EB Daily Market Report - Trading Stocks Edition - Wednesday, May 8, 2024

Brief Market Update

We saw a gap lower this morning and our major indices have mostly traded higher from that opening gap, with the Dow Jone showing a bit of leadership. Utilities (XLU, +0.87%) continue to lead from a sector perspective, while financials (XLF, +0.32%) are next in line. Lagging today are real estate (XLRE, -0.82%) and yesterday's winner, materials (XLB, -0.43%). 4 sectors are up, 7 are down in a mixed day.

One surprise earlier was seeing the S&P 500 lower AND the Volatility Index ($VIX) lower. Fear coming out of the market as our major indices decline can't be a great feeling for the bears. Keep in mind that a VIX in the 13s is conducive to stock market gains, so don't be shocked when a weak morning turns into a stronger afternoon.

Trading Stocks

We had our morning Live Trading Room as we generally do on Wednesdays. The focus the past two Wednesdays has been on opening gaps, and where they're located - above or below key support/resistance - and developing an intraday trading strategy off of it. Last Wednesday, we had two winners - Clorox (CLX) and CommVault Systems (CVLT). Both of those charts and their gaps gave bullish signals and we made money intraday on both. Both have traded higher since last Wednesday as well, especially CVLT, which is up roughly 7% from our entry. But to be clear, we took profits that day (at least I did). I've been (1) demonstrating how I decide which stocks I trade, (2) discussing a strategy for each, and (3) ultimately cashing in profits, though small profits. I've encouraged members to understand the risks involved in these trades and to possibly "paper trade" these candidates, or trade them with very small position sizes. This is the way I'd approach these trades for awhile, until you become more comfortable with the strategy and its limitations.

This morning, I added 3 more stocks to trade during the Live Trading Room. Here were the 3 stocks:

Ovintiv, Inc. (OVV)

OVV reported better-than-expected revenues and EPS, but still gapped lower, though above key candle body support. Here's the daily chart with key candle body support highlighted:

This had been a very strong stock during much of 2024 and the earnings news was solid. So many times I'll view a gap lower like this as an opportunity. The key, however, was waiting for a lower intraday low than the previous bottom. This low is pointed out above, along with this morning's gap ABOVE candle body support. The only thing left for me is to say the stock reverse back to the upside.

The Trade: At 10:24am ET, we entered OVV at 50.78. Candle body support was 50.73. So the drop below that level violated gap support, but the recovery was the "kick save" that we were looking for to enter. We immediately saw strength in OVV as it jumped nearly 2% within 30 minutes of our entry. When it rolled over and started pushing back lower, we decided to take profits, exiting at 51.23 at 11:30am ET, just as our Live Trading Room ended. It was nearly a 1% gain in just over an hour. It certainly wasn't a huge gain, but 1% in just over an hour isn't bad. And once the profit is taken, the risk is gone.

Currently, OVV trades at 50.96. After taking profits, OVV traded back down below key support at 50.73, so a 2nd opportunity to enter OVV was available.

BRP Group, Inc. (BRP)

BRP also reported better-than-expected revenues and EPS and was set to gap higher this morning, which it did. While BRP looks like a solid stock currently, the trading strategy here was to act like a market maker and go against the gap higher, shorting the stock. I know I've said not to short a secular bull market and that really wasn't what we were doing here. This was not a long-term short position. This was a "short like a market maker and take our quick profits and run" type of trade. BRP gapped up, but it failed to clear key candle body price resistance at the opening bell. My experience is that many of these intraday "breakout" candidates fail. So the idea was to sell short BRP on its first indication of intraday weakness (at 31.55 at 10:23am ET), keep a tight stop (32.25 originally, but I've since lowered it to 31.50, the worst I'll do on this trade is make a nickel) in case it continued trading higher, and potentially benefit by a short-term failed breakout. The key level is 30.59. A close beneath this is a failed breakout. Here's the chart showing that key candle body resistance:

I am still holding this short position, but I have adjusted my stop to 31.50. I can't lose on this trade and now can watch to see if it continues to drop back to or possibly below that 30.59 candle body resistance. I like BRP going forward, ultimately on the long side, but a failed breakout today could represent the right side of a cup with further short-term weakness ahead to print a handle. I won't hold past the close today, instead walking away with a guaranteed profit. Here's what BRP looks like right now on its intraday chart:

The Trade: We shorted BRP at 31.55 at 10:53am ET. The idea was that this breakout would be a failed attempt. We set our stop at 32.25 early, in the event that BRP took out its earlier intraday high. I take no chances with a big loss. "If I'm wrong, I don't want to be wrong for long." Fortunately, though, we've seen BRP fall throughout much of the day, so the only question left right now is where do we want to cover. Quite honestly, there's nothing wrong with covering this short position right now, posting a near 2% gain. It's up to each individual. Just don't allow this to become a loss.

Toast, Inc. (TOST)

Once again, TOST is a stock that reported better-than-expected revenues and EPS and I like the stock on the long side for the long-term (or maybe intermediate-term). TOST gapped higher, but like BRP, failed to clear key candle body resistance on its opening gap. TOST soared this morning and we patiently awaited a potential rolling over on the intraday 10-minute chart before entering. Here's what the daily chart looked like:

TOST is a very solid performer and, again, I'm a fan of the stock on the long side. The idea here was simply to make the role of market maker, going against the early buying and shorting. Volume today is extremely heavy, so a breakout should absolute be respected if the buying continues into the close.

The Trade: We entered a short position in TOST at 26.93 at 11:08am ET after this happened:

Once the downtrend appeared to reverse back to the upside, I wanted to guarantee profits and not allow this winner to become a loss, so I covered at 26.59 at 1:57pm ET.

I thought following up on these trades would be welcomed, especially by members who weren't able to make today's Live Trading Room.

Happy trading!

Tom