When To Fade Morning Strength - A Dillard's $DDS Case Study

As I mentioned on Instagram (make sure you follow me on Instagram!) over the weekend, Dillards had a HUUUUUGE move yesterday, closing up 20% on nothing but a short squeeze.

Instagram post on Friday's Dillards $DDS Move

(This was also an entry in the handy daily Premarket Breakfast post [make sure you check it out daily])

DDS Entry in the Premarket Breakfast

Okay, so what, we know it squeezed on Friday.  What is the stock likely to do on Monday?  On Twitter, I put out a poll and gave a hint:

DDS Poll on Twitter

The poll, reading "Dillards $DDS peaks out at 10am ET and goes red today (poll)", kind of gives away what I think it will do, no?  Well, 74% of people voted "no", (the correct answer was "yes"), so we will go over the pattern that I saw, and tweeted about, today.

Generally, if a stock (1) has an unusually strong day the day before, (2) closes at highs and (3) the stock gaps up and has a nice morning run, there is a good chance that the price will peak out around 10am-10:30am ET.  Here's what $DDS did today:

Intraday chart of $DDS after its big day yesterday and gap up and push

Why?  Well imagine that you are short Dillards yesterday because you think it's "up too much".  Today the stock gaps up and when you realize that it might continue going up, and this would continue to add to your losses, you would panic out of your short position, creating the peak morning top.  Then there are no more natural buyers to buy the stock so it will drift down.

Let's look at a few more examples:
Here's Sinclair Broadcast Group, where the day before the stock ran 30% on the announcement that the company was going to acquire 21 regional sports networks for Disney.  The next day, we had a nice morning push and fade back.

Intraday chart of $SBGI after they announced news and the day after

Here's Red Robin Gourmet Burgers $RRGB, who's stock was closed up 31% the day before on news that Vintage Capital gave it an unsolicited buyout offer at $40 (which the management is unlikely to take).  The next day, we had a nice morning push and fade back.
Intraday chart of $RRGB after they announced news and the day after.

Now, does this pattern work 100% of the time?  Of course not.  But that is the job of a trader to figure out what patterns they think will emerge and manage their risk well.

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