Selectivity and specificity in markets should be respected, as noise is a factor that everyone should strive to reduce. Noise is what makes us confuse two different assets that might be somewhat similar, but end up being quite different because we perhaps miss the key underlying condition to see the difference.
While many might be aware of the concept of multiday runners in small-cap stocks, it is less common to see traders differentiate the sub-patterns so that better expectations are built on what each ticker is more likely to do versus the prior one.
Since multiday runners tend to deliver quite a broad behavior differentiation, it is ideal to have different criteria on what identifies tickers setup A versus setup B, even if both might technically be multiday runners.
One of the common concepts that come as side effects of multiday runners is the surprise factor, where if tickers are too averaged out, it is too often to see surprising moves come along frequently that, for example, is not aligned to the previous few tickers.
There are many different methods to deploy on trading those setups, and in general, there is no right or wrong. Both long and short side approaches can be extracted since those tickers often create wide ranges and plenty of volatility. Still, there is a specific time-based directional likeliness that traders should implement, based on specifics multiday runners pattern that it belongs to so that one is not fighting it, but rather joining the side that, at least roughly speaking, might have a slightly higher chance of delivering.
The focus of this article will be on understanding the life span of typical multiday runner, the impact of current market cycles on its potential in terms of range extension or time duration, different trading approaches that one can deploy, and as well to highlight the overall significant difference in their behavior and to highlight why flexibility and the short plus long playbook is the best way to approach those setups. Since those assets tend to trade within ping pong start-end scenario (strong rally that ends with strong unwind), why not extracting both the upside and downside move of such tickers, or at least parts of it.
The term used in the article for multiday runners is MDR to clear up any further confusion.
The average life span of a multiday runner
It should go without saying that multiday runners have layered behavior; a lot goes into price differentials (cheaper tickers and more expensive ones), the frontside move duration in terms of days, or how many fresh highs it can breach over its life span. Additionally, how many reclaim the macro highs after they go into a prolonged period of consolidation or unwind for several days, ie the reclaim power.
Since MDR tickers can have quite different ranges of behavior, it should be noted that the averages mentioned can vary a lot and depend on external factors such as currently present strong or weak market cycles. For example, it is often expected that within weaker market cycles, the life span of MDR will be shorter, and its rally will exhaust earlier. Therefore, using averages for MDRs in both strong and weak cycles can lead to confusing data points if one builds an edge around that.
We can therefore specify four key points:
1. MDRs in strong cycles tend to last longer (could be by a factor of 2 or even 3X)
2. MDRs in weak cycles tend to have lower liquidity and less decent entry opportunities
3. The frequency of MDRs in strong cycles is higher than in weak cycles, especially in clusters. For example, while weak cycles also create MDRs, they will be sparse and spread across a more extended period, while strong cycles can cluster and spawn a large amount of MDRs all within just a few days. Therefore clustering is much more concentrated in strong cycles. A trader should implement that into expectations, especially if swinging.
4. Correlation factor between MDRs is very likely to be higher in strong cycles and in weak cycles the MDRs might trade on their own since its also lesser chance that many MDRs would be running in first place. This is important to understand as one trade on ticker X might turn into same trade on ticker Y if both MDRs are in strong cycle, but trader is unaware that those two tickers are trading correlated in response.
However, very roughly speaking, two weeks is the average behavior rate I use for identifying the potential ending of tickers frontside and macro topping if the ticker is extended enough in % terms (for the current cycle). Enough would be relative because, as mentioned above, it depends on the current present cycle and the strength of the flows. However, a textbook example would be ticker running for two weeks, extended 800% since its first day of the rally, and is now trading at the highest volume day since the MDR stage began. Typically tops on those tickers are set on highest volume days, and as well the further past ten days of frontside rally the ticker still holds, the more likely it is that topping day might be around the corner.
However, again, to highlight the key points again, make sure to weigh all variables to define those changes; if one does not match well enough, consider yourself open-minded still for any scenario on the MDR ticker. For example, if the ticker has been running for ten days, but it is only up 300% since its first day, those two variables are not extended enough to signal a likely chance of topping unless the market conditions are very cold.
But to put basic likely scenario for when ticker of MDR might be topping in strong cycle somewhen soon-ish:
-If ticker starts to pass 700% threshold since day 1
-Ticker has been running for 10 days or more, ideally as close to 20 or more
-Ticker is displaying high volume numbers, or perhaps highest ones in last days
When measuring the life span of a multiday runner, always start with its first day, where usually the MDR will have a slight (or in some cases bigger) gap up and decent volume that will stand out from the rest of the days. That should be the first day to measure the length of duration for the frontside rally.
Example of first day of MDR on ticker KALA:
Additionally, be aware of the current present cycle. If momentum conditions in the market currently are extreme, be mindful that ticker can run longer and do not force the expectations on top too early. Moreover, try to place some longs. Meanwhile, if the opposite is the case and the market is very weak, be less eager to follow the upside momentum, especially if the ticker is already in the MDR stage for ten days or more.
Ideal tops on MDRs are high-volume Type1 traps. Not all MDRs will have them, but that might be the best RR opportunity to short for a solid trade if it is present. Always track the volume progression; for a high volume trap, the volume traded on the current day of ticker should be the highest volume across any previous days. Most pumped tickers (Chinese pumps, for example) will top out on significantly highest daily volume prints, and the ticker will collapse from there onwards.
How to use the MDRs behavior and implement it into expectations or trading approach
The average data for runners frontside is helpful in a few ways. First, it gives one the ability to plan for how long it still makes sense to long the ticker intraday in the expectation that further upside might be delivered. It also gives traders who are swing long ideas on when to start taking profits and where the top might start to become more likely and probable so that they are not closing trades too soon or too late. It also gives a short-seller idea of where to start shorting so that one is not too early and creates harm to equity.
To sum it up, studying and researching MDRs using all the context variables displayed on the article aids trader or investor with:
-ability to plan the intraday longs and when it makes no longer sense to do so
-ability to plan the TPs on swing longs with higher accuracy than just guessing it
-ability to sit back with discipline on shorting until the right moment, not being too early
The major drawback is that MDRs behavior can be very different. All of which requires the trader to be well intuned with all the exposed market conditions for one to judge well, which might be the situation for the current ticker.
For shorting, it is highly recommended that one waits for backside formation first or a clear topping day before starting to short. Although that might lead to missing specific tickers, those that will top out very quickly and sharply unwind. The backside provides enough meat if plenty of trades are recycled, so there is no need to catch the exact top of the ticker and deliver that high RR trade. Five recycled trades on the backside could equal that one perfectly executed frontside short that ends up being macro top. Moreover, that one perfect trade is likely to be much more difficult to nail than five recycled trades on the already confirmed backside after topping day might be. Always keep this in mind.
The day 2 effect
Often when there is a stronger cycle, and the MDR theme becomes highly in play, by that it is meant that many tickers will turn into MDRs, those that get plenty of attention on day 1, in such conditions, it is essential to watch day two and day three performance of tickers. Day 2/3 is almost like a swing confirmation checklist if the tickers display the correct behavior. If many tickers in a row are not fading on day 2 or 3, this could be an early indication that the MDR theme might be coming into play. Its not a guarantee by itself but it is one of confirmation variables that might signal ahead behavior change.
Using reverse engineering approach, or inverse confirmation, tickers typically fade on day two or day three. While it is possible to see one or two to hold still and squeeze, the critical indication to correctly spot the MDR theme in the making is when multiple tickers on days 2 and 3 are not fading but rather holding neutral or pushing. That is typically the beginning stage of the MDR theme in progress. The earlier one catches this behavior; the more edge potentially can be extracted; remember that to make the most out of the MDR theme, being early in identifying it is the key. And keep in mind, not just one ticker, but few in cluster have to show such behavior.
From a trading perspective, day 2/3 behavior is crucial as one should start making adjustments when this becomes apparent.
It is more likely that swing long trades will work in strong cycle conditions, as tickers are more prone to holding after day two.
