• Jan

Behavior of small cap stocks

Updated: Mar 7




One thing is for certain, out of all assets, small cap stocks might be one of the most interesting assets to trade, especially due to their wild nature and often very diverse behavior, even though that essentially one can categorize majority small cap day 1 plays within just two main sections which is either a squeezer or a fader, but under the surface there is a lot much more diversity going on, making them interesting asset to trade for daytraders.


This article will cover some of the data collections on behaviors from 2019 and 2018 small cap stocks (day 1 plays), and specific behaviors or patterns that are often present around them. It might seem like a breakdown of many different complicated methods, but in my view rather than using VWAP under/over to explain basic behavior of stock and creating very broad mixed behavioral data, personally i rather use very specific patterns that might be more difficult to identify, but at least they perform with much higher performance rate and can be very robustly back-tested. The key point is that if enough of those patterns and behaviors are stacked in traders playbook, even if rare, once stacked with enough setups trader will eventually get one play a day on some stock frequently.


Be patient, learn, research and stack that playbook up!



How to use the data?



The patterns or variables outlined on this article are mainly just guide to give trader better perception on expectations of the moves, but without trader studying them by him/herself over historical examples the variables will not serve much use. Trader has to re-affirm the use-case of variable before it can be applied on realtime trading, and for that doing the study of each given variable is necessary.


It is best not to isolate just one variable and base the potential scenarios on stock on it. It is always better to operate with several variables and using them together in orchestra to see the more realistic outcome of moves. That is why each pattern explained on article is composed of multiple variables for better accuracy on detection and identification. Also for the practical reasons article covers only few examples for each patterns / setups, otherwise the article would just get too extended, it is up to trader to do further research on his/her own.



Data collection sections:



1.After strong backside (after 12:00 PM), does stock reclaim HOD (high of the day)?

Data: 10% chance (low chance to happen)

2.Keep adding shorts / recycled adds on backside of stock if stock displays proper backside after 12:00 PM?

Data: Often right thing to do (60% cases)

3.Stock has a fade and closes under open price

Data: 75% chance

4.Stock has decent fade, early / mid day / or trough later hours, and essentially closes relatively weak.

Data: Similar to above.

5.Is dry liquidity present between 10:00 to 11:00 resulting with more fade?

Data: 90% chance of further fade (especially if following the trap setup)

6. Liquidity is strong at 10:00 to 11:00 and stock has front side with further push(opposite of above number 5.)

Data: 85% chance





1.HOD reclaim after strong backside fade (often EOD short squeeze)



This variable is meant as general guide that stocks with strong backside after first hour of open tend to have lower chance of reclaiming the high of the day, especially if all the conditions fit the "strong backside". The idea behind this guide is that on stocks where the buyers dry out relatively quickly (after first hour) and the volume drops significantly, the remaining present liquidity will in most cases be just sellers. On small cap stocks sellers are usually present, even if buyers are not, since the long term fundamental drive puts those stocks very often towards bearish pressure, along with the fact that if stock has faded since open there are potentially some fresh buyers caught at high prices of that day, that might eventually be forced or willing to just sell out towards later hours of day once they see that stock is not bouncing to the upside.


One thing that is rather important to point out, is that definition of strong backside has to be identified with the same rules as outlined on article bellow. Because the variables that were noted from my research are strictly order-flow / liquidity based and perform relatively well as they exclude stocks that have EOD (end of the day) short squeezes relatively well.

For example if one would to use very simplistic identification of defining backside on stock just as price being under VWAP after certain hour, that would lead to completely different % wise performance of pattern, as VWAP is too simplistic way to look at backside of stock, especially if trader wants to exclude the stocks that have higher chance of strong short squeeze in later hours (those stocks that actually do breach the HOD in later hours, which is the whole point of this sub-section of article).




Thus looking at liquidity conditions to define backside and following that 10% HOD takeout chance (small chance to happen) would only be applied realistically if trader uses the rules to define backside as explained on article bellow.


