How (Not) to Short the Bounce on RGTI — A Trade Breakdown

Hi. My name is Pete and I tried to short a volatile small cap and it was an upsetting experience.¹I FUCKING HATE TRADING SO MUCH.

Have you ever been in this situation? There’s a huge initial move in your bias. You have maximum conviction on the trade. Maybe the first move was too fast for you to have full size or any position at all but then the market begins to retrace and you think “this is a gift. this is my chance for redemption.” So you slap on a position, all excited and whatnot. It goes a little further, that’s GREAT–better prices! Give me more, yum yum yum. It’s the all-you-can-eat party. You have now scaled into a full position.

And then… it just keeps going against you. It goes a little further than your initial game plan for it but because of “conviction”, you stick around. Maybe you even add slightly above your intended bet size, just as a gesture to yourself that you still got the belief. Yet… it shows zero signs of volatility in your direction, it just keeps going. Denial. Disbelief. Anger. You go through every stage before the market closes. Then you stop out once it dawns on you that it’s never coming back. Then you find acceptance. Punt this shit position into the ether and never think about it again.

Then… sometimes… not every time… the worst possible outcome happens. Now that you’re finally out, the market starts to trade in your direction. You’re either an asshole because you got out at the max pain point or you’re an asshole because you’re not getting back in for the sake of discipline. Or maybe the market is just bullshit and you’ll never figure it out. Pick whichever narrative make you feels worse.

So that was me yesterday on this piece of shit stock called RGTI and I’m a little upset about it. Over the years I have thought to myself… Pete there’s no reason you couldn’t be a $50 million trader if you just had the right mindset. And then the market finds a way to reminds me, that I will never have the right mindset for this. There’s too much bullshit out there that makes me upset and that’s why I stopped trading full time. You know what??? I bet I wouldn’t even recognize the very person who I am today, if I actually did have this so-called “right mindset” anyway. The Pete who could make infinite money in the markets would be this totally different person. Probably a complete psychopath with a massive dopamine addiction who posts his PnL on twitter. Fuck that guy.

Anyway, let’s breakdown yesterday’s trade so I can get some closure.

QUANTUM COMPUTING — THE NEXT BIG TECHNOLOGICAL BREAKTHROUGH?

So, usually, this is where I do 5, maybe 10 minutes of research to give you context on these quantum computing stocks that have risen 10x over the last month or so. I don’t even want to do that. Let’s run through this quickly. There’s IONQ, QUBT, QBTS, QMCO, and this RGTI. They’re all racing for the first real quantum computer that will change the fabric of society and possibly seize all bitcoins… or something like that.

I literally just discovered the very existence of this RGTI the day before I traded it. I didn’t even know about Google’s Willow breakthrough until that day either. I don’t keep up with anything anymore, for my own sanity. Too much mindspace being spent on the market = total waste of time, unless I can DIRECTLY make money off the information. I want my head in the sand on purpose. I don’t know the slightest thing about this RGTI but I’m 99% sure it’s either a scam or extremely overhyped bullshit.

So there’s your context. Quantum computing. They’re up a lot. They’re probably definitely all pieces of shit that will never make a single profitable dollar in their entire existence. Sabine Hossenfelder would agree with me and she’s a billion times smarter than me.

This is just the background info and none of this matters when it comes to trading. The only thing that makes you money is buy low & sell higher, or the opposite if short.

IDENTIFYING OVER EXTENSION

So I saw RGTI when it was at $6. I saw the chart that day on Tuesday. Extended yes but not ready. Then I saw it afterhours go to $8 and I boldly declared to myself “I’m shorting it tomorrow.” I just know that day–which would be Wednesday Dec 11th–is the day. I might be shorting at $8, $10, $12, doesn’t really matter. There’s a blow off top happening and you can’t really predict the top with much certainty.