Macro theme and importance to be well researched
Research and broad market knowledge are beneficial in trading, regardless of assets traded. One thing that becomes more obvious over time and experience is that the more one broadens the knowledge on the functioning of different market asset classes, the more correlations can be seen and its interconnected dynamics that help to push one asset class up and at the same time some other asset class down. There is always a limited flow of capital available. Typically, there is always rush into somewhere or rush out of some other place at the same time. A typical risk-on and risk-off relationship is that capital is always flying out of equities into risk hedge assets like gold or dollar, or vice versa. Those basic in/out flows create all sorts of different macro themes that eventually impact small-caps as well.
Often it can be seen that small-cap traders are, on average, less knowledgeable in macro or being curious about larger asset classes such as commodities, currencies, or even large-capitalization stocks for a few reasons:
1. First, they do not have to do plenty of research because the small-cap stocks might often trade as market niche on their own and not directly highly correlated to other markets.
2. Second, the additional research does not provide much practical execution value. For example, just because one has an excellent background in how biotechnology and medicine work, it does not mean that such an individual would have substantially better edge positioning than someone who has none of such knowledge but has done plenty of research on tickers behavior. Alternatively, an individual knowledgeable in how commodity markets work within a single year might not be able to deploy his expertise into small-cap stocks. If commodities are within neutral or backwardation performance, there won't be any rush of the flows, therefore no opportunity.
This is why it is not surprising that many view the small-cap stocks just as the trading vehicles, capital in, capital out. Moreover, the most time spent researching the background of companies will be very narrowly focused on balance sheets or structural components of the ticker itself, such as short % float, market cap, and similar conditions. However, in the end, those conditions often share the issue that they are very noisy in performance, where one ticker with substantial dilution on day one might perform with significant fade and that similar ticker with the same dilution on day ten might do precisely the opposite. The company-based conditions will yield noisy performance or "predictive ability" especially in short term, or at least nowhere near as clean as what macro themes can do when they come into play.
So to lay it out, the basic difference is:
-Company based conditions:
-Are easier to wrap your head around,
-Take less amount of time to figure out,
-Can be quickly deployed
-They take a decent amount of research time on day to day basis, let's say 15 to 30 minutes per ticker, depending on how detailed one is if dilution also is included.
-Macro based theme conditions:
-It is much more complex to figure out a macro theme,
-Takes at least ten times longer to learn,
-Cannot be quickly deployed, at least not accurately.
-It takes just the same amount of research daily because one has to be in-tuned with current macro flows globally or the recent news.
Both approaches require time, but that is not the critical conclusion. Both of those approaches are worth researching and deploying, but critically is to be selective about it and not force it when conditions for either/or are not very clear. Prioritize macros when those are stronger and in play and vice versa when companies fundamentals show something very obvious. Some individuals are good at just going with the flow. Checking the news and then using "gut feeling" to notice when some prominent macro theme came into play, they will focus on the long side and try to join the momentum. While some might be able to do that and can perform well, it won't be the case for most traders. The majority is in a similar position to myself, were to execute on a theme like that, preparation has to be done, and everything has to make sense even before the media craze begins. This is where research into macro-related subjects comes into play which might somewhen down the road impact small-cap strong cycle ignition.
What are the potential topics of the broad macro themes? It could be anything related to the functioning of the economy, such as:
-Commodities rally (oil, food, of 2022 for example), when commodity prices rally strongly this has ability to ignite many low priced small-cap stocks
-Innovative sectors, in general, are ones that often spour the influx of capital into smallcaps and ignition of strong cycles
-Weed legislation (APHA or CGC tickers in 2020 and 2021 impacted with positive flows)
-Electric vehicles investments from govt side (TSLA sympathies of early 2021)
-Investments into the new innovative sector (crypto in early 2021 when strong cycle was still present in crypto, tickers like BTBT or MARA).
-Broad government investments into infrastructure such as BBB and impact on industrial smallcap tickers, if such plans are big in capital size (300,500 billion)
The idea is you do not know which of those might come into play and requires as much curiosity to be engaged in research across as many so that once that theme is in play, one can execute on. And all the others which individual has to lack research (because it is impossible to do them all quickly as each takes time to learn or research), it is acceptable to miss the opportunity because building a solid thesis would be, in such case, not probable. That is the cost that you should accept, the key is not to get all of those themes when they come into play, but only the ones you understand and have prior knowledge.
This process has to be respected because it can be very damaging to building a strong thesis on something you don't understand well or exposing across too many of such small-cap tickers while being too late, which is an actual problem that happens to many. They get excited about some theme they have just recently started to research, but they are chasing the tickers at already extended prices over a week or two, likely to get caught. This is perhaps the most frequent mistake made and is not just applicable to small-cap swing long traders.
The idea is to be well researched on macro ahead before ignition of theme happens. It provides one with positioning swing longs well before the tickers even respond in smallcap sector strongly. Not being researched and prepared ahead will still provide one with plenty of trading opportunities howerver more significant swings might be missed due to missing the context of the bigger picture, or they might lead to fighting the theme by underestimating it due to lack of research. Those are the main reasons why one would want to be researching macro if trading small-caps.
Sustainability of macro theme for smallcap tickers
While macro themes can ignite the smallcap sector and deliver outstanding performance to several tickers (typically 5-10 tickers) with 600 to 1000% moves, in most cases, those tickers will not sustain their moves. The question will only remain when and from where will the unwind begins. Is it within a few days or a several days, but rarely will smallcap sustain the rally past few weeks (such as was AMC although AMC was not a typical smallcap company, some of the runners along it were).
Most strong cycles do not have long enough momentum to sustain the rally, and fundamentally the structure of the company will not change; therefore, the tickers will mimic their long-term trend performance (which for most is to the downside) sooner or later. This is an important point to understand, especially for beginner swing long traders, who tend to get attached and excited about the theme too much and then hold the bag once the momentum completely collapses.
Regardless of the strength of the macro theme, those tickers should always be considered as hot potato plays and not something that one should consider as portfolio swing for several months. If you are holding a position for a few weeks, your tolerance meter should already be flashing with warning signs as it is unlikely that ticker will deliver any more than it already has. The longer you hold that hot potato, the more likely the cooloff will begin.
This is complicated when one has less experience because it does not make sense on the surface. Suppose the macro theme is very powerful and has shown enormous interest in buying smallcap companies related to that sector (in hundreds of million shares of volume). Why would that all of a sudden evaporate? Surely the macro theme has a long-term ability to sustain the presence of flows. That in itself is the most common misjudgment that many will make.
The market makers that push those tickers are not doing because some large hedge fund wants to now include those into portfolios, it is done on the winds of considerable media attention and the attractive for chasing from many market participants that create short term reason to squeeze those tickers like there is no tomorrow. However, once the % extensions start to near anywhere from 500 to 1000% for the primary running ticker, typically not long after that, the macro top will set in. The capital will leave those stocks just as quickly as it came rushing in, or in other words, it will take a similar amount of days to deflate the ticker back down as it took to inflate it to the upside. Not always the case, but roughly speaking, frontside and backside have some similarities in duration, especially on primary tickers.
It is because of that why timing matters. To have research on a macro theme ahead, so that one understands when it is not yet too late to join the long side of those tickers, and to know that the more absurd the primary tickers % extension becomes, the more it might be closer to forming a top.
A very rough guide that I use is 1000% extension on the primary ticker as likely the top, and mind, this only applies to the primary ticker of whichever the current sectors theme is in play because it could be in some cases that it is not just one. Therefore you could have two or even three primary tickers. However, in more cases than not, it will be just one. Such an example was SPI 2020, or IMPP 2022. Once each of those extended approx 1000%, the top was formed, and many tickers collapsed altogether; however, the essential factor is that many fresh tickers went into the multiday runner stage.
The growth and capital intensive aspect of small-cap companies versus the macro theme long term exposure
Everything in the market can be explained well if only one approaches it from the right angles. As mentioned above, the classic mistake is to get excited about the macro theme, and how much capital it might attract over the long run, but not understanding that structurally the company remains what it was before this theme came into play and long term fundamentals of the company will be the force against the positive inflows of macro theme for the majority of small-cap companies especially if they are loss-making and dilutive.