As comparision if one would use VWAP to define backside and then figure out what chance for stock is to take out HOD once under VWAP , the statistical behavioraldata would be far less reliable and weaker as there are just too many crosses up and down over VWAP trough the day (small cap stocks). This does not mean that VWAP is not useful guide, it just means that the performance of pattern is different, and the data research done from my part is only useful and relative to specific rules in how the backside is determined.


Below is conceptual example of what is meant under this pattern (HOD reclaim after strong backside drop):


And realistically it should be pointed out that most of the cases where this major HOD clearout does happen is where the liquidity trough the middle of day is still not completely dried out, and the stock still displays average 10k volume traded per M1 candle on average.

With other words, this rare strong backside HOD clearout happens mostly on stocks where there is still decent liquidity present on backside to cause EOD short squeeze.


The concept of this rare pattern is that, if market makers want to squeeze short sellers at later part of day, the stock needs to trade with at least decent liquidity trough the day so that short sellers keep coming and participating trough the day. If liquidity on stock dries out very quickly (lets say 2 hours after open) then short sellers are much less likely to short into weakness as they are scared to be caught in dry liquidity and having issues of covering out. An underwater buyer with negative position might be much more willing to just sell out his position in dry liquidity conditions compared to short seller who would decide to start participating on fresh position on weakness of dry liquid asset. Thus less shorts to be squeezed, and supply should do its job pushing the asset lower if there is not enough liquidity for short sellers to keep participating.


Conceptual difference of how short sellers participate on dry liquid asset versus the more higher liquid asset trough the day, thus impacting potential chance of short squeeze.


Low liquid conditions (supply mode, no short squeeze):




Medium / higher liquidity conditions (mid day short participation with EOD short squeeze):





There is only 10% chance of this pattern to happen overall if ticker has decent backside fade, but it depends on details, how weak really the liquidity is relative to float, and to be within more realistic window using right variables to identify the "strength" of overall backside is what matters.


Majority of those type of rare EOD (end of the day) clearouts will happen after 2:00 PM and will be forming large short squeeze. The key tell-tell variable will often be unusually high volume burst all of sudden above previous major high in most cases (100k+ vol print).



An example of such ticker on REXN (strong backside fade trough mid day and then all of sudden huge volume short squeeze all the way into HOD clearout, a rare type of heavy squeeze after backside) :





Another example of very highly liquid backside and strong liquidity trough whole day with rare type of full HOD clearout is ticker BPTH:





Or the ticker APDN in November:






1/B. Strong backside



Variables to define strong backside:


-quick washes with strong volume (quick unloads of market sell orders)


-weak bullish pushes on soft volume (lack of aggressive bidding into ask)


-micro gaps between 1 minute candles (1 minute chart)


-frequent stalls on tape with no major bids going trough (lack of demand)


-consistent lower highs and lower lows (overall weakness and supply in control)



Example of micro gaps between M1 candles on live chart:







The more expressed the variables above are, the "stronger" the backside is, as supply is dictating the core orderflow on the assets (buyers getting dumped on from bigger sellers, or not much buyers participating at first place just sellers mostly). And usually it is important to have big picture in mind and as well small picture in mind, ask yourself does price behavior over last 30 minutes fit stronger backside, but what about over last 10 minutes, has anything changed? Were any of above variables clearly canceled-out by strongly bullish ones?


As mentioned on previous articles, to be along the flow of potential short squeeze or fade you need to know what variables to look for, keep comparing bull thesis versus bear thesis, and keep asking yourself: What about now? And now? And now, is initial thesis still valid, or was there drastic / noticeable change? Because in majority of short squeezes there will usually be tell-tell variables that will discredit the "strong backside" thesis sooner or later. The sooner one can spot them the better.


