Buy em, Sell em

PLS gap up fade 11/12/23

Intro:

There has been a sharp bounce off the low in Lithium stocks since my last post. Given this and given their current juncture, I thought it would be an opportune time for a follow up to introduce one of my key principles and heuristics: the Daily and Intra chart must align. What this truly means is that I want all timeframes on my side. I am not looking to buy short term breakouts in extended stocks on the daily; I am also not shorting stocks that are oversold to the downside. I want everything aligning for max expected value. The sweet spot is when the equilibrium is changing for the first time and you are right from the start. However, that EV changes dramatically in “price and or time”. How you go about defining extension is really up to you but this core message should save you some pennies and increase your win rate instead of thrashing around on a intraday chart without context.

The trade in question is PLS yesterday. Lithium stocks have had a huge bounce in expectation that the Lithium price has bottomed and is sold out. Wait for it…..

(China spot lithium prices)

On a more serious note, the Futures have gone limit up on two consecutive sessions on Thursday and Friday. They drove spot prices lower so perhaps this is a lead indicator the spot market is set to recover? Or are futures just a volatile instrument thrashing around equilibrium? Whatever the reason, the stocks reacted. And when the stocks react, Traders will suddenly take notice. No doubt the market is now all over it and watching the prints like a Hawk. No one pays attention until, well, they do.

The Pendulum concept:

This sudden crowding around an event whether it is a futures market, a data print, or Elon’s twitter account reminds me of the Pendulum concept. The first time an event happens, it is almost like a black swan with the market caught truly off guard. Think Trump tweeting about China trade tariffs from his phone. Think that first hot inflation print after years of zero rates. Think when Russia decided to throw a few grenades near a Nuclear reactor. There is panic, mispricing, and sweet sweet opportunity for the prepared. However, each further data point in that narrative leads to increasing efficiency. Suddenly, everyone is scraping Trump’s twitter account for a breaking news trade. Computers start automating what to do around a inflation print to drive the futures market. Live satellite images now beam next to that reactor to see what the Russians are up to next. Through more and more reps, the market becomes more efficient. And with that comes more crowding.

Although not a perfect example, I felt yesterday’s Lithium futures market was not too dissimilar. We had two limit ups on Thursday and Friday. Over the weekend there was a note circulating:

“we understand ahead of first even settlement on 14th Jan for the GFEX futures exchange, GFEX traders hve been securing pyhsical product in China. However, on receipt of product from a bunch of no name Chinese producers, 70% of the material was deemed not sufficient quality and was returned back to the sellers. The view is futures could trade limit up for some days until the right balance is found”

So what was everyone doing in Australia yesterday? Setting their alarms for 11.50am and watching the futures market come 12pm. So not only was their more crowding but most importantly, PLS had already rallied sharply on the daily. Indeed it had bounced four days up and sharply into this event. That is short term extension.

I wold love to say I am the polished article and did not get caught around this action. However spoiler alert - I too traded in that zone. I never flipped long despite the strong buyer on the tape because that Daily just wasn’t there for me. I was able to step back and gauge the spots where the market may be caught. This wasn’t an A trade. This wasn’t one I crushed. The point really is to introduce principles and ways of thinking real time. Concepts and nuances.

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Trade write up: PLS

Major note: IF I am looking for a climax I want to see an extended Daily AND then a price capitulation or turn lower on the intraday. That is when everything is aligning.

This whole trade was about reacting to Lithium futures coming off Limit up. It was recognising the clear buyer on the tape who subsequently gets caught. Perhaps he forgot to hit refresh on the browser? Whatever the reason, when the market was caught long in that 375 zone, the pain trade was lower on breaks.

-Trade name:

• PLS gap up fade

-Catalyst:

• Citi downgrade PLS to Neutral from BUY. Slashes their Lithium commodity price deck. Spodumene (SC6 China) cut from $2400 to $1300 over near term (-46%); CY24E cut from $2275 to $1500 (-34%); CY25E cut from $2200 to $1700 (-23%).

• JPM also out with a deep dive sector note slashing their Lithium price deck. Spodumene (SC6 China) cut from $2000 to $1300 over near term (-35%); CY2024e from $1950 to $1175 (-40%); CY2025e cut from $1800 to $1100 (-39%).

• These changes have sweeping implications in their models and consensus revisions.

• In itself, this is following the sequence of other Brokers of late and mark to market e.g. UBS, Jeff and MS all last week. Thus, the market may look through this. However, 2 brokers on the same day AND with background context is meaningful.

• AKE fair value up at $9.80 or approx. 5% given LTHM move so will lead to early sector strength.

• Lithium futures go Limit up early BUT trade off immediately. Wuxi at a decent discount and also sells early.

-Variables:

• Daily has traded from one extreme to the other. Capitulation to overbought and top end of the bands.

• 3 days up AND new gap today.

• Lithium futures limit up on Friday. Market anticipating another limit up today: "we understand ahead of first even settlement on 14th Jan for the GFEX futures exchange, GFEX traders hve been securing pyhsical product in China. However, on receipt of product from a bunch of no name Chinese producers, 70% of the material was deemed not sufficient quality and was returned back to the sellers. The view is futures could trade limit up for some days until the right balance is found

• PLS Gap +1.34%; Previous day open to close +1.9%; Previous day close to close +3.6%. This is NOT extended enough for a true A fade. Actually does not fit my back tested criteria as not strong enough previous day.

• Rally off low to open +21%. Strong move but not truly extended on my metrics

• Shortbase still very elevated. This has not washed through. Above $4 the real pain point

• Biggest concern is running any position into Lithium futures at 12pm

-What did I do:

• Open Volume: Opens at 376 on 810k shares or $3m.

• Entry: Vwap in first 10mins as per rules. Rest on a clear turn lower. I didnt want all my size on open given strength in AKE, given the shortbase and because it was not a strong grading for me. I did also sell my overnight long into this gap. Biggest concern was running into the futures open come 12pm.

• Size: This was NOT a true strong grading for my system. Goal was to get to 75-100k shares on a true backside reversal.

• MAE: 5c or 1%. This is inline with my rules

• Adds: Add 2 on the break and hold below 375 zone/open early. Add 2 was on the breakdown through 370 when Lithium futures traded down from Limit up.

• Exit: Exit 1 into 370 zone come 12pm. NOT dropping and didn’t want to run the risk into the open. Normally I am open to close for these trades but decided to cut rest as they were indicated limit up. Exit 2 post the 370 breakdown was on the flush and subsequent hold at 360. Here it is decent extension on volume and 360 bid held.

• See it moment: Futures coming off sharply from Limit up early. Confirmed by Wuxi. Sweeping buyer through 374 and 375. He did this twice despite Lith futures selling off. Clearly he was wrong below 370s and press below here as volume caught. 8m shares traded around this period and alot of this has to now come out. Major prints were 150k at 374, 240k at 3.76, 291k at 3.78. These were all buy orders

• Notes: Really pleased with early entry and then covers into 370 noticing the strength. Would not drop. Broker downgrade has hit market and will not drop. Clearly market awaiting the Lith futures open and I didnt want to run the risk. This is now a line in the sand point. Once futures started selling off, I added on the true breakdown through this zone to get me up to 100k shares short in line with my early planning.

-Better next time:

• Sizing: 100k on the 370 break was good. This was not a A or B for my true fade system so hindsight to suggest pushing it

• Management of trade: I did get too reactive to that buyer lifting 375. However, adapted well. Better would be to add a basket short across sector as futures traded down sharply from limit up. No borrow in LTR. AKE and MIN the choice. AKE < 940s and drop of open.

• Tech solutions: none needed

My plot:

Daily: