The PlayBook Webinar Series - http://www.smbtraining.com/blog

1. 2nd Day Play – Trend-Trend Short - EDU
Steven Menking
July 18, 2012

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3. 2 Day Play – Fundamentals
nd
• In order to find the best profit opportunities on an intraday basis, we
focus on stocks that are In Play. These stocks have fresh news or
some other catalyst that will likely draw the attention of the market.
On a day when a stock is In Play we look for it to trade at least twice
it’s average daily volume and to move at least twice as much
intraday as it does on a normal day.
• Because a stock is In Play there will be more market participants
focusing on the stock than usual. One consequence of this is that
the stock is less likely to trade with a consistent, readable pattern.
Also, the stock is less likely to be clean at technical levels.
• Watching the tape and finding important levels on the day a stock is
In Play is extremely important, because those levels can be used the
following day. This is particularly true of the intraday high and low.
These can be used for a powerful 2nd Day Play setup on either the
long or the short side.

4. 2nd Day Play – Fundamentals
• This setup is powerful because on the 2nd day not as many market
participants are focused on the stock, so the technical levels are likely
to be cleaner. Additionally, finding the important levels when a stock
is In Play gives us a price edge. There may be longer-term investors
or other participants who weren’t following the intraday action closely
enough to know where the key levels are.
• Once the technical levels from the previous day have been breached
it’s game on. The strongest pattern we are looking for is a Trend-
Trend trade, where a stock is trending on both long and short term
time frames.
• It should be noted that 2nd Day Plays don’t have to occur exclusively
on the 2nd day. In some cases the stock can consolidate for several
days before the key levels are finally taken out. If the proper setup
doesn’t develop on the 2nd day, set alerts that don’t expire in front of
the important levels, wait for the levels to be tested, and reevaluate
when the stock returns to those important prices.
• What follows is an example of a Trend-Trend 2nd Day Play in EDU
from July 18, 2012.

5. SPY – Big Picture
• Knowing the trends and levels in the overall
market is crucial to executing 2nd Day Plays
properly. They can be used to get more or less
aggressive depending on the direction of the
market relative to the direction of the 2nd Day Play
setup. When the trend in the market lines up with
the trend in the individual stock trading these
types of setups can present a great deal of
opportunity.
• After closing above the 136.00 resistance level on
July 17th, the day when EDU was first In Play,
SPY opened on July 18th at that level and trended
upward through the morning before flattening out
and consolidating between 137.00 and 137.60.
• The market was unable to test the next resistance
at 137.80, but closing above 137.00 was a bullish
sign.
• Holding below 137.00 could put 136.50 and
136.00 back into play, and holding above 137.00
the recent high of 137.80 could be tested.
• Above 137.80 it looks like 140.00 is the next
target.

6. Intraday Fundamentals
• EDU, which has been in a downtrend since mid June, had a significant gap
down to new lows on the In Play day on the bad news below:
• July 17th: 10:28 AM Shares of New Oriental Education & Technology
(EDU -27.2%) crater after a SEC investigation into the company is
announced on an earnings CC.
• An investigation by the SEC is a very severe piece of bad news.
• This was a 2nd Day Play, but on the day in question there was an additional
piece of bad news:
• July 18th: 1:42 PM New Oriental Education (EDU -19.1%) slumps
again after Goldman Sachs suspends its rating due to a previously-
announced SEC investigation and Muddy Water sets it short-selling
sights on the financials of the company.

7. Technical Analysis – Long Term
• EDU started to trend down in early June, eventually
pulling into the 22.00 area which was support from the
beginning of 2012 prior to its earnings announcement.
• The gap down to new all time lows on earnings and the
SEC investigation confirmed the weakness in the stock,
and on July 17th the stock was extremely In Play.
• On an average day EDU trades fewer than 2M shares
and moves about 1 point. On July 17 th EDU traded
over 30M shares and moved over 5 points intraday,
trading up on the open to the highs before reversing all
the way back to the low.
• Both the intraday high and low were levels to watch the
following day, but the weakness in the stock made a
continuation of the downtrend more likely than a
reversal.
• Staying objective and flexible is important. If the stock
had opened up very strong on July 18th and traded
above the intraday high from the previous day a gap fill
to 22.00 could have been in the cards. However, in this
particular case a great deal of confirmation would be
required to make a reversal play.
• The best kind of 2nd Day Plays are the Trend-Trend
setups. In this instance EDU was broken longer term
as well as weak intraday on July 17th.