For many such companies, they run "experimental" businesses, trying to push the envelope in innovative opportunities, which often leads them to flip flop the sectors (the one-day biotech company the next day crypto mining), which all can be a toll to companies capital, the shareholder's security or professionalism or just, in general, they might be involved in industries that are highly capital intensive (oil, biotech) and the macro themes typically will not be able to create enough of fresh, positive revenue inflows versus what the company will eventually burn as a capital expense, hence the fundamental picture will not change.
It is easy to see all the opportunities that a company will be able to make from the exposure to the macro theme, but what often long-biased investors or traders forget is that there is also the cost, the other side of the equation. So, in the end, it's all about balancing out the pluses and minuses, and the pluses of macro theme for most companies will not be able to create enough change to outweigh the minuses, at least not in the short or mid-term. They might be able to do in the long run if that macro theme remains persistent for a while, but let's be honest, in many cases, that does not happen.
A regulation change can kill quickly macro theme like weed legislation; for example, a strong commodity cycle can just as quickly within a few years turns upside down, a biotech company might run out of cash and go insolvent just a tiny step before they actually would have made it through FDA approval. Things like that happen all the time, and it is why this market niche is so "shady" on the surface often, although in some cases it directly is (paid pump and dumps), in many cases, it is not intended, it is just that macro themes can flip flop so strongly that company has spent years adjusting to it, and now it is getting the rug pulled into a difficult situation.
When you rationalize the macro theme versus the companies fundamentals, it is vital to understand that macro themes will provide short-term tons of momentum and excitement. It also provides a long-term growth opportunity for that company. However, what it does not provide usually is significant enough short and mid-term revenue increase that makes a huge difference for the company; therefore, the fundamental structure in mid-term does not change strongly enough to justify a big rally in the ticker and keep it at those prices. That, in short, explains why it is often to see a very strong rally in companies exposed to some unexpected and strong macro theme but to see them collapse all the way back down just a month later.
Moreover, while one could develop the whole arsenal of methods on how to judge which companies are worthy of long term holds (cash burn situation change, decreased dilution, a new partnership which is significant to the companies market capitalization, etc...), in reality, it is still better to consider that swing plays like a hot potato. It is much more probable that you will get it wrong by holding a ticker like that for an extended period than to get it right. And suppose traders' timing is somewhat good on identifying new macro themes in the play, positioning swing well. In that case, a hot potato method will let you capitalize on that, and then begone with any further analysis or lost nerves on holding for a long time that might be hit or miss.
Typically when holding a long swing position in the MDR ticker, it should play out within two weeks with the solid winner. The longer that trader holds the position open after those two weeks (especially a month and more), the more chances start to lean towards the fact that short/mid-term negative fundamental forces of the company will outweigh the long term positives of the macro theme that ignited the ticker in the first place and thus result with full unwind of ticker lower. Any long swing trader should be highly aware of "the hot potato" concept. The time of delivery on swing long is important; the longer you hold with no result, the more chances on average that it will result in a negative hold.
The lag effect from primary tickers collapse and impact on further MDRs
As the primary ticker collapses, the positive drag or lag effect on the strong cycle will persist for a while more. How long that is debatable, but it is often safe to say that at least a week. This means that once the biggest extended ticker, the one that was the ignition for the strong cycle, collapses from its top by significant %, there will still be opportunities in other fresh tickers that might turn into multiday runners. Typically one might see 5 to 10 tickers that go into smaller MDRs that run around 70-200% within following week or two, depending on the strength of cycle.
The cycles in markets are like tanker ships; once the ship is already clearly rotating, it does not mean that momentum instantly shifts to that new direction. There will be flows that are carried still for a while in a bullish direction. However, that will only remain so mostly for fresh tickers, those that are not already extended and have collapsed. It is because traders should still seek new extended opportunities in other same sector-related tickers if they show initiation of momentum on strong volumes. After all, they might still turn into a multiday runner. While that multiday rally stage might be much shorter if they start to run very late into a strong cycle, it is still good enough to provide a good swing long and then swings short opportunity.
Conceptually it is often approximately like this:
The key takeaway should be if one is swing longing MDR tickers, and it is very clear that the primary ticker (IMPP, for example recently) has topped out, a trader should be aware of how long ago that was. Because the time ratio will impact how long the current MDR ticker in play has as a potential total rally. If this MDR ticker is far away from the primary ticker's top day, the chances are that MDR days are numbered and might end quicker than expected. Meanwhile, if this fresh MDR ticker starter rallies very close to the day when the primary ticker topped out, it might still have more days to catch further momentum (as long as some other tickers are running too). That is due to how long, on average, the strong cycles last and what chances are to see a strong cycle last three weeks (high) versus two months (low), for example—being aware of that is important to calibrate trade expectations along with entries and, most importantly, where to start planning for exits so that one is not unrealistic.
Unrealistic expectations based on primary tickers performance
Something especially common for beginners is that they start to draw projections on what the next tickers might do based upon the strongest performing ticker out of all. It is the optimism, greed, or hope that drives those projections. It is mostly oversimplification that solidifies one's opinion on why many will start to believe that their opinion is not just clouded by greed, for example, but there is good rationale to it.
Moreover, that rationale is that if one ticker did X, that also gives a decent probability that some other will perform just as great. If ticker X had a 1200% run, which sounds like a great trade to make, and I am not willing to settle for anything less, then surely this next randomly selected ticker for my potential multiday runner is also likely to perform 1200%. Not 500%, but 1200%.
Beginner traders often set targets on trades on what they choose ahead of what they want to see, not what the behavior might suggest, but what the P/L goal they have set ahead has to display. And if they do rationalize it, it might be oversimplified because setting a large expectation on the second ticker to deliver what the best performing primary ticker did is more complicated and much more unlikely than it sounds, so let's break it down why.
In each strong cycle, where plenty of multiday runners will show up, there will be multiple MDR tickers that over1-2 weeks, create range anywhere from 50% to 1000% of total move, but the reality is that very few will reach that 1000% or even 700%. Basically, out of 20 tickers, typically, one or maybe two might reach those numbers. So if we take out the primary ticker as one of those, because that one already does not count since it is used as a reference before the trader would even come to such a conclusion, we are then realistically only left with one ticker. So if such a trader selects 20 to 30 random potential multiday runners, he/she would have to figure out which out of those is also going to be this 1000% runner because, as stats suggests, it's likely to be no more than one. You can see that it becomes a guessing game essentially at this point.
However, it gets even more problematic because the whole issue does not end here. Many beginners trade or invest mentality, go big or go home. Alternatively, go big or go broke. Either of those two. And when they do land on decently performing ticker, they do not scale out the gains in chunks as the trade develops in their favor. 300% is not going to pass; it's either 1000% or nothing. And once you set goals like that, your chances of catching that decisive winner will decrease even further down. Perhaps nothing can damage your chances in the long run out of everything than a mentality like this. With such an approach, your accuracy and edge have to dramatically increase to catch up with the potential to turn this into an acceptable long-term approach that does not end in ruin.
This is why aiming for those 1000% gainers based on a projection of primary runners that showed this kind of performance is a trap for many beginner traders. It goes without saying that this was the case for AMC just as it was for many other tickers in the past, but no other ticker has trapped more people in such mentality as AMC did or its actual primary to it the GME.
My personal approach is if one ticker has already done that 1000% rally (IMPP for example as recent Q1 2022 runner), the play is done. After one such ticker confirms my expectations for the next MDR tickers decrease because, as perchance, it is more likely that all next tickers will deliver less than that, maybe 300-500% some of them but unlikely another one hits that 1000%. That means lowering expectations for the next tickers if they are swing longed, from 1000% maybe to max 400% or even less.
The whole reason why this happens is the timing aspect of how long the strong small-cap cycles tend to last. If strong cycles of small-caps were to last as long as crypto cycles do, this rationale would not work the same. It is very common to see in crypto that many tickers deliver 1000% runs across the span of 3 months or more because the strong cycles have much more significant capital power behind them and last longer. The crypto strong cycles last 5-10X the what smallcaps do, which is why there is no surprise why so much more 1000% runners show up. So the data on how it is positioned around the small-caps works like that for a reason and the capital exposure this market niche has.
It is important to research relationships in % of moves for tickers in each strong cycle to see the big picture, and formulate also better plan for when the future strong cycle arives. How many 50% runners, 100% runners, 500% runners, and so forth per each 1 month of cycle cluster.
