Was $TOST the toast of the town for bulls or bears? – August 12, 2022
TOST
I want to look at Toast ( NYSE: TOST ) today and here’s why; one of our traders, in the forum today, posted his plan for this stock, which gapped up between yesterday’s close. They reported earnings after hours yesterday so the stock moved a lot. I am just showing you the daily during-hours trading action here.
You will see the stock gapped up from yesterday’s close to today’s open by about 20 percent. This trader that we have, he’s really good, he understands short-term, 59-minute trade tactics, which is what I teach, he understands that very well. He laid out a trade for both the long and the short side.
And you may say, what the heck is somebody thinking about going long on a stock that gaps up 20 percent? And I will tell you why, because it is just the second side of a 2-sided trade, it could go either way. A lot of times you will see these kinds of low-profile stocks make a big gap on earnings and then just keep going.
One of the strategies he was looking for was a gap and run or a gap and go, whatever you want to call it, in this case, I would just call it a breakaway gap. But that is not really what happened. By the way, I’m doing this video and we still have an hour to go in the day, you can see what the time is here. But I wanted to describe this trade, real quick, to the short side. So again, context, 20 percent gap.
Now, let’s look at this stock in terms of VWAP, volume-weighted average price. The VWAP is an indicator that tells you what the average price per share is in trading that day. In other words, volume is a component, it is not just what was the closing price on a, in this case, a 5-minute bar chart. It is how many shares were traded, and at what price. Add the prices together, divided by the number of shares, and boom, now you have your VWAP value.
The idea is, that if a stock is holding above the value-weighted average price, that means there is buying interest. If the stock is holding below the value-weighted average price, that means there is selling interest, the sellers are more aggressive.
But here’s the other thing, when you have a stock that gaps up so much the first print on the VWAP is, obviously, going to be much higher. But what you want to be doing is, watching and seeing where the stock goes after that opening gap.
Here you can see, this is really important, the stock gaps up here. I was watching it, I didn’t trade it, I had a bunch of other stuff to do, I just didn’t feel like watching it. But I was watching it, just curious to see whether the stock was going to go up or down after the open.
Now, it opened at 21.76. The high was 21.76, so the stock just kind of oscillated around here in a fairly tight range. But then starting the second minute, 9:31 or 9:32, what happens? The stock starts trading down and then, ultimately, just about the time it fell just below the first minute’s low of 21.40 it was also below the volume-weighted average price and never looked back for several minutes. You can see here, that it was half an hour before the stock even came back up to test the volume-weighted average price.
You have to have a lot of experience doing this, I make it sound really easy, it’s not easy but it is simple. These are simple, simple, simple concepts. The difficulty is in handling your emotions and handling your bias, your preconceived notion of, whether the stock should go up or should go down. Because if you have a really strong bias one way or another your mind is going to start sorting through things to confirm your bias.
On the other side of the coin, read Gladwell’s book “Blink”. The first 5-seconds of looking at something tell you exactly what you need to know. In that case, this is kind of a “Blink” trade. Once a stock starts trading down you are thinking, hum, 20 percent, a 20 percent move. I wonder, if I held this stock yesterday, would I be selling into a 20 percent gain and saying, well Mr. Market, thank you very much, may I have another? That’s what I would be doing.
And so when you see this confirmation of a like zero continuation on this, a gap up, it never comes back to it, it starts trading down. Your strategy is if you like to short stocks, your strategy is to short the stock, even short it at 21.50, maybe as it moves below the first minute of trading, the low, which would be 21.40, let’s say you are shorting it at 21.38.
Well, lo and behold, just a few minutes later you’ve got a 7 percent gain in this. That is not to say you are going to sell it right at the bottom, but at some point here you are going to start lowering your stop on the trade, you always want to have one in place.
That is the extent of my analysis here. A big gap up, 20 percent. You have got to be looking for the possibility that it is going to be a cap and run but the probability that it is going to be a gap and crap and fall down. That is what we have here. I just wanted to point that out to you. I think it was kind of a good spot by Alex to be seeing this trade. And in this case, it was a great trade to the downside.
What happens next with this? Well, nothing you want to worry about because, after this kind of move, I will tell you one thing, there is a lot of pain in this chart. And what I mean by that is, anybody who bought where it is right now, if you bought above where it is right now, you are in pain. Because you got sucked in and now you are hoping to sell on any kind of a rally or you are giving up the ghost and just selling anyway.
I am expecting this stock to consolidate for a long time. It is certainly not a trade that I would be interested in taking now, but at 9:30, 9:31, 9:32 this morning, this was a monster trade.
Free Chart
🙂