Daytraders like to relax on the weekend. Holding positions they cannot close makes them uncomfortable. Their short term view of trading interprets a weekend as just a long period of time during which trading is impossible, and positions remain vulnerable. So, they typically unload their positions, both short and long, before the weekend. Knowing this fact, is there a trading principle which we can rely on to make money from this movement of daytrader money? There certainly is.
Daytraders carry long and short positions both, and often seek to balance them so that the “market components” of stock price changes are somewhat neutralized. In many stocks, the price transients at the end of the day, or the end of the week, reflect large positions being liquidated. We see price rising during liquidation of shorts and price falling during liquidation of longs. Looking at the behavior of the stock near market close, we can surmise that we see one group, then another, dumping their positions. But without knowing whether the biggest dumpers are longs or shorts, we don’t know which position is a bargain, we can only guess.
The situation is slightly different for certain stocks which cannot be shorted. This may be either because a short position is disallowed by the SEC, or because no shortable shares are generally available. For these stocks, we know that daytraders will mostly be unloading long positions, then resuming their positions by buying later. That means that drops in price will often be due to unloading of positions, and therefore potentially the price drop is reversible when the positions are resumed later. This is all we need to know. It gives us an opportunity to buy shares being dumped, and sell them back later to the daytraders, usually at a profit.
Selecting the stock is important. The stock should have these properties:
- Hard to short.
- Heavily daytraded.
- Its price movement is largely on technicals, which is equivalent to saying that no one is quite sure what the real value of the stock should be because there is little news.
- There is a clear pattern of price falling before weekends and holidays.
One good example is FRE, charted above. I have been making a few dollars to several hundreds of dollars every weekend on FRE by buying it late on Friday, or even in Friday’s postmarket, and selling it off on Mondays. Note the clear pattern showing in the weekly movement of the stock.
Keep your eyes open for these kinds of diurnal and weekly patterns and you may be able to exploit them on a regular basis. Good luck!
[by Skymist]
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