Difference between non-themed MDRs and macro theme MDRs (weed, EVs, energy)
Not all strong cycles of small-caps will be triggered by a macro theme or at least not a very obvious broad market theme. In some cases, there might be just one runner in, let's say, biotechnology niche such as BPTH in 2019 that gets plenty of market-making action and plenty of volumes, that ends up igniting the sympathy momentum across other biotech stocks within the next two weeks. A theme like that is more difficult or impossible to predict because there is nothing from the general market that might drive it. It might just start one day and go from there, triggered by very low key PR from a company.
It is not those situations where there is no pre-broad market theme creating the inflows into small-caps are often less sustained and might collapse quicker. In other words, they are better shorts than longs, especially if it comes to swings. Personally, themes like that are typically ones I avoid swing longing because the conditions are not clear, nor can the media attention pulse be well judged because there isn't one in such case.
The media attention meter
The more exposure to a particular media theme has, the more power it has to sustain the trend; this especially is important for multiday runner plays. Not all strong cycles are the same, and some might have themes where there are high amounts of media craze and those that barely have any and is more of the small-cap isolated cycle.
For example, 2021 January and February was perhaps the longest strong cycle in small-caps in the past few years that provided more MDR plays than any other, and media exposure to it was significantly stronger than in any past ones. For the first time, small-caps along with GME and AMC received wide media focus, which is not very common. Just as much there were many other correlated strong macro themes running hot at that time, such as weed legislation and investments into EVs plus crypto, which combined have been able to create much stronger media focus and momentum than any past strong cycle of small-caps. The pure strength of stacking the right kind of bullish variables on top of each other was the culprit of why the cycle was so strong in the first place. It never is just a single reason why the cycle is performing as it is; it is always compound or lack of it (if it is a weak cycle).
2021s strong cycle is, therefore, a good example of extreme or peak strength, but obviously, for most cycles, they will not reach those heights, which means that one should be more balanced in measuring the media strength, and not expect too much.
It is difficult to explain how this media meter is precisely applied to one's expectation, but because I don't think there is too much value in stretching the article way too long to explain this well, I will leave it there.
The end conclusion is that strong cycles can have different media exposure, and the ones that typically end quicker are the ones where the is a lack of media attention relative to the strength of the moves. The ones that last longer are where multiple bullish catalysts are present with a high media focus, moreover, by media that does not include just social media, but rather anything that belongs under the umbrella of entertainment or "serious" media channels. One of the good ratios for judging the media exposure recently is to see entertainment channels that are not even financial market-related. If plenty of attention to stocks or other assets is there, that typically will only happen in very highly media-exposed market cycles.
After-hours liquidity to determine the "health" of further potential upside momentum
Typical behavior of small-cap stocks is that once the market closes and the ticker running through the day will have limited participation and liquidity in after hours, after the market close. The volumes can vary from cycle to cycle, so using set conditions to determine what is strong or weak AH volume is not the best idea, but it is safe to say that the AH volumes will remain under 50k per 1 minute of candles in most cases.
Once AH liquidity increases and it is not just one ticker but perhaps a few with volumes that reach 100k per 1-minute candles in AH market hours will typically only happen in stronger market cycles. It will be one of solidifying variables that confirms the strong cycle is likely play.
I place much attention to this aspect, as soon as performance of tickers intraday might suggest decent strength (gappers that close somewhat at decent % and don't fade too much), and there is confirmation of few tickers with substantial AH volumes, that usually is starting warning that swing longing should be placed on the table. And equally swing shorting should be avoided entirely because if that is the starting season of MDRs, the swing shorting will likely perform terribly.
Suppose you think about it from the perspective of market makers. In that case, it makes complete sense why typically small-cap tickers get no attention in AHs because if there is a low chance that next day ticker will receive the same attention from traders and market participants as it did on day one, it presents too much risk for market makers to be buying up the ticker in thinner liquidity of AH and getting locked with a position at high prices, being at the risk of facing the "null liquidity" after the open as there are no fresh buyers to unload their position to.
Those chances will strongly decrease in strong cycles where the MMs might justify further longing the asset in AH, therefore. This is especially true if float on the ticker is small as MM is likely already going to be in the money on the position regardless of where the buying frenzy comes in, at higher prices. There is always someone willing to buy at even higher prices when strong cycle conditions are present; as strange as it sounds, that is part of the MMs game when it comes to bidding up those tickers, and judging the momentum strength is everything. That is why so often, many MDR tickers trade highly correlated. The MMs that hold correlated ticker to the primary one might be forced to react with selling when this happens, increasing correlation.
Example of ticker HYMC, where the AH liquidity for the first time increased a lot reacting above 100k per 1-minute candles and delivered solid MDR squeeze in next days. Typical setup personally is to long accumulations in such case, or straight away longing soon after the market closes and ticker confirms required volume thresholds if the macro theme is still hot.
The variables outlined for AH liquidity and relationship to the MDRs in the early strong cycle stage are especially important for swing short-sellers because those tickers when they meet for first time criteria as the HYMC above tend to gap up a lot, and its best to cut losses quickly once those conditions are present, to avoid gap up with a large loss.
Observing the AH liquidity on day to day basis is important as it often signals the health state of the current market cycle. In most cases, as stated above tickers will be dry in AH, and display under 50k per M1 average volumes, when tickers start to display 100k plus volumes in AH back to back, that signals the strength of the market cycle has increased.
Watching all tickers in play, especially primary ones (multiple monitors?)
One monitor or multiple ones? As pointed out in previous articles, there is no right or wrong for most situations or edges, and one screen can be just enough. However, that might not be the case in the initial stages of strong cycles where having more screen real estate is very beneficial, due to the reason that watching the correlation exposure across tickers and their tick to tick behavior is very important.
Having only a single screen in such a case can be quite a hassle because one has to constantly flip flop between the tickers to gauge the momentum changes. However, it is still doable.
As pointed above, when the strong cycle is in progress and its earlier stages, especially (first two weeks), having a pulse on all frontrunners will be critical since one can never know which ticker will respond to a certain direction first. This ticker will likely lead the surge or dump in momentum across all the rest. The correlation factor in the initial stages of the strong cycle will increase, and it is key to observe all tickers at once.
Personally, perhaps one of the most overlooked aspects that I did not see many traders discuss or notice is how important to edge itself is in such situations when multiple MDRs are in play, to always gauge momentum or any potential rotations on any ticker as likely the rest might follow. Not necessarily all of them, but a significant portion.
Again, this "more screen real estate" mindset only applies when a strong cycle is present, and the MDR theme has just started to run, which typically will last for only about a week or two. It will happen only 3 to 5 times in the entire year typically.
This means that in all other situations of more neutral market conditions, the MDRs will still be present, but they won't be correlated, and therefore traders won't need a lot of screen real estate to keep an eye on them; one screen will do just fine.
Anticipating the top based on high volume trap
Let us outline some of the common topping patterns of the MDR tickers. Be mindful that if MMs want to collapse the ticker, they will need to form some liquidity trap, and often some sort of Type1 version is the way to do it. High volume presence is also a must, relative to the volumes ticker was trading in prior days. However, as already mentioned above, not all tickers will top out like that, and some might do it more organically.
Four basic topping patterns of MDRs:
1. High volume topping with strong reject
2. Type1 structural trap with top
3. Organic top without presence of high volume
4. First major gap down
Ticker CEI the previous year was one of the cleanest prolonged MDR tickers, with high volume topping and strong reject, following pattern number 1. The next what followed was backside unwind that delivered relatively quickly 80% collapse.
Example of high volume topping on ticker GSM, following pattern 1. Day 2 did not provide much shorting opportunity since ticker collapsed straight away.
Example of ticker MRIN that topped out with a combination of patterns number 4 and 3, after the first gap down and no prior major volume on top, it went into backside unwind for the remaining period.
Example of ticker BTCS in MDR stage, that topped out with clean type1 setup, which resulted with quite high RR trade if one caught it well.
And to highlight the same from the intraday chart perspective on ticker BTCS, for the setup above, on image below.
