• Jan

Smallcap stocks recap for the month of October



Overview


The month of October has brought decent opportunities, but as well it has disappointed many by breaking the traditional promise within the community to deliver a hot action. Often Octobers (or early November) historically have been the months where strong cycles kick in and deliver 2 weeks or more of higher liquid action. While we did see the strong cycle in between, the duration and its liquidity were much weaker than the typical cycle from the past few years. Especially if we use FNGR as one of the leading tickers of a cycle where the liquidity was dry all along, there was a slight disappointment in filling many traders' expectations.


I do not hold the belief that one should expect markets to respond on a precise monthly basis using their past historical expectations i will explain below why that is. There are a few reasons for that, why I prefer to go with neutral expectations every single month. No "summer is dry", "October is hot" "new year is cold" type of semi-superstitious statements to form expectations, the small caps do not respond with enough timing accuracy for those statements to be reliable. The tilt and difference in action and timing is too high. However, there is value to point out things, on consistency basis, for example if 3 months have low action of strong cycles that is worthy info to point out, because regardless of what month it is around it signals liquidity weakness.


The justification for "every October is hot" is very loose. There could be plus or minus 30 days to that statement, it could be a large time delay and the difference between each year, plus the difference in overall how many tickers get into play. If a trader keeps trading on some very static expectations that are based on very loose data in the first place, it's easy to get frustrated and disappointed in the end. So, don't unless you have something very specific and reliable as part of your expectations.



Low ranges, and low presence of strong fading tickers (ADF-ers)



While we did see decreased liquidity to some extent (at least based on prior strong cycles as a comparison) the action has still been around, it is just that ranges have been somewhat more limited. Not that many tickers have been above 100% runners within a single-day move. Low-ranged tickers can be especially problematic to trade under medium or stronger market conditions because the downside is limited, and the upside doesn't deliver much before the demand is shaken out, which makes trading of those more difficult, where market makers sustain the manipulated order flow for a while.



However, let's open the real bag of worms, the low presence of ADF tickers. It is fair to say, that this perhaps is why the morale of so many short sellers dropped at month's end.


Rigged tickers are nothing new in small-caps, and most traders just go by it, while many are aware that there is manipulated activity going on, they don't dive deep into trying to figure out tricks, instead, it's about extracting the large faders and then just minimizing the losses on "annoying manipulated tickers".

This works in some months but not the others, when you have a month such as October with quite a low presence of ADF tickers the difficulty increases because the cushion filling pump for traders' capital just stops functioning. "Cushion filling pump" is those large R trades from strong fading tickers that just don't come around, which makes the entire trading performance much more exposed to having a good read on manipulated action (and extracting legs rather than whole move) of the tickers that just hold a neutral range through the entire day.


Therefore low presence of ADF (all-day-fade) tickers will start causing troubles in many areas for short sellers. Tickers are rigged every once in a while, but typically there is an in-between filling hole of a few ADF tickers commonly. This makes it worthwhile on trading (and fight) the rigged tickers where many might struggle. Well, that wasn't the case as much in October. And if there were ADF tickers, most of those were not 150% nicely liquid tickers, but rather the low-hanging fruit with small gaps and weak liquidity, therefore low RR opportunity.


An example of such few low RR low volatile ADF tickers of the past 30 days is NURO (Novembers ticker yes but the pattern is the same):


Rigged flows and the low range theme



Something that has to be taken very seriously is when tickers are rigged but offer a low range as those can be very annoying and damaging to trade. It is common to see traders including myself will get chopped on such tickers, it's often to see when switching bias that you get taken for loss on multiple directions because a ticker on low range has no indication of price behavior to reads its rotations ahead due to limited range.


It is important to figure out if the ticker has a rigged flow and low range, to completely adjust the trading approach (usually its best to downsize and only take high range shorts and low range longs), or perhaps even avoid trading it if possible. This is especially true in neutral or stronger cycles. For example in weak cycles if tickers range is low with maintained order flow, it isn't too problematic because chances are ticker will not deliver any surprise big squeezes. But that might be the case in neutral or stronger cycles. This means cycle momentum conditions should also play a role on trading approach deployment for such low range but rigger tickers. We had some days in October as such.