The way to apply "what about now" approach as the stock is moving trough the day (this is how my usual context comparing approach looks every day on almost any asset, not just small cap stocks):






Negating the strong backside:



Variables that negate potential strong backside are exclusion variables mostly:


-strong volume wash that reclaims quickly within 10 minutes


-reclaims of highs after big initial drop


-high volume bullish push on backside of ticker in late hour (2:00 PM+)


-etc...




To negate your initial "strong backside" thesis, there have to be micro negation variables that no longer support that initial supply fade thesis, either in minor case, or if many clues stack up, then in more major case. Depends on how much of counter variables stack up.


For example all 3 presented variables above (negation variables of strong backside) are all usually present on tickers that are rigged after 1:00 PM and end up squeezing shorts towards the close. Those variables are not random, they were extracted from research across many rigged tickers and the backside will usually still be "technically" present as many traders would define (price under VWAP, downtrend) but in reality, the riggers are building their short squeeze behind the scenes If you use and learn above 3 key negation variables you will be armed to spot short squeeze much quicker.

And keep in mind, negation variables have to repeat consistently to be playing a role, just because price once reclaims single wash it might not mean much, but once done few times, thats where the odds start to stack up.



It is important to be research oriented and test by yourself which are truly the variables to look for on chart of ticker, because without knowing what you should be looking for the "what about now" approach will be useless since there is no guide to follow trough. Test, test, test. It takes time and many of failed attempts, but this articles are not meant for those looking how to trade stocks with 10 minutes of time per day, but rather how to find more opportunities and adjusting trades trough the day as the stock chart / behavior develops. Being short at market open and then flipping into long by later hours is something that requires the study of behavior on small caps and the differences of variables (or vice versa).


Examples of strong backside:



Example of stronger backside with dry liquidity on ticker JAN (using the above 5 key variables to identify):



Another example of strong backside on ARCI, applying above key 4 variables. Especially highlighted 2 variables here are, heavy washes are not reclaimed (bearish variable) and along the backside drop of ticker the major volume pops are all on heavy washes and not on bullish pushes. No rigging activity present.






4. Stock fades and closes relatively weak (full fade)



Often in small caps certain stocks tend to have large supply imbalance and fading large portion of the move or gap. And then there are those stocks that have either smaller fade and then consolidate until the market close in the mid way of gap (50 ish% from the high of the day) and the third component is the mixed bag of stocks that consolidate trough whole day or drop and reclaim the losses by the end of the day.


Very general rule to use for aiming on full fade is to look on few variables to determine if stock is more likely to have stronger fade (and to hold short till end of the day):


Higher chance fade variables:


-is microfloat stock (float under 5 million shares)


-has no major previously traded volume historically, basically stock does not trade across average day any major volume (for example 5k shares per day)


-has strong persistent down trend on daily chart (non-dilution stocks are especially better as those are less likely to be manipulated, where the downtrend is mainly due to weak buying interest rather than consistent heavy dilution)


-has history of fading every gap up on news, or has frequent 50-100% moves up on no news (pumps)


-stock fades 50% of gap in pre market (before open) and has weak liquidity with higher float in pre market



If such variables are present on gaping up stock, or a solid day 1 pump then that is general guide to be more patient on take profiting and aiming for larger fade on a stock trough the day.


Above concept applies to 2019 data collection, around the key 3 variables that were collected around 2019 day 1 plays (including pumps):


-Keep shorting pops on backside after 11AM : 85% yes

-Stock has decent fade till EOD: 70% yes

-If short is working in first hour, keep holding for semi or larger fade: 85% yes



Those 3 variables actually overlap especially with the above 5 variables, meaning that larger fades are usually on the stocks named with 5 variables of "Higher chance fade".



Again important to keep in mind as always, above variables are cannot be isolated. For that "wider take profiting method" and larger fade, all of variables should be present (all 4 or 5 of them, not just one). Isolating just one of them would create performance variations all over the place. And a thing to note from above 5 variables, the variable 1 and variable 5 are excluding each other (cannot be present at same time, only one of them can be for obvious reasons).