Another example of Type1 topping on MDR ticker IMPP, where clear structure of Type1 was present, resulting with top and macro unwind. The ticker was present in stronger market conditions.
The examples above show that trader needs to deploy dynamic playbook with different expectations because tickers tend to top out differently each time, but still non the less follow those 4 different patterns more or less.
Macro high clearouts vs real breakouts
Another frequent question asked is how to anticipate if macro breakout will be real with follow-through or if it will just end up flopping as a clearout and unwind type of move. To estimate the chance of either few factors should be considered (this applies to MDRs specifically, not just day one breakout/clearout plays).
To list the key five ingredients, let us use the example for strong variables that signal more likely a real breakout with follow-trough to happen:
1.Macro theme presence: yes
2.Cycle: strong
3.Teme (from other tickers): many tickers successfully go higher after a breakout
4.Volumes traded daily: high
5.The strength of other MDR tickers: many MDR tickers are running and doing well
To use the counterexample where the same five ingredients, if they are present in this order, would more likely deliver clearout and a flop after breaking out, resulting in unwind soon after:
1.Macro theme presence: no
2.Cycle: weak
3.Theme (from other tickers): many tickers delivered clearouts with fades recently
4.Volumes traded daily: low
5.The strength of other MDRs: not many MDRs running, and those that are have been consolidating neutral with lack of strength
To put it conceptually:
The basic premise is you can see is that clearout is just the best possible area for MMs that was responsible for pushing MDR ticker up to sell into. It is just their best location as it will likely attract breakout buyers either way. So if the conditions are not excessively strong in the market, the clearouts will have higher chances.
In contrast, if the conditions present are very strong, then it's more likely that fresh MMs will come and pick up tickers at high prices and continue the rally after the breakout. That is the basic premise, but the key is to know what exactly are those ingredients that signal strength or weakness, the five ones listed above (there are more, but those are strongest).
When weaker market is present and MDR ticker trades on lower volumes, clearouts might be more common as mentioned above. We can see such example on ticker PTGX below:
Another version of clearout MDR that did it several times due to low liquidity is on ticker BFRI. Most of liquidity burst was into squeeze but after that the volumes dried out.
Both BFRI and PTGX besides the day 1 volumes had very dry liquidity across most days.
Different types of MDRs
There are several types of MDRs that one should be aware of; there might be some others that I have not yet noticed, so don't make this list as final, just one I have so far.
It is important to segment the tickers into different subgroups because the behaviors can have different tweaks to them. Being specific about it, can improve the edge and reduce the noise of traders' exposure to those different subgroups.
Primary hot macro theme MDRs
Those are flagship MDRs, where one can build stronger conviction, and overall, if this macro related theme ticker is the leader, it might be the one best performing if the trader is looking first for swing long, and then as well swing short once it tops out. Those plays offer strong RR on both the front side and backside and are one of the MDRs that actually can be very well laid out ahead in terms of how well they might perform and approximately what price behavior they might deliver if the strong macro theme is the main reason on why they are running in the first place. The liquidity on this plays will also be highest, providing plenty of opportunities.
Always pay attention to what theme, in particular, is driving the theme so that potential sector tickers can be listed that might be responding to such a theme.
An example in the image below is ticker APHA that went into the MDR stage once weed legislation catalysts become frequent along with a powerful market cycle. Cycle strength conditions in 2021 were extremely high, providing even more momentum behind ticker to sustain MDR state for more than a month.
Another example of macro theme MDR ticker of IMPP that was triggered on global energy shortage in Q1 of 2022.
Macro theme-driven MDR tickers on high liquidity are typically the one highest likely to achieve 1000% runs, an important aspect to keep in mind as it shows for APHA and IMPP above two examples.
Chinese macro pump and dumps
Those MDRs tend to be the most notorious since their collapse will be swift. Before the 2015s, this was especially common among the OTC tickers, but since the liquidity has dried out in that market and is now entirely shifted into Nasdaq small-caps, this type of pattern still exists; the only difference is that the owner has been changed. While before, many OTC companies that followed such patterns were the US or worldwide listed, Chinese listed companies took the torch on that run in the last two years. This is a relevant factor because if one spots such MDR in progress and is aware that it is Chinese listed, the chances increase that the ticker might follow the pattern and could be a solid short setup once the time arrives.
Those plays are not good long setups since liquidity on frontside of the move will be very dry, and the ticker will take many days, sometimes up to a few weeks, before really delivering any substantial move on frontside; it just is not worth it in the long side, plus the risk of being rug pulled all of a sudden on one random day is too high. Therefore the edge is more or less on the short side, by waiting for high volume day and then looking for a liquidity trap to short into for potential collapse. The pumpers will try to create excessive interest and liquidity "baking" when they decide to pull the plug because they need that active participation to unload a significant position. This is why waiting for that high volume day is the best bet for a trader to catch the macro top.
Typically when those tickers collapse, they do so within a single day, and the unwind can be substantial. Typically ticker will fade between 70-80% of the entire frontside pump move, and the rest 10 to 15% will additionally be faded over the next several days.
This makes it a great first day short for strong RR and multiday bounce short play for some additional reward.
The downside is however, that liquidity even on the significant unwind day can be rather weak, not giving traders the ability to control risk or position size too aggressively, which by itself limits the RR. It depends that is true for some tickers and not for the others.
A conceptual example of a macro pump that tops out on very high volume activity and then crashes 70% within a single day:
However, the key takeaway to trading those is:
-TP target on short is 70% of frontside pump fade
-over the next few days after the ticker already collapses, it tends to give further step-down action each day
-once the selloff day begins, do not expect any significant retraces to fill the position. Typically it will be a straight line down, and if the position is not filled into weakness, the most likely trader will be left behind. This is a specific behavior that only applies to this kind of pump MDRs.
The example below for ticker JWEL and its macro pump resulted in the highest volume type1 trap day being the top. What followed was the heavy crash of around 80% within a single day, and the remainder was sold off over the following days.
And below is JWEL from close up on the intraday chart. Shorting into the rotation when the line got breached to the downside after popping the highs was one of the ways to play it. Typically tickers like that will not provide any intraday retraces to join short if the trader misses it initially near the top. It's either a chase or no entry at that point.
An example on the image under is ticker TIRX, another Chinese-based company with a macro pump that resulted in harsh collapse within a single day. Typically if a trader misses day one short, there are still several days of pop-short opportunities following in following days as ticker will still keep slowly unwinding.
Another example of such a macro pump is ticker EJH; both charts show only intraday charts as a highlight on two different days. In both cases, after the initial day one collapses, the next days provided push from market open and unwind type of opportunities as it is typical for this kind of ticker setup. AS usual, if a trader misses day one collapse, there are still several short opportunities in the next few days usually.
Some key takeaways for Chinese macro pumps:
-the tickers are typically pumped on a very dry liquid frontside for one to three months
-the risk of rug pull is always high if one is long
-typically, tops are set on high volume days because the pumper has to exit position while creating the action and participation, observing relative volume numbers is important
-when they crash, they do around 80% or more
-initial 70% is unwinded typically on the first day, and the rest across the span of 15 days providing many short opportunities
Secondary sympathy MDRs:
This category is the widest, as it can have tickers that run along with the primary ticker of the hot macro theme. They could be some sympathy runners to other unspecific MDRs so that the behavior can be in the extensive range. From tickers with strong volumes and heavy % performance such as HUSA recently in March of 2022 to tickers with very dry liquidity and lesser % performance such as KALA in the same period of March, that did not have any clear primary ticker that it was running along with.
If the ticker is sympathy play, it should be noted by the trader because the primary ticker will yield a large influence. Sympathy tickers tend to collapse if the primary ticker loses momentum, if they trade under same theme and have similar liquidity. It is also possible that in some cases, secondary tickers carry the torch if the primary ticker collapses, this is especially true if liquidity is different on both tickers and they didn't start to run at very similar same time. This has happened to a few tickers in January of 2021, where sympathy tickers carried future momentum while primary tickers started to stagnate. This can also happen to intraday on any primary-secondary (sympathy) relationship as well, so be aware of that. The leading torch can flip for at least a little while, but typically not for long.