8. Technical Analysis – Short Term
• Watching EDU closely is important because the
stock defined several important levels that were
useful for the 2nd Day Play.
• 15.50, the bottom of the midday range, is a
relevant level. 15.00 is also important as an
inflection point from the open that tried to show
support in the afternoon.
• The most important level is the low at 14.00. This
level was approached twice, and EDU ended up
closing near the low.
• EDU did open higher on the 2nd day, and offered
some excellent opportunities to get short. Once
the stock got below the previous low it did retrace
back into the range from the prior day. This made
me wait for additional confirmation of the
weakness in the stock.
• There were still some buyers willing to step in, but
once the prior low dropped a second time there
was no turning back. The selling pressure
mounted and the stock made three distinct down
moves with periods of horizontal consolidation in
between.

9. Reading the Tape
• The tape in EDU on July 18th was
cleaner than it was on the 17th,
which is one of the benefits of the
2nd Day Play setup. This offered
some excellent entry points with
controlled risk.
• Once the downtrend started there
were sellers on the tape that
continued to step down from 14.50
to 14.00 to 13.00 to 12.95 to 12.00
to 11.40 to 10.00 and all the way
into the close below 9.50.
• When the sellers took a break the
stock would consolidate but never
retrace, and a great deal of volume
was done at all these points.
• Paying close attention to the tape
made the pattern of the stock clear.
When the first downmove from
14.50 to 11.50 was over the stock
made a finishing print. This was
indicated by the massive volume
that occurred at 12:30pm.

10. Reading the Tape
• The same pattern happened
again when the 11.50 support
level dropped. The tape
signaled that move had stalled
with massive volume printing
into 10.00.
• Both of these volume spikes
were good chances to lighten
up the short position and
capture the profit, but neither
give enough indication of
reversal to get flat. The
weakness of the stock and the
power of the short setup
necessitate holding a core short
position with size until there is a
clear signal that the downtrend
has ended.
• There was no reason to get flat
until the close, and the price
action below 10.00 was very
unique on the tape. There was
immense selling pressure and
volume and the only thing that
prevented the stock from
making another measured
move to prices below 9.00 was
a resilient buyer who fought the
sellers for every cent.

11. The Play
Fails at 14.50, 14.00 slows the
downmove, the really big volume
starts to come in at 13.50, when that
drops stock has substantial downside
momentum
I had an alert set for 14.00 in Below the intraday low can get short
front of the low from yesterday one lot in front of the retest. I think
at 13.86. 14.00 bids held on SIZE UP when 12.95 holds, new all
the tape before shaking out time low with huge volume coming in
and then holding below 13.95.
Aggressive to short because
yesterday’s low untested New lows in front of If you missed the first leg, retest of
13.00 and an upmove, 11.40 low offered a narrow window to
bias is still short get short. Great place to add as well
Crazy action and volume into
Can take some off some in the close, the sellers grind the
this volume spike (this 5 buyers down another $0.50,
minute bar was almost 2x trend from first entry isn’t
ADTV) broken, only substantial
buying prevented this from
being a full third downmove
Looking for spots to get
shorter, 12.00 holds very
cleanly with high volume
Take some off on this volume spike as well, good exit in front of 10.00

12. The Real Trade2Hold
• The real Trade2Hold in EDU is when the stock consolidates below
the prior low and holds offers. This setup offers a high probability
chance of a continuation to the downsize with well defined risk.
• On the day in question, EDU traded down below the prior low of
14.00 on the open before retracing back into the prior day's range.
14.50 offered an entry point on the short side, but the real
Trade2Hold starts when the stock breaks through the new swing low
at 13.20 and holds the offer. The offers then step down to 12.95 and
briefly consolidates.
• The strong downmove on heavy volume to 11.50 offers an
opportunity to lighten up, there was a gigantic volume bar on this
move that was easily recognizable as a finishing print

13. The Real Trade2Hold
• Offers hold at 12.00 and then at 11.98 half an hour later, good
opportunity to add with an out above 12.00 for the add while still
holding the core
• When intraday support at 11.50 drops and then holds the offer more
can be added. The uptick rule was in effect so just hitting the bids
below 11.50 was not allowed
• Another opportunity to lighten up was on the volume spike that
occurred on the downmove to 10.00. This was another clear signal
that the immediate move was over and either a consolidation or a
retrace was likely.
• After another hour and a half of consolidation the support at 10.00
dropped. Add below at the best price possible.
• A final volume spike occurred into the closing push down to 9.50.
This was a final signal to lighten up before taking the entire position
off at the close (low of the day)

14. Reasons2Cover
• The primary Reasons2Cover for EDU that manifested on the
day in question were the volume spikes / finishing prints
indicating that the immediate downward pressure on the stock
was exhausted and that a consolidation or retracement was
likely to follow.
• The final Reason2Cover all of the remaining position was a
finishing print into the close.
• Buyers stepping up and pushing the bids up breaking the
trendline would have been a Reason2Cover. For instance, if
EDU had been able to consolidate above 12.00 midday and
was able to hold a bid above 12.00 that would be a spot to
cover.