To keep it more in simple terms usually there are two typical patterns of higher chance fading stocks (gappers):


-1 dollar turds that fade 50% of pre market gap by the time that market opens, on weak liquidity and no float rotation in pre market. Usually those have larger floats above 10 million shares.


-higher priced volatile microfloats (5 million shares float and under) that do have solid liquidity in pre market (and often float rotate before open), but they also have 4 of 5 named variables of "higher chance fade" from above of article.




4/B. 1 dollar turds (higher chance faders)




Specific category in itself are 1 dollar stocks that are gaping up 50+% for those there is decent approach that trader can use to trade along the full day fade scenario. Below is criteria of variables that one can look for in pre market price action to determine if such asset fits potential higher chance fade scenario:


-Is stock with price between 1,00 USD to 2,00 USD


-Ticker has float higher than 5 million shares (the higher the better)


-Has few or more examples of fading gaps / news on historical daily chart


-Fades 50% of gap before the market opens (for example is trading substantially under the pre market high by the time when the market opens)


-has low liquidity in pre market with micro gaps between M1 candles and weak bullish pushes (in pre market)



One side thing to note that borrow costs on those stocks (on short side) can have rather large impact on overall equity curve, especially with more expensive brokers, as volatility on those stocks is often relatively small. Something that trader should keep in mind in order to gauge if entry is worth it, or perhaps to wait for larger extension where stock gets larger range before trader starts to trade it, to neutralize borrow costs.

When it comes to borrow cost always compare the cost of borrows relative to the ATR / volatility that ticker has on average 10 minute moves, never rationalize borrow costs just from the price of borrow per share itself alone! This is mistake made by many traders, and is not justified.


For example a X ticker with borrow costs of 0.1 dollar per share and volatility of 1,00 USD move per 10 minutes versus ticker Y with borrow costs of 0.2 dollars per share but volatility of 5,00 USD move per 10 minutes, even though the per share price of second ticker Y is twice as much, realistically the price is lower! Because the actual potential volatility that trader can extract from the ticker Y is in size of 5X relative to initial example, while the cost is only 2X. To weight/justify the borrow costs taking volatility into equation is a must!



Alright back to the 1 dollar stock, pre market variables / conditions to define potentially high chance fade play (before market opens):


Example of pre market condition checking on ticker FAMI as described with using 5 variables from above:




For any reader to not be confused, this section might just seem the same as the above section of article "High chance fade variables", but in fact is not, as this is specific to stocks that are strictly priced around 1 or maximum 2 dollars and those often have certain specific "crowded" behavior which is a bit different to all of the included stocks above, which fit into "High chance fade variable" category.


Bellow another example of such 1 dollar ticker with gap up and similar higher chance conditions (in pre market) on ticker MBRX and then resulting with solid whole day fade:




Another example of ticker on CODX:





How to play it (1 dollar high chance faders)?


Entry:


-1. Short pop at the open, either smaller pop (10 cents) or more extended one (20-30 cents). Wait for market to open, some bids to come in and push and thrust a bit upwards, then look to short into that push. Ideally the tape should be guide on such entry, or using stuffed rejection as entry for cascading move south.


-2. Ideally best case cenario which is my most preferred method is to use some combo setup to time entry better, such as soft clearout but realistically not many of stocks will have combo setup present. This allows you to tighten risk much more and extend the RR on trade by few factors.


Scenario 2 is ideal but not very frequent. Statistically the most common are two scenarios, either push from open and then rejection with topping, or fade straight from open (on the plays that actually have fade, excluding the ones that dont).


Conceptual examples of both most frequent scenarios:




Risk management:


One of the most common problems across small cap traders is that many traders have difficulties setting risk or stop losses on such 1 dollar gapping tickers, they do not know if risking 10 cents is the right way or using wide risk all the way up to pre market highs. My personal trading approach is to cut losses quick (quicker than most would assume "quick") and jut get back in if setup "re-confirms" itself. For me this approach works on 1 dollar plays, i rather take 2 small cuts and get back in, than to have 1 position where i have jut been adding and adding and am now emotionally charged on size. But then again, this is just my approach, the key is not to follow my plan, but instead to study the setups and do research to see what kind of risk management makes statistical sense for you.