MMs might use this rigging approach on those low-range tickers so they do not let any trapped liquidity exit out in large gains. If longs are in the money they won't squeeze price much to let longs liquidate and sell at mass, and vice versa for shorts when it comes to dropping the price. This means that the price will often consolidate for while and then swipe the range to the upside or downside, but the swiped amount will be so minimal that most traders won't consider closing out positions in green because the move is so small it does not justify the risk to reward profile over the long run. So they stay in and hope for a bigger move, which often does not come as the price returns back inside the range. The reason for this tactic from MMs is to keep as much liquidity inside the ticker, shake out weak hands into micro-clearouts and always ensure that nobody manages to liquidate position against MMs because the whole idea for MMs is to distribute position towards market close as much as possible and then let ticker hang up there on the air. Which often causes it to the next day or two to unwind south on 0 liquidity.


This is why many of such tickers end up with exactly such price action and day1/day2/day3 behavior:

Strong cycle leading ticker (FNGR):


The leading ticker of the strong cycle in October was FNGR. While there were PEGY and GTII as their correlated tickers running at a similar time, we could summarize that somewhere in between FNGR might be the lead.


Recognizing the leading ticker of each strong cycle is key because once that ticker starts to top out and deflate, everything else will sooner rather than later follow. The topping process on FNGR between 13th and 16th October (fake breakout above macro highs), therefore, was a major shift across the board for all other tickers into weakness. Always track once the leading MDR ticker starts to extend near 700-1000% and possibly inverse to the downside, and shift your bias into bearish on the majority of other tickers, especially other multiday runners. Often this introduces for a week or two weak cycles and colder flows. The above rule has pretty good follow-trough, with exception of January and February 2021 cycles obviously where there was always some new strong cycle leading ticker poping up somewhere and carrying the torch forward. But that is an exception, in most cases once the first lead ticker deflates, there is no more strong cycle for at least 2 weeks.


1000% around 10 was also a good topping confluence which is often going to be the maximum on multiday running tickers.


Failed multiday-runner (HUSA):


One ticker I was watching a bit closer was HUSA, for a potential smaller multiday runner squeeze of approx 4 points (3 to 7). The reason for long play was the large supply cut by OPEC as a key catalyst and the squeeze of crude oil prices higher. Those two in combination with crude oil large-cap names starting to rally into strong up trends I thought it was decent enough reason to perhaps see some upside movements on HUSA. In such situations often the strong bullish macro catalyst sends the underlying commodity into the rally, followed by large-cap tickers tied to such commodity rallying as well, then then the tail smallcap tickers follow, such as HUSA. Well, in this case, that didn't happen. Rally was very muted and short lasting.


Goes to show that smallcap tickers can be very sensitive and vice versa, dull and cold, even when the macro context makes sense for them to respond with upside move.

The typical rule is: Whenever you see strong reasons for small-cap to rally, but it does not respond within two weeks, that is it. You should remove bullish bias, because there is an underlying weakness on the ticker working against it, as an observer perhaps you can't pinpoint what exactly it is, but no-price response clearly signals that to be the case. When something is obviously bullish out there in the market, the tickers related to that event should respond, if they dont, whatever the case is, suggests weakness. In hindsight, i gave HUSA a bit too much time to respond after the 7th of October when the weakness to rally was already clearly visible, gave it 4 days which were perhaps not needed.


HUSA low-response MDR (multiday runner) chart below:

D1 gappers: There was a bit lower than usual day1 gappers in October, but there was decent amount of pump tickers running in between, so total action was not too low. Offerings: Some tickers had intraday and pre-market offerings. Most of them deflated completely. Some such as IMUX also had major catalyst failure (not offering) and crashed from 8 to 1 shows just how big a risk sometimes it could be to swing a long multiday-running ticker.


Common themes: Fake breakouts, multiday runners, rigged tickers with low range, fake breakouts that reclaim fast are some from top of my mind.

Some fake breakout examples:

TOPS:

SOBR:



High institutional ownership


This is always a hot topic of discussion and there is a lot of misconception about high institutional ownership in small-caps. Traders assume that anything with high IO% will have a higher chance of upside move and will be saved by institutions therefore short bias to be incorrect on such tickers. This might be true in many cases but as well not in many others. I think it is much more useful to implement cycle and current market momentum conditions into bias formation to increase accuracy if ticker has high IO% ownership (above 70%).

Which means:

-high IO% in the strong cycle: more upside chances than downside roughly speaking.

