How to Use the Pre-Market to Form a Trading Plan - $DKS $PETM

Yesterday (5/20/14) I traded DKS on the short side. The stock was very much In Play, as it was gaping down over 13% on above average volume. Again, I want to emphasis the reason I was trading or even watching DKS that day, on a short-term basis, was because it was In Play and was showing signs of offering some nice low risk trading opportunities. If you're a short-term trader, you have to understand this idea.

Ok, so now to the trade. As I always do, I first pulled up my longer-term charts and noticed that the next potential support area on the weekly chart was $43.50-$44, as you can see from the chart below.

DKS, weekly chart

When first I saw the stock pop up on my scanner in the morning, it was trading around $45.50ish, so I felt there was still a decent amount of potential downside for the stock. With the longer-term technicals in mind, I then "zoomed in" to the pre-market action to refine my trading plan for the open. The stock had developed a range between $45 and $46 in the pre-market, so I felt shorting a potential pop on the open into $46 would offer a low risk entry to try to capture a move down to $45 at a minimum and then look for the larger move down to that $43.50-$44 support area on the weekly chart. You can see this pre-market range as well as my trade management in the charts below:

DKS, 5min chart with pre-market

DKS, 5min chart trade management 

I think I could have done better by holding a portion of my position overnight (let's say 1/4) given the fact that it closed at lows, which suggested it may see follow through to the downside; I booked a good chunk of profits, but I feel that risking a small portion of those profits to try to capture another point would've been a better thing to do. Today, the stock made a low of $42.55. We'll get 'em next time!

Another recent example of how I used the pre-market to develop my trading plan was in PETM today (5/21/14). PETM was gaping down below some support levels on the weekly (~ $61.50) and the next potential support level that I saw was around $55.

PETM, weekly chart

Similar to the trade above, I then zoomed in to the pre-market action and noticed that the stock had traded down near this $55 area and bounced over 2.5 points. The stock (again, in the pre-market) then consolidated above $57. I thought that if the stock dropped out to $57 on the open and saw some buying there like it had in the pre-market, I could look to put on a long position for a move up to $58-$58.50, where it had stalled out before the open. And that's pretty much what I did, as you can see from the chart below:

PETM, 5min chart with pre-market & trade management

So while the post-market action in a stock may not be particularly relevant for a longer-term investor, looking at the price action in the post-market session can be of great significance for the short-term trader.

If you have any questions or comments, please just let me know in the comments section below. You can also follow me on StockTwits and Twitter.