No matter what pattern one trades, the risk management on setup has to be marriage between statistical performance of usual winning setup and your own preferred personal trading style. It is a mix of both, and none of them can be excluded fully. If you force risk management to fully fit your personal style while completely ignoring the markets behavior, your performance will suffer. Or if you listen to market well but use risk management approach that is completely against your personality or style, you will find a big struggle to make it trough. It requires a balance, kinda like a real marriage.



Profit target:


The aim on profit side should be ideally whole day fade where the ticker fades as close to where the gap started as possible. For example if ticker gaps up from 0,80 cents to 1,80 dollars, then the aim on short target could be 1,00. Usually if there is enough selling liquidity it will get around those levels. (All three ticker examples on screenshots above faded majority of gap by the later hours of day, as example guide).



Again to point out, details matter! This section of post is not about the fact that if stock has 1 dollar price and is gaping up, that it by default fits such play conditions! All the variables have to match, and for that it requires to study historical setups, and to also input some practice and expect as well some failures before one understands the pattern overall.





5. Dry liquidity pattern




The basic premise of this pattern is that the liquidity on stock dries up to the point where no major fresh buyers are interested to participate anymore, majority of liquidity on asset remains smaller buyers and persistent sellers.

This pattern should appear between 10:00 and 11:00 AM hours of NY trading time. Defining "dry" liquidity is all about using the context, without using historical context (initial 30-45 minutes after open) it is impossible to really define if liquidity is strong or weak. For defining this pattern compare:


- initial liquidity on asset from 9:30 market open to 10:00 (first half hour)

versus

- to the liquidity of 10:00 to 11:00ish.


By the term "liquidity" it is meant that trader is looking at volume, quality of price prints (micro gaps), consistency of volume across few candles, relative volume on bull pushes vs bear pushes...etc...


It is important that all variables have to match (together present), in order to define dry liquidity being valid! The issue might be, if trader is only using volume to identify if liquidity is drying up (which many traders do) that will lead to in-complete definition and huge over-simplification. And the reason is relatively simple why.

Fact is that on majority of stocks the volume between 10:00-11:00 hour will be lower than it was at hour 9:30-10:00. Thus it is important to not just use volume as identification of dry liquidity, as that can lead to huge over-simplification (basically trader starts to fit every stock into dry or weak liquidity pattern, since chances are that majority of stocks will have lower volume 2 hours after open than they had in initial first 30 minutes).

One can hear it all the time in small caps where traders just call stocks "dead" because the volume has dropped by factor for 2X since first hour, that sort of analysis has no major value or statistical significance, since many of such stocks will still push and squeeze! Very important to have all the details down, and not to just only use volume.


Use some of the variables explained above to define strong backside, as well as variables for defining strong liquidity or dry liquidity pattern (read lower on article) to compare which liquidity conditions are most likely present on the asset as that has strong impact on what is the potential on the asset in terms of mid term direction for that day on small cap stock.



For dry liquidity pattern all variables should be present:



-1. Micro gaps between 1 minute candles (a must to use M1 chart). By this it is meant that price opens lower or higher on next candle to where it has closed on previous M1 candle, which in highly liquid stock should not happen. This is result of lack of bid/ask positioning on limit distances. If you are unfamiliar with concept overall, just try to zoom very close into M1 chart, and that might do the trick as well.


-2. Null (0) price prints (Single flat lined candle with no body and no wick (no volume traded, or very little volume traded per that M1 candle). Price basically closes where it has opened with little or no distance traded in between.


-3. Price structure under dry liquidity window should be under distribution phase, not a major pushing stage (look for article "Weakness / distribution" on blog for what distribution structure looks like).