1 dollar minimum bid requirement MDR pumps:
Those are quite rare; if one were to bulk all MDRs together, those would represent probably less than 10% of total plays. When a company no longer meets the minimum bid requirement on Nasdaq, which is to be above 1 USD for a certain period and the ticker has slipped with a price much lower under that (typically around .50 or .70 cents), it is then when the company will get notified and will have to find a magic wand to push the ticker above 1 USD. Some can do so, and some are not, which then end up being delisted.
The play is there from time to time, but it is essential to be very selective. It might sound relatively easy to look for companies with Nasdaq notice of delisting potential and long them in expectation of company hiring the market makers to push the ticker above the 1 USD with decent probability. It does not work that simple; such an approach would yield too noisy results. To filter the cases where it might be worth considering swing longing such ticker in expectation where the ticker might be squeezed into 2 USD for example from current prices under 1 USD, the company needs to be as close to not meeting that deadline as possible. And the ticker needs to show on current day very strong volumes present, showing unusual MM activity, which might signal hidden agenda in play.
Therefore what matters is always to check how long the company still has to meet that listing requirement (for example 15 days, 30 days, 100 days etc). Ideally, it should be as close to the end line as possible to signal urgency as only urgency can provide you conviction. Mind that it is not rare that those under 1 USD tickers will get randomly some momentum burst and will also by chance have Nasdaq's delisting notice, but that momentum will quickly die off, and nothing will happen since the company is not yet in urgent need to meet the requirement (has several months) and the rally will stop very quickly if one wants to swing long such tickers the timing matters.
There should be additional reasons why one would want to long such a ticker, other than just being non-compliant for the Nasdaq listing. However, to create a better edge, in my view, one should use 1 dollar minimum compliance as part of the thesis only when additional conditions favor such a company. For example, some fresh PR or partnership, or perhaps a strong macro theme that is in play for the same sector that such company is in.
Link below for rules on listing requirement for 1 $ bid:
https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/nasdaq-5500-series
And example of ticker HYMC not meeting the requirements:
https://www.reuters.com/companies/HYMC.O/key-developments
Unspecific MDRs in colder markets (often biotechs):
Those tickers often tend to finalize with the offering, either ATM or direct offering that will typically drop somewhere on the backside of the ticker—finding why they run in the first place is often difficult, while it could be easy to say in hindsight that it might be controlled pump for the sake of dilution activity, that might not always be true. The point is, finding reasons beforehand might be difficult or not very reliable and does not contribute to edge that much. I tend to avoid those plays on both the long and short sides.
Trading approaches
Swing longing if strong cycle is present, or major macro theme
My favorite approach is to swing long the tickers that already confirm that they are within the potential early stage of the multiday running stage if the macro theme is already present. The macro theme from the broad market gives you the reason why the tickers should be running as there is likely a lot of media attention and broad market going into that theme, giving a chance for a prolonged MDR stage. A macro theme is essential to build conviction.
In the article above, some of the confirmation conditions need to be present before I would consider swing longing those tickers, such as strong AH liquidity across few tickers, strong PM liquidity, and large gap ups in % terms (100% for example), at least several tickers in play over past three days. Those are confirmation conditions that the MDR stage and strong cycle might ignite, and it still might be early to it, if this was no more than a few days ago having its starting stage. Being aware of when the start has begun is essential to approximate if one might be too late.
An example situation would be speaking from the current 2022 energy squeeze cycle, using IMPP, HUSA, Brent crude, CVX as the main frontrunners of the theme.
Brent crude and CVX as main large-cap oil tickers were used as confirmation of broad market response to energy shortage. IMPP and HUSA being up 300% on their MDR run over past 1-3 days was another confirmation that sentiment is strong, but not too late yet since primary ticker can extend a lot more than just 300% in such a strong cycle initial stage, therefore justifying that MDR swing longs are still potentially in play.
Accurate / tight approach:
Typically there are two approaches to building swing position on a ticker like that. One is more accurate, tighter on risk but also more difficult one listening to order flow behavior very closely to spot potential micro rotations of the price that might eventually lead to a major rally. Personally, this means using accumulation and rotation setups to initiate such longs. The downside is that some of those will be stopped out before the ticker turns into a runner; that is the downside one has to accept since the advantage is a much higher risk to reward. The additional advantage is that traders might not be exposed to overnight gap up or gap down random chances with this method. I am always on the watch for those micro setups on tickers in the early MDR stage and early strong cycle.
A conceptual example of timing micro rotation that might lead to strong rally:
The point of the setup approach above is that majority of strongest rally legs have their initiation in some sort of micro accumulation before the MMs ignite and start buying up the ask at the frenzy. They will typically accumulate some size first at lower prices as this reduces the risk of being trapped with too much size at too high prices if one had to pull the plug for whatever reason. That is why often before impulse move begins, there will be some sort of accumulation phase at the bottom, sometimes shorter, sometimes longer.
One significant advantage that using micros for entries can have is that trader does not have to be exposed to overnight gap down risk as much. If he/she chooses positions swung overnight could be only those where the micro setup already delivers strong push into the market close where the trader is in-the-money on position decently. This way trader is more in control of the whole concept, and this especially is useful if one is using a strong position size due to higher conviction as this is the only way to mitigate the risk properly in such case.
Being in control is one of the most attractive aspects and virtues that traders should strive for, after all, in an industry where much of the game is set against being under the control of anything. It is why this remains, for now, my favorite approach to swing longing MDR tickers.
Looser approach:
The secondary approach is less time-intensive and weaker in RR but more straightforward. It is dip longing the ticker and repositioning the position into the best (lowest) price possible by shifting position over a few days until ticker turns into a strong ripper. This means buying dips sometimes, adding the next day at a bit lower price (but still acceptable risk), selling a portion of position at break-even of first entry, and then keeping this process going until ticker starts to run (all with initially accepted risk at whichever the price for 1R is for that trader's appetite).
Ideally, both approaches should be combined, as that compliments the trader's exposure overall. Using the first approach on more liquid tickers and the second one on less liquid tickers is the best way to do it. Keep in mind that if ticker has very low liquidity the looser approach will be the only possible choice, as it wont be possible using tight risk.
Trading the lagging ticker in anticipation of correlated response
One very robust approach is trading the lagging ticker if one other ticker showed strong rotation to upside or downside if there is a strong correlation present on MDR tickers. Keep in mind, this approach is only applicable if MDRs are:
1. Trading quite correlated,
2. Have similar liquidity (volume and spreads),
3. Are driven by the same macro theme.
Typically in an earlier stage of the strong cycle, there will be 2-5 tickers that will run alongside in similar liquidity and have also started to run at a similar time. In total, there will be far more tickers, but what matters is to only compare the ones that trade in similar liquidity as it's likely that similar market makers and algos are driving those, while not the others.
Structuring a watchlist is important to address that and bulk the right tickers together (using daily traded volumes is the decent starting point, for example ticker X 120 mil shares traded on the day and ticker Y 90 mil shares traded on the day, if they are also somewhat similar price one might bulk those two together).
This method can be applied both on the long and short sides, but what it requires is that one ticker has to disconnect from the flows of the rest by either surging in strong volume push or equally hard dropping. This then should be the tipping moment that might also push other tickers into doing the same and replicating it, therefore providing the trader with an edge to position on those tickers before they react. Often there will be anywhere from 5 seconds up to several minutes for a trader to react and position. In some cases, it can be very quick. However, if the secondary ticker has less common with the primary ticker that performed rotation (such as starting to run much later and has weaker volumes), it might take more time before it reacts in correlated response. It is essential to understand that dynamic in timing.
Conceptual example:
The example above shows shorting when one ticker responds in quick rotation, especially if that rotation is against the previous trend. MMs have to price that quick shift in momentum into the second one (not to get bagged). Keep in mind that in a ticker like that, not all MMs trade in concert to each other, nor is the same MM running all the tickers, so the response of MMs is just as retailers to manage the risk by not getting trapped on the momentum shift since they also have to unwind their positions much slower than a retailer might be able to do. Hence the timing of going from the buy-side to the sell-side is important as there might be 5 minutes of distribution for the position window required after such shift happens.
