I’m going to be doing a day-trading class in the near future, so I thought I’d talk about one of my favorite setups. It’s a very short-term trade called the “Companion,” or sympathy trade.
When looking at a group of stocks, you’ll notice a particular stock can suddenly move dramatically based on some news or event. Usually other stocks in the group don’t react immediately to the “stimuli” and trader can quickly jump in and make big profits.
Here is an example from my live, pre-market chat before the opening, in $DB.
The “twittersphere” was active with charts showing the rising CDS prices on DB. These are insurance products that hedge against a default of a company, or its debt. DB’s CDS spreads have rising ominously in the last month. After this table got circulated today, DB was subject to a sharp sell-off before the opening.
As seen on the next chart:
Since $GS and $DB have correlated well in the last few weeks. You’ll notice that $DB was trading BELOW its previous Wednesday low in pre-market trading. Also, $GS was looking to open much higher than last Wednesday’s opening.
Therefore, the play, the companion trade, was to short $GS on the opening. This trade, which we mentioned 1 hour before the opening in the www.simplerstocks.com live chat, was good for at least 7 points!
This is exactly why the “Companion Trade” setup is one of my favorite setups.
See more from Chris Brecher at Simpler Stocks.