-4. Washes should be slightly stronger than bull legs are. Volume is key to look for (strong volume on washes, weak volume on bullish pushes) as well as the time it takes for price to push high versus how quickly it washed out. It should wash out quickly, but it should take much longer to climb back up.


-5. There should be significant drop-off in volume traded at dry liquidity window, relative to volume traded in first 30-45 minutes after market open. By "significant" it is important to define that number. 2X drop-off is not enough, basically the drop of the volume should be in size of 4X-7X at least. If there was 1 million volume traded in first hour, the next hour with potential dry liquidity window would need to trade under 300k volume for same period of time (an example).



Use above 5 variable guides to determine if asset is potentially fitting dry liquidity conditions, and mark it on chart to keep it in perspective as a constant reminder (either with text on chart, or use of rectangles as myself).


Examples of dry liquidity windows / patterns below:
















Why should you care about defining dry liquidity conditions?


Dry liquidity pattern is relevant to keep eye on, as if it is present on ticker, it increases the chance for ticker to have further backside fade, not because of my opinion but due to statistical data pointing towards that with significant result. It is not just about logical point of view that agrees (supply overload), but as well as data agrees that further fade is statistically more likely, since those assets are unlikely to be picked up by market makers and squeezed up (not enough short liquidity to do so).


Should be as well added that for this pattern mostly day 1 tickers were included as part of data study (tickers with fresh news, that gap up substantially, as well as pumps on day 1). Overall dry liquidity conditions can provide trader with further bearish expectation on ticker, it is not guaranteed by any means, but statistically is relevant enough to pay attention to it (data collected on 200+ tickers, with high statistical relevance).



6.Strong liquidity pattern





Inverse of dry liquidity conditions are strong liquidity conditions, usually on front side of ticker at the same time window compared to dry liquidity pattern window (10:00 - 11:00).

To observe the strong liquidity pattern it is valuable to understand well the dry liquidity pattern as those two patterns are inverse of each other.

As are micro gaps between M1 candles key variable on dry liquidity pattern, on strong liquidity pattern the reverse of that is basically - no gaps between candles and every candle opening is exactly where the previous candle has closed.

Additionally to that on strong liquidity pattern the liquidity is deep and bid/ask are trading tightly together (tight spreads), usually with not much of spread dynamics (spreads are not widening much). Watching spreads is also beneficial to spot high liquidity conditions, are spreads staying very tight for majority of time (high liquidity) or are they often widening a lot with large distances, signaling weakening liquidity.


The volume size is also important, there should be candles on M1 chart with 200k volume or above on major bullish pushes/pops, and such candles should be frequently present. It is important that volume exceeds those numbers, otherwise trader might start to seek for this pattern where there i none across many other assets.


Conceptual example and difference between some dry vs strong liquidity conditions:





To conclude variables of strong liquidity pattern / window:


-no micro gaps between M1 candles (each candle opens exactly where previous candle closed on M1 chart)


-spreads remain tight for majority of time inside the key time window


-volume exceeds 150k or 200k per M1 candle frequently and most of high volume is on pushes


-asset is on clear front side by measures of price or indicators




Strong liquidity pattern on ticker ASTC below:




Strong liquidity pattern on ticker REXN:



One statistically relevant note to add is that strong liquidity patterns have higher chance to appear on tickers with very small gaps on news (under 30% gap) or on tickers that have no gaps at all or news, and are just pumped and then rigged by market makers for some reason.

After strong liquidity pattern is present at key time window, chances for some further upside on stock increase.


Putting dry/strong liquidity windows in use:


To conclude both dry and strong liquidity patterns the main reason why trader should pay attention to those two at critical time windows is because statistically they have further continuation impact on stock likely (85% chance), based on data gathered. It is however upon the trader him/herself to decide on how to use those patterns along his trading strategy. It should be noted as well that data gathered for dry liquidity pattern is much larger than for strong liquidity, due to nature that larger portion of small cap stocks fade rather than push strongly.