This approach is beneficial for traders who like to actively watch the tape and ticking action very closely and monitor several tickers at once. While if you are a type of individual who likes to focus only on one ticker and does not like more of a hectic quick decision-making trading, then this is most likely not going to be for you.
In either case, to research edge on this approach, it is critical to create videos or access some market platform that allows you to replay the historical behavior of tickers and then compare them against the few tickers that were on a play that day. This is required to observe how those correlated flows happen and how to build realistic expectations in terms of how many setups might be realistic to expect on a daily basis from such a method. Videos will be your essential guide to such a method, not the charts since still images won't leave the message needed.
As with any method, you also want to be aware of the failure rate or the randomness. This means that not every rotation on the primary ticker should deliver a response in the secondary ticker. You should objectively check by comparing tickers in the past how many cases the correlated response fails. It is really about identifying the strong disconnects that will yield the best and cleanest opportunities.
For example, just because the primary ticker pushes 10c within a few minutes, it does not mean that there is a high probability that secondary will as well. You should focus on stronger anomalies and objectively test everything to see how often it is even worthy of expecting something to happen as that will impact your edge. Never use assumption as your crucial driver for an edge; always test if possible so that your expectations will meet the reality as closely as possible. Untested assumptions could be far from actual reality.
Trading the halt drag and lagged response of secondary ticker
To further explain the above concept of trading the lag, let us use HUSA and IMPP as two examples to highlight how to deploy the lag trading approach that focuses on using the halt as the main component of trading direction.
Halts are an especially great way to go about trading the lagged move because they typically create the strongest pull of the secondary tickers to follow the initial ticker that was halted, whichever direction the halt is into (ticker dropping into downside halt or squeezing into upside halt). For example if the primary ticker squeezes into upside halt, the secondary might have a long play if it hasn't yet reacted to it at all.
The reaction time of trading the halt response will differ from setup to setup. It could be anywhere from a few seconds up to a few minutes. Some setups require very quick decision-making abilities, such as the one between IMPP and HUSA on the image, while others allow much more decision-making time.
As you can see on the setup below, the maximum decision time given to the trader was only 3 seconds, before IMPP reacted and followed HUSA into downside halt. Only 3 seconds to place that short trade.
Also, keep in mind this approach only applies to tickers that trade correlated and have already proven over the past 30 minutes that their correlation factor is pretty high, which can be seen for the charts of HUSA and IMPP above. The higher the overall correlation, the better the lag trade will work.
The example below on images shows the lag trade to the long side of ticker INDO since this one was the lagging and the HUSA was the leading ticker. The liquidity on HUSA was far stronger, and typically leading tickers will be the highest liquid ones. In the case of HUSA, it went into breakout at 12:54 and squeezed into a halt at 1 PM, while INDO was still lagging behind and only joined the squeeze when HUSA was about to halt into squeeze. That gave traders few minutes to absorb the info and join potential correlation long on INDO.
As seen in the image above, INDO only reacted strongly when HUSA was already about to halt, which gave solid directional drag to the upside on all energy-related tickers along with INDO and solid long opportunity (regardless of how much INDO was extended to the upside at the moment). There is no right or wrong in terms of approaching this trade to the long side, but shorting this would surely be a strange decision that in the long run might not be worth it; chances are correlated tickers will follow in such a case.
To compare the decision times, HUSA/IMPP setup had 3 seconds of the maximum allowed decision time to place short, while HUSA/INDO breakout setup had 3 minutes of maximum decision time allowed. This shows that it can range a lot from setup to setup, based on outside external conditions present.
Bulk longing tickers that are aligned to same theme/sector and might turn into runners (diversifying)
Another approach that I do not utilize much, or at least not in small caps, is longing tickers that all belong to the same sector and are exposed to macro themes currently in play. For example, if that might be an energy squeeze as we had in early 2022, then longing oil sector small caps across the board might be such an approach.
This requires a few components if it wants to be executed correctly:
-Being early in positioning
The most aspect is to position before the sector even gets proper volumes and attention on social media. The RR is best when done early as in the middle stages of where many tickers might already be running the RR starts to decrease a lot. This requires understanding the macro theme well so that it makes sense of buying early.
Typically trader will have 3-8 days to position roughly speaking after the theme gets in play. As can be seen on example of IMPP below the ticker gave room of around almost a week for one to position still at low prices once the energy catalyst came into play (February 23rd).
-Equal weighted position sizing:
This means that one should not prioritize too much size against any ticker, in particular, at least not in terms of % of equity exposure. Because it is difficult to tell which tickers will turn runners and which not, the exposure should be split across them all equally (unless one has an excellent reason for why one particular ticker might stand out as more likely runner), the size should also not be the same in shares for all tickers, but it should be R neutralized (check first blog article).
For example, ticker A with the price of 5 USD and volatility ratio 1X should get X amount of shares long, while ticker B with the price of 10 USD and volatility ratio 2X should get 0.5X shares or less. The higher-priced and more volatile it is, the fewer shares to equalize it against the other tickers that the trader has exposure to.
-At least ten tickers selected:
Since as mentioned above, one does not know well which tickers will turn to runners and which will not, as not all will, and even more importantly, the % of the run will be asymmetrically distributed with some running 40% and others 300%, it is essential to long at least ten tickers at once from the same sector. The whole approach works similar to venture capital, spread capital into ten eggs because it is hard to tell which of those will make it, but chances are one of those will be, and if capital is sized correctly and R neutralized, it can work.
-Scaling out gains infraction as they move:
Again because it is hard to tell which tickers will outperform and which underperform against their peers, it is best to be scaling out in chunks winners rather than holding it all for one exit. It just does not make much sense to do so.
-Picking tickers with higher liquidity if possible:
The higher liquid ones often have a bit more chance to run as they are more attractive to market makers (easier to MM the bid/ask spread as it is tighter). However, that is often not the privilege that smallcaps traders or investors will have since many tickers will be at almost null liquidity.
Example of ticker that was in play from major macro theme of energy shortage caused by several catalysts. The idea behind catching play like that is to bulk long 10 sector plays and then manage them along as they progress as one never can tell exactly which will turn into 1000% runner, but typically if macro theme is strong one will, and few might also get close to hitting solid 500%.
Swing shorting backside
Swing shorting brings its own pluses and minuses to the table. Some disadvantages could be that such an approach requires access to borrows, unlike the swing longing. This adds to costs limits the broker's selection, not to mention it brings another difficulty to the edge because it often is more difficult to spot where the top might be. In some cases, those smallcap MDR tickers might top out very quickly and inverse sharply. If the trader misses it, that big chunk of backside might already be done. However, often that is not the case. The backsides tend to more often than not develop slower, especially on thicker low priced tickers, giving plenty of days to join the backside and recycle the position along the way (short pullbacks, cover selloff, repeat). An additional issue is that many brokers will charge overnight fees (3-5X the borrowing fee), which could make this approach less liked due to added cost regardless if the trade is winning or losing.
Hybrid shorting ("intraday" swing shorting)
If one was to use this approach, the best way from my perspective is to wait for confirmed backside after significant topping action, and then each day approach it as intraday trade rather than swing trade. This way, overnight fees and potential surprising gap-up exposure are reduced completely, and the trader is more in control. This means shorting such ticker as it is unwinding on macro backside over the next several days or up to two weeks, waiting for some sort of push from the market open and then shorting into that. More often than not, the ticker will soon top out and return lower.
An example of that would be on ticker ISIG from 2021 strong cycle:
Example of backside on MDR ticker SGOC that provided few in opportunities on shorting the retraces to upside on macro backside with unwinds.
And similar behavior on ticker MRIN with several pop-short opportunities each day. Typically those mid priced tickers (15 USD) will create on backside behavior where they push from market open decently, halt and then unwind for the rest of the day, giving decent extension short setup, across a week, two or even three.
Some examples of MDR tickers:
Let us review some of the recent MDR tickers and highlight a few different concepts that were highlighted in the course of the article to combine the methods that one should pay attention to.
Let's start with NAOV on the image below, MDR ticker with tighter range and formation of accumulation setup that resulted with squeeze into macro clearout where the ticker topped out. Backside followed after that with consistent unwind.