15. Reasons2Cover
• However, in this case because of the strength of the catalyst
the core should be held through that price action and only
taken off if for an unusual hold, a more convincing
retracement breaking the trendline, or some other external
catalyst in the stock or the market (e.g. new breaking news).
• Additionally, the pattern of the stock was to make a 2 point
downmove followed by a consolidation, so if a strong reversal
pushed the stock back above 10.50 with a good deal of
buying power then the pattern of the stock would have
changed and the trendline would have been broken. Both of
those are good Reasons2Cover in this case.

16. Trade Review
• This trade is an excellent example of a 2nd day play using levels established
on a first day gap. The price action was a bit cleaner, but the exceptional
volume stood out to me. EDU typically trades under 2M shares a day, but on
July 18 it did over 50M. The longer term view on the Technical Analysis slide
puts the relative volume into perspective
• The word ‘long’ shouldn’t even be a consideration when trading such a weak
stock. The only relevant questions are where to get short and where to get
shorter
• Getting short immediately when the new low drops the first time makes
sense on momentum, but I was waiting for a consolidation at a new low
as a spot to get involved, which is a conservative approach. I used the
previous day’s trading pattern as a clue, since it wasn’t really good to trade
before noon. When the volume came in on a holding offer at a new low, that
was a powerful indication that the stock was about to go lower.
• Lightening up on the massive volume spikes made sense. Both times this
was confirmed by a subsequent horizontal consolidation without any real
retrace, which is a bearish sign.

17. Trade Review
• Adding at 12.00 made sense to me because the tape was clean and my risk
was defined. One of the benefits of the 2nd Day Play is that the intraday
levels are likely to be cleaner and more well defined.
• Adding at the retest of the latest low at 11.40 makes sense to me as well,
but the timing window to get that trade in was very small.
• The price and volume action into the close was like nothing I’d ever seen
before. It looked as if there was a buyer or a couple buyers that was the only
thing stopping the stock from going down another point and a half. This is a
unique 2nd Day Play in that this stock was exceptionally weak and actually
did more volume on the 2nd day than the prior day when it was first In Play,
but it was a clean, powerful downtrend once the stock held an offer below
the intraday low from the prior day
• If I am not max size in this setup I am leaving money on the table.
Look for this weakness to continue, the same pattern and approach
could work the subsequent day as well

18. 2 Day Primer
nd
• Each day on the desk we focus on stocks that
are In Play. These make the best candidates for
2nd Day Plays, although there are setups that can
take longer to develop.
• Each day we look at what was In Play and figure
out if any of the stocks offer an opportunity for a
2nd Day Play. We use these to create a 2nd Day
Primer.
• This primer includes a snapshot of relevant
information on the stock, giving traders a
resource to go to that will let them evaluate the
trading opportunity and set alerts for the
appropriate levels.
• Vital stats on the stock (short interest, ATR,
beta, and average daily trading volume) are also
included so that individual traders can select the
opportunities that best fit their personal trading
style.
• We also include continuation plays and other
technical setups in the primer so that we can still
be aware of a stock if it is In Play and then
needs a day (or several) of consolidation before
breaking out and trending again.

19. Finding Levels
• The key to trading 2nd Day Plays is to find the key decision levels and set
alerts. Every day we look at the stocks that are In Play for that given day, but
2nd Day Plays can do nothing the following day, so unless there is something
special about the situation it is typically a more efficient use of mental capital
to set alerts and wait for those plays to develop instead of watching them tick
for tick.
• This way we can focus on the In Play stocks while allowing ourselves to be
prepared to capture profits from a 2nd Day Play if one materializes.
• Levels are important price points and can be found visually on charts.
Psychologically, if a stock cannot get above or below a certain price for a
period of time and then breaks the level something is clearly different and
that difference could be actionable.

20. Finding Levels
• Every level that a trader looks at should have an importance factor based on
how significant the level is. In general a level lets more important if: more
volume is done at the level, more time is spent at the level, more time
frames the level captures, the longer term the level is, and the more clean
trading is at the level.
• As a rule of thumb one-sided levels (support / resistance) are more
important than two-sided levels (inflection points).
• For our purposes of finding 2nd Day Plays, the In Play high and low are
relevant levels (especially if they correspond to 52-week or all-time highs /
lows). However, based on the In Play action other levels could be more
important enough to initiate trades. Based on watching the tape and the
price action of an In Play stock we can find the key levels from that day and
take note of them in case they can be used for a 2nd Day Play opportunity.
This is a key edge of our intraday style, since longer term investors may not
be focused on the intraday action and may not have the information that the
level is important.