Soft clearouts on backside



There are two types of clearouts in small caps, first group are front-side clearouts usually on stocks that are strong whole day and trade relatively high volume trough the whole day, and the second group are stocks that open with weakness and selloff , developing backside and then having softer clearout under weaker liquidity conditions.


First group of clearouts, the heavy clearout on front side has been already covered in article "Short traps on rigged stocks", thus this article will only focus on soft clearouts on backside of stock.


The second group of those backside stocks is where often market makers like to create softer clearout trap, where they clear out the range on strong pop to scare out short sellers. The required conditions is however, that asset should trade some medium amount of volume, the backside should not be completely dry otherwise there are no chasing shorts to squeeze. So ideally the backside should still display some sort of decent volume.

Backside soft clearout is all about squeezing out chasing shorts, not shorts from much higher prices.



Look for those variables to determine if soft clearout has chance of happening:


-stock is on clear backside (use variables above on article to define clear backside).


-backside still has some decent volume (the whole point is that short sellers to chase they need liquidity, at least some decent liquidity).


-stock builds range on the backside (some decent symmetry of highs and lows).


-sudden push of explosive candle on high volume above the highs of range, likely initiation for soft clearout.


-ticker starts building clear symmetric microshelf after that strong volume candle (important, microshelf should be very clean in symmetry)



Conceptual example of soft clearout on backside:



Below is example of soft clearout with microshelf+rug pull on ticker BRN:




Below is example of soft clearout with microshelf+rug pull on backside of ticker VTVT:





Below is example on how to prepare ahead for potential soft clearout play, make scenario of what to expect and how price should develop to trade it, on ticker BIMI:




Then after that the scenario did came to fruition along the plan, and then it is up to trade to execute on the trade, and set risk above highs of microshelf (just a suggestion, but up to everyone to figure this out), on same ticker BIMI few minutes later:




Another slightly more unusual example of backside clearout on CPAH (example below), this one is especially great case to confirm all the 6 explained variables above because it had very strong decrease in liquidity participation after the clearout trap and the rug pull. After manipulators cleared out all the shorts and pulled the plug, the liquidity dried of significantly which is the part of variable number 6, signaling further selloff, and in this case it was rather obvious case of no further demand just before the support broke.




Soft clearouts provide solid entry opportunites and great RR, since in majority of cases the rug pull will follow it, giving short seller RR with above 1:3 RR ratio on trade.



Micro-shelves




Microshelf is very symmetric price structure where highs and lows are held within tight price range, and riggers are unloading their shares on top of those micro-highs, while short covers+buyers are causing price to bounce up from the micro lows, basically riggers are unloading into rest of the traders their long position from that explosive clearout candle (or from more accumulated liquiditiy from before).


The size / lenght of microshelf will usually be between 8 - 20 M1 candles, this is important component to keep eye on (in order to time the entry well), but it will largely depend on liquidity on asset. On soft clearouts the microshelves are usually in size of around 10 candles because there is not enough liquidity for market makers to sustain them longer, but on more liquid assets they can be over 20 candles in development time (1 Minute chart only).


If microshelf is really valid, usually the result of price move after it will be rug pull, giving trader great RR opportunity to short (risking highs of microshelf and covering into rug pull for 3+ RR).



Very important thing to note about micro-shelves:


This concept is not to be confused with just any micro consolidation on stock, for valid microshelf this structure needs to present at very specific market conditions after clearout push, that is a must. If not, then it is just a random consolidation, and not a microshelf.


Example of microshelf from the close up (zoomed in chart on 1 Minute):




Microshelves are a part of rigging process that manipulators use on those small cap stocks, important aspect to keep eye on, as often quick drop is the result after the microshelf, giving trader solid shorting opportunity. Some examples around this concept has already been given on article "Short traps on rigged stocks".