In the image below, ticker PROG was one of longer lasting MDR tickers over the past two years. The ticker sustained two months of MDR state, although it had quite a bumpy or neutral action in between. But it shows that MDR tickers drop 50% from their highs often and still manage to squeeze into fresh macro highs later on. The cycle conditions were stronger at that time.
BTBT on the image below is another example of a ticker that goes into the slightly more parabolic rally and delivers two decent accumulation setups in between. The ticker's action was driven by a hot macro theme (crypto), and even though the ticker is quite highly dilutive, it shows that the macro theme can at least for a while put the dilution into the backseat and put some upside on the ticker. It is essential to prioritize the hot macro theme above the dilution, at least for 1-2 weeks, depending on the cycle.
Another example below is ticker EFOI that had more unusual very narrow range action resulting in late squeeze and clear V-shaped top. The backside provided decent unwind.
GRTX is another example of an MDR ticker with two subsequent accumulations; the ticker had a smaller full range, only around 100%, before it topped out. This was present during the weak/cold market cycle, which is not unusual to have a weaker range on MDR tickers.
Below is an example of ticker SBEV that squeezed very slowly into macro clearout, topped, and then unwinded across the span of three weeks.
MYNZ is an example of a mid-priced ticker squeezing on very dry liquidity and slow grinding action. Those mid-priced tickers between 10 and 18 USD tend to have slightly different MDR behavior to the typical 2-4 USD smallcap tickers that squeeze into MDR state from day 1.
Example of MDR on ticker BBIG and symmetrical frontside and backside distribution in terms of life span for each.
Another example of MDR on ticker GMVD, is where the ticker provided two accumulation setups along its way. Accumulations are one of the best ways to execute the longs on multiday runners as they provide clear criteria on entries (look for accumulation article to get a better idea on that). GMVD also highlights the concept of high volume topping, combined with that typical 10 days of MDR state.
And the last example for nearly textbook MDR, of very pump alike symmetrical front side, resulted in a sharp drop after which ticker no longer recovered and formed backside. Ticker also completed the 70-80% drop target as tickers symmetrically pumped on frontside do (use above Chinese tickers as reference).
Frequent mistakes due to oversimplification
-Shorting too early (not interested in longing, so I have to start looking for short opportunities quickly):
Short-biased traders will often start shorting MDR tickers too early because it is a ticker in play and only a potential opportunity. They do not respect the cycle's strength or age and rush with entries too early, especially in an earlier stage of a strong cycle. The edge will be leaning to the long side, and demand will likely defend the lows, making strong winning short positions much less likely to happen. All of which can more easily lead to frustration and only balloon the issue of fighting such ticker next days to recover for previous days of frustrating trades.
Researching MDR tickers, having a pulse on cycle momentum strength, and in general getting enough experience to see a few of those strong cycles through your career will be critical to make the distinction on when it might be still too early to short. However, there is no substitute for live market experience on seeing those cycles in play and how MDR tickers behave. Those experiences will be most likely (for the majority) the most crucial guide, so trading with lesser size in the beginning stages to not pay for mistakes too much is something many wish to have done later. This is especially true for cycle and MDR theme recognition as it is difficult to grasp this concept just through research or backtest; it is something where experience is required to build a good read on.
-No playbook for long side (missing out or being only short biased):
It is better if the trader has a long and short edge built for MDRs as that will force fewer trades, especially avoiding fighting the ticker. Often traders that start to short MDR ticker too early keep trying to do it repeatedly over the next days, as the frustration kicks in. Being flexible to deploy a more likely edge based on the context of current MDR is always better as one can adjust to what might be best. MDRs always provide plenty of long and short opportunities, and there is no need to be just thinking within a single angle frameset. Missing on longs of strongly squeezing ticker can also lead to some regret which might force than too aggressive shorting just for the sake of it, and is another reason why one should at least try developing some long playbook for MDRs.
-Joining long very late into extended MDR ticker (not using the time of run as a primary determining factor):
Knowing when the MDR ticker started its first day of rally is essential because it gives trader context on the probabilities of ticker to continue higher, based on how much in % terms it has moved so far since day one plus the current market cycle.
For example, if the current MDR stage is four days old with a ticker up 80% and the market cycle is strong, that might overall still indicate there is a good chance for the ticker to have still upside, and a trader might not be necessarily late to join the long. Meanwhile, if the MDR stage was 13 days old with a ticker up 300% in a weak market cycle, the chances strongly lean towards the potential top to be soon in place and trader to be very late. In other words, the edge starts to lean to the short side with the last set of 3 variables much more. Be aware of those three combo variables at all times on MDR tickers.
-Zooming too much into a single ticker and not observing the strength of momentum or correlation on other sympathies MDRs:
When multiple MDRs are in play at the same time, especially if they are from the same sector, being in tune with behavior across all tickers is quite essential. This especially applies if they trade somewhat similar liquidity (as low liquid ones might have more disconnected correlated responses). Paying attention to the tickers across the board will be more beneficial if one ticker disconnects in behavior that might create a push on other tickers. If a trader is too zoomed in to a single ticker, it is easy to get caught by surprise in the trend directional shift that some other MDR correlated ticker might cause.
-Using too much size and too tight risk (not adjusting to the more extensive range that MDR might have):
MDRs behavior can be pretty different in total, and the tickers can have noisy intraday behavior going from frontside to backside and back to frontside again. The intraday trends can shift frequently; therefore, if one wants to use a stronger size to time the moves, accuracy is needed. If, on the other hand, a smaller size is used, a trader can let the ticker breathe a bit more, which might be more beneficial, especially if the trader does not have a high conviction on the ticker's potential end resulting direction.
-Being caught with pants down on strong reclaim after initial 50% drop (being too convinced about the top):
This applies especially to short-sellers; they will see the MDR ticker unwind 50% from its highs and conclude that this should now result with ticker being topped out and highly unlikely for it to return to highs or break them. That might be a somewhat more frequent and valid thought process on day one plays, but on multiday runners, it can lead to being caught in surprise moves more often. It isn't that rare that MDR tickers will reclaim and squeeze again after they initially drop 50% from their highs or even more. This especially applies to those MDR tickers that trade in very range-bound action and smaller volatility.
-Longing breakouts in wrong market conditions:
There is a right market and wrong market to be longing breakouts. Ideally, in the initial stages of the MDR theme is where a trader should focus on longing those types of setups more. Typically within stronger markets, breakouts will work better, resulting in fewer fake breakouts. If market conditions and cycle overall are weaker, it is more likely that the macro breakout will result as clearout only and soon after that unwind.
-Obsess with un-performing variables (short float, social media activity, etc...):
Market cycles and themes will have priority decision drive on what the tickers might be capable of doing daily. This will take priority over any other variables. Typically traders are paying too much attention to variables they have easy access to on websites such as finviz of short float data or amount of institutional ownership, thinking that solid directional thesis can be built just from those, which in reality gives a very noisy performance. Spending more time identifying the cycle conditions and themes by themselves will always yield better accuracy.
Conclusion
Multiday runners are an important concept to understand when it comes to small caps because their behavior differs from regular day one gapping ticker. The variations can be significant, and not making a clear distinction between trading approaches can be unoptimal.
Since those tickers are strongly momentum-driven, it is essential to have a good pulse on momentum and flip the needed directional approach when momentum shifts. Having the right default bias is critical (not forcing shorts when MDR theme is young for example).
A typical mistake is that short-biased traders begin with short bias too early, and long traders start with a long bias late and stay for too long, getting caught at the top or backsides that do not recover.
Being open-minded and flexible on MDR tickers is as well required. Just because ticker has dropped 50% from its highs, it does not mean that it cannot reclaim those highs in the next three days; they often do. Being very flexible on expectations is the key. It is much less likely for day one gapper to reclaim the highs after a strong backside develops. Meanwhile, MDRs can do it more often, especially if the strong cycle is still young.
Moreover, remember, it's a game of hot potato. Do not marry any thesis or ticker, for that matter. It is likely that whatever your winning side was one week ago will change the next week and inverse. But most importantly, the inverse can happen more than just once. MDR ticker can go from hot to cold to hot to cold and back once more to hot. This is why flexibility is required, and some decent historical research to understand why this is critical.
this is so brilliant, thanks a 1000 times for doing this writeup <3