it lost momentum and pulled back to the VWAP soon after. It spent the next several minutes there and I thought I would get stopped out.
Fortunately at 7:11 AM PT it made a strong bounce off the VWAP, and at 7:14 AM PT it reached $6.94. Since the price had reached the 1 to 1 reward-risk ratio price of $6.83 [ ($6.41 – $5.99) + $6.41 ] I moved my stop to break even.
Sadly, AXLA made another downturn and hit my break even stop loss at 7:19 AM PT.
It was disappointing to not have reached my target, but I am glad that I determined my stop loss correctly and managed my trailing stop well. Since it could have yielded me a profit if I had went for a 1 to 1 reward-risk ratio, I will log this in my data tracker as a winning setup.
NOTABLE DATA POINTS
Day of week: Wednesday
Approximate market performance at open: Dow 0.64%, S&P 500 0.62%, Nasdaq 0.00%
Company name: Axcella Health Inc.
Recent news date: 05-06-2020
Approximate performance before buy signal: +26.34%
Approximate volume before buy signal: 218,601
Float: 16.93 million shares
Setup: Stop and Go, VWAP Bounce
Buy signal time: 6:43 AM PT
Entry time: 6:45 AM PT
Maximum exit time: 7:14 AM PT
Entry wait time: 2 minutes
Max exit wait time: 29 minutes
Order type: buy stop market
Entry price: $6.40
Stop loss price: $5.99
Maximum exit price: $6.93
Maximum reward-risk ratio: 1.24 to 1
Did I trade this setup? Yes