-high IO% in weak cycle: unknown or neutral bias because delivery could be very noisy over 100 samples. My personal view is, if strong market conditions are present be careful of shorting high IO% tickers because chances of squeezes are higher and as well of very tricky action. But the key is, a strong cycle has to be present. A hot multiday running ticker has to be present.


We might use the above outline as a starting point to expand on. So rather than thinking just anything with high IO% can squeeze any time in any market conditions which is not the highly responding way to think about it, only be careful of such tickers in stronger momentum markets. There have been many tickers of the past year where high IO% tickers did get plenty of upside movements on rigged action, most of which was present in strong cycles.



Below is a chart of ticker PCVX with high IO%, but ticker unable to rally through the day. While it did rally slowly after that day, the day1 is what is in focus here due to highest liquidity.

It had a decent gap up on the catalyst release in pre-market, but after opening, there was more or less distribution in progress. Cycle flows on that day were leaning towards weakness more than strength on the scored side. My bias was short on PCVX for that day because cycle was weak and tickers have been deflating a lot over those days, which increased the chances PCVX will not deliver much upside surprise, in hindsight that was the right way to think about it.





Average cycle max range for tickers



Something that is a relatively robust variable to use in small-caps is 1. the maximum average range recently displayed by tickers.

And another subcomponent is the 2. average maximum range of tickers per cycle.


Tickers like that stay within a certain max range depending on strength of market conditions and flows. In strong cycles, the ranges will expand and the average maximums that tickers reach might go to 150%, while in weak cycles those ranges could be limited to just 60%, the neutral cycle range being somewhere in the middle of 100%.


There could be a large disconnect in data, and it is important to keep this in mind each day when coming to market, to not force wrong expectations on a wrong day.


I should add, the ranges are measured by my own method perhaps different to how platform my display it by default. I measure them from where the pre-market gap action starts, which in many cases is prior days close but not always. Just to clarify the % are not measured from market open, but from pre-market gap action start.


Strategically there is a good reason why cycles have their own order to the % averages. When a cycle is hot and tape transactions are moving the MMs will create larger upside moves because there will be a new influx of demand at higher points of price, at enough scale to where they can unload into those fresh buyers in many cases. When cycles are weak that might not be the case and market makers will be more prone to being trapped at higher prices doing large % runs (due to weaker per-minute liquidity influxes from other traders), so the % ranges decrease due to "safety reasons". The price gets pinned down earlier.

Typically the tickers in the neutral cycle for example might follow such prints on the maximum ranges they display (HOD max on the day):

Ticker A: 70%

Ticker B: 80%

Ticker C: 75%

Ticker D: 95%

Ticker E: 130%

Ticker F: 65%


Which combined might result in average maximums around 80 or 90 but no more than 100% per majority. Those ranges will then often repeat in each cycle yearly. However, if the trader is unaware of what cycle is currently present or how to figure that out it might be an issue to deploy it.

Either way, just listening to the recent theme on what ranges ticker display can help the trader to figure out the theme a bit better (last 5 to 10 tickers), without understanding what cycle might be in play, or what to name it. If data is very consistent it might already suggest enough, but the issue might be, some months have very inconsistent cycles with a lot of different behaviors and ranges. There are those months as well and it's important if that is the case for a trader to be much more open-minded and adaptive, again...listen to recent behavior on ranges to understand just how consistent the current cycle or current month might be.


In either case, cycles as mentioned have often their average max ranges, and the trader can use those to better define higher RR short opportunities and long opportunities, especially on where to sell longs. For example, if the current theme of tickers suggests the max average range to be 70% across 10 tickers with a relatively consistent performance range (no major anomalies) then if the trader is a long ticker from 40%ish range, and the current price is hanging around 70%, it could be a good idea to start thinking about selling that long. This however only applies if the performance of tickers and their ranges has a good consistency to them and similarities. Again, there are weeks like that, and there aren't weeks like that. It's important to either keep in memory recent ticker performances or just to note them down on paper to have it as a reminder.



The example below is ticker KITT where 100% max avg range was used as additional confluence to make short trading decisions, especially after the first unahlt and reject of FBO. To re-affirm max avg ranges are never used alone to form the trading decision of, they are used as additional confirmations if there are other reasons why ticker should top out within that range:

HTCR 100% range:


SONN 100% range:


To emphasize again, the above examples are not some sort of bullet-proof short strategy into 100% extension. They highlight how if market conditions are more on the colder or neutral side, it isn't uncommon to see that tickers will not be able to hold squeeze past 100% thresholds. That does not mean the ticker has to unwind straight away from that level, it just means the ability to hold the price strong with progression higher above that range will become statistically decreased substantially.