Recycling borrows on backside pops



Data points out that recycling shares (re-entering on small pushes up) with short position is valid way as it will be right thing to do in 80% of cases. Personally still my area to work and improve on thus wont give any suggestions on how and what to do, since i am personally not good at it yet, but the data is pretty clear overall.


Bellow is conceptual example of what is meant under this pattern:



This method however is not suitable for everyone, especially for trader who likes to have very tight risk on trades this method might not be good fit, since those backside recycled entries should use slightly larger stops (in cents/volatility, not P/L dollars).




Quick pump and dumps




Specific category of behavior in small caps are pump and dumps, usually small cap stocks which are pushed up in significant % moves in very short amount of time (usually within 30 minutes) and end up collapsing all the way down after pumpers sell of their shares, either as a part of specific rooms or individuals behind the pump initiation.



Ideal progression of quick pump, variable by variable, those are usually the most cohesive to play on short side and timing the top has relatively decent % of win rate (and solid RR):


-Stock is up on no news and has very quick price progression in terms of % vs time

-Ticker travel initial distance on light volume then halts

-price makes at least 50% move within 20 minutes, the more the better

-after halt open, there is high volume extension candle on 150k+ volume on M1 that stuffs and rejects

-After large rejection candle, price is unable to reclaim high and starts to fade, and keeps fading till end of the day, giving back up all gains



Below is example on PETZ, ideal setup of such pump on PETZ following majority of variables for possibility to time the topping well. Ideal short in such case would be after heavy rejection and high volume extension candle around 3,80 price area.




Below is example of pump and dump on ticker INXP and the fade progress explained in two stages. The fade progression in terms of time between to stages is the same as on ticker example of PETZ above, this is how usually quick pumps fade that "travel" their distance to upside on quick 30 minute progressive move. Slower very low volume pumps however tend to fade more slowly (pumpers need more time to attract the liquidity to dump into).





2 staged typical fade progression of quick pump explained in time units conceptually:




The pumps shown on examples above are the ones that i personally trade, and by no means do this rules apply across just any stock that moves on no news or is potentially pumped by specific chat room. This only applies to quick pumps, usually within first 45 minutes of market open that have specific behavior as outlined above.

It should be also noted that this specific pump pattern shown above comes around only once a week or not even that. It is just one of the plays to have in playbook, but by no means it should be the only thing that trader trades.


Another example of quick pump on ticker BNGO. Often the volume difference between initial volume (on majority of distance that pump travels) will be relatively small, and then on last portion where huge extension candle happens it will be drastically higher, that will often be the top. This is often solid way to enter short and risking 50% of last major candle size / distance.




Conclusion



This article covers some of behavioral patterns across the small cap stocks, my preference is to not give any suggestions on how to trade any pattern (even though i gave some personal suggestions here and there) but rather just to present the researched data of setups that do behave with relatively consistent behavior and let the trader build his own trading approach around that.


One thing i would suggest to any small cap trader is to always save intraday charts of the stock that is in play on the day, there is no excuse to not do it! There is plenty of things that can be researched and observed in hindsight with many of collected data over time. Too many traders are trying to figure out what they are doing wrong in trading by studying their trades historically, instead they should be first focused on studying the stocks themselves / behaviors, and their trades second.


Additional important thing to keep in mind, is that examples given on article are all winning/performing setups with very clean picture perfect setup behavior, not all setups will follow such path, and the rest is up to trader to handle trough risk management to cut the setups that do not work, even if the variables match very well.


It should be added that in order for trader to do that obviously it is not enough to just read this article and then start trading it, each setup needs to be studied and researched by trader him/herself and then let the collected data guide you on what is right or wrong to do. Make sure that your first priority is to shape trading strategy around the behavioral data of same setups, and then adjust that strategy over time to fit your own personality as much as behavioral data allows you to.

SUBSCRIBE VIA EMAIL

Follow on social media about latest trades or macro plays on stocks , FX or crypto:

  • Twitter

TradeTheMatrix.net