There have been plenty of examples from October where tickers bumped near 100% of the range and topped out. The problem was just the fades were either nonexistent or low in delivery, where tickers were hugging near that max range.


It is also worth noting that cycles where 100% is avg max range are quite more common than cycles where 150% or 170% is the common avg max range. However, there are market cycles where 70% is the common max average range per let's say last 15 tickers. What does this data tell you? That there is at the same time a lot of range difference but at the same time little range difference, especially for a trader looking to extract volatility each % difference means more profits or a bigger loss. If a trader is unaware which avg max range is somewhat in play currently, it can easily mean oversizing in expectation of too tight range, getting a bigger % squeeze, and ending with a larger loss. Wrong range expectations combined with big size use is one of the most common reasons why short sellers end with large losses.


Observe and track recent ranges of tickers, and refresh every last 5-8 tickers to have the most updated data on expectations. Where many fall into the wrong area is they use anomalies rather than averages to project expectations, often because greed plays a role in it. For example, long-biased traders will see 1 out of 10 tickers that recently went up 200% thinking this is now a healthy range to expect other tickers to follow, neglecting the fact that the rest 9 tickers had only 70% of avg range. This means the next few tickers are much more likely to fall into the 70% range than they are anywhere near 200% on a large sample basis. Unless you have the consistency of high-range tickers, do not anticipate on a frequent basis that anomalies will turn into new status quo. It is psychologically unhealthy to operate that way as expectations get crushed and unmeet too much.



Quick-wash reclaims


We have seen plenty of wash reclaim patterns played out in the month of October, definitely a bit unusually high rate versus prior months. This pattern is bullish in itself, especially in strong cycles. Its performance will drop in neutral and weak cycles, but especially in strong cycles it is a very key one to follow, as result more often than not is a squeeze in a price higher once such a pattern accours.


We have seen a strong cycle presence in October, which is where the wash reclaim pattern becomes important to track. But we have also had weaker flows on the month in between, where such a pattern either disappeared or if it was present, its performance decreased, meaning tickers still flopped and sold off after reclaiming major washes without first squeezing higher. It is important therefore to prioritize this pattern mostly when strong cycles are the present or higher end of neutral cycles because that is where the statistical follow-trough of the pattern will increase. Especially for the short seller, to cover out shorts when the pattern gets into play.


Let's list some tickers with wash reclaim moves recently:


ADTX:


IMUX:

Type4 patterns:

This Octobers action has had an unusually high presence of type4 patterns, from top of my memory there were probably around 15 of such patterns. For a relatively short duration of strong momentum that is quite a high number and not just that a large portion (about 70% plus) had great follow-trough to the upside after reclaim of underwater demand levels. This pattern is present only on rigged tickers. If you are unaware of what type4 pattern is make sure to check older articles on "rigged stocks".

PEGY example below on type4 with a strong wash of demand followed by quick reclaim and instant squeeze into a halt. This was one of the better long plays on the month.

FNGR type4 example below from close up:

KITT type4 example below but smaller and weaker structure:

LUCY type4 example where the opening wash went under pre-market lows, rotated and squeezed all the way back to higher portions of the range. As per type4 setup, they first go for longs and then they go for shorts, shaking both sides of the market out to good extent. The margined traders at least.

APDN type4 example on more dragged-out type4 that took a while to resolute with squeeze into HOD:

Type1s:

LASE example with type1 but not the cleanest one, the reject on HOD however was super clean with highest volume print on the day:

Macro type1 SOBR:

Macro type1 with topping EPIX:


Conclusion


October has brought quite a consistent action throughout the month, unlike September which was much colder and dry in between. But it is fair to say that we haven't seen an easy action for short sellers and neither the longs were rewarded with many great % squeezers. One of those months that ends up with many traders with the sour taste of disappointment and doubts at the end. Is the next one going to be easier or? Just gimme the damn ADFs and big % gappers. The short seller's mecca. But then again, rigged stuff is always interesting and challenging to trade as long as its highly liquid such as PEGY for example.

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