People ask me, bunch of you guys emailing me all the time…–Pete, how do you identify the top? And first off, let me share a short story that might not go anywhere. There was once a trader I knew and we’re going to call him Professor Boring. The professor ran a discord chat that I was a part of. He used to be a discretionary trader who had written down some interesting concepts about how stocks moved²(mostly stuff that I already knew to be intuitively true but he was very good at articulating his ideas so I thought a like minded chat would be healthy for my trading, so as to reduce the days when I spazz around). Then after 2 or so years in that chat, he thought he made this amazing discovery that would transform his discretionary trading into systems trading. Here’s his thing–he would try to take all the best mean reversion outcomes, after the fact, and try to find common traits. He’d use this software called Trade Ideas and he imports data from 40 different filters into a spreadsheet and try to optimize ³is that the right phrase I’m using, IDK, I’m not a quant. from these hand-selected outcomes. For example, a stock going from $2 to $10 and then it traded -50% in a day, what were the parameters prior to the day of the crash? So he “figures out” that the common parameters preceding large corrections would be things like high RSI, a high % over 3 days, certain amount of relative volume, etc–then he’d create a scan where only stocks that had those selected parameters would populate each day. He’d also try to cherry pick the best entry patterns—for example, all the best stocks had a 30 minute low that went to a good 2R target so I’ll always enter the low and set a cover target at the 2x or whatever it was. He labeled this “black and white trading” where he no longer had to guess and these scans were now his golden compass.

At this time, I thought it was a stroke of brilliance. The professor finally cracked the code and we could just use a box to say “ok today is the day to short XYZ, top is in” instead of guessing based on experience and price action.

This was maybe 2018. The discord had around 50 traders and we all thought Professor Boring found the holy grail of mean reversion trading.

Guess how many people made millions off this holy grail method during the pandemic when trading was the easiest, scans were popping all day, and all the prop traders I knew had career 8-figure years? Zero.

Needless to say… for many, many complex reasons that I don’t have the bandwidth to get into–I would later conclude that this was this a gigantic waste of time. Professor Boring might have something useful if you’re a total beginner but I’ve come to realize that, at least for me, the only thing I can do is just lean on experience and eye-test the chart myself, with a blank and unwanting mind. It’s not foolproof but it’s the best I can do and it doesn’t require 120mg of adderall and 8 hours of “backtesting” every single day.

And on Wednesday, I thought RGTI was ready for a nice -10 to -20% red day. It wasn’t the greatest of all setups but it was good. I can’t really put it into numbers or words.

INITIAL MOVE AND OPENING PRINTS

There are these secret lairs where evil short sellers collectivize to discuss strategy. At one point, there was this weird ongoing debate whether they should just short the opening print on every single stock. Whether it’s a valid strategy or not. When to do it. When it works or when it doesn’t. I guess for them, it’s about the simplicity, in that they don’t have to figure out price action trading to get in. I only know of this debate because I was part of these wicked circles once, until I decided to seek salvation and eject myself.

Did you know… that there are traders who just find anything up 100% or more pre-market, they short the opening print, and they just decide to give it a percentage based stop⁴(I have not once, in my life, used a percentage based stop, I use highs and lows and price levels like a normal trader)? What percentage–I don’t fucking know, some even suggest 100%. And then they have the nerve to call this a system. I’m currently recoiling in disgust just thinking about this. If you do this, DO NOT TELL ME because we will not be friends. Open printing to short every single extended/gapping micro-cap is an affront to my platonic ideal of trading. It’s perverse. You “traders” should not exist. You should be blown up to smitheerens every single day like Wile-E Coyote.

That being said… there’s a time and a place to “open print” as an entry. It’s one tool of many for the discretionary trader. It’s a good way to get exposure on a volatile trade idea when I have max conviction and I have a “gut feeling” that it could trade in my direction clean from the bell. If there’s going to be a lot of volatility early on, sometimes chasing high confirmation like a 15/30 minute low will leave you with a lagging signal and a mediocre price.

I thought it would makes sense to open print RGTI and just hit the bids to add when on micro-weakness. It works like a charm. I’m not gonna say this is what I do EVERY TIME because it’s not. I’m not going to claim that I have a cheat code to know when to do it and when not to do it because I don’t. It just worked out this time because god knows why.

So I’m short 25000 shares at 7.60’s average. The first high probability target is a flush of the next whole number and the -10% mark, which coincides. RGTI makes a morning low of 5.71. I mean that’s perfect. That alone could be a good trade. I’m already up over $30,000. I cover about 60% into that. The next target is low 5s for the -20% level. It seems the rest of the quantum stocks are also weak and that’s a plus factor in my favor–I’m thinking they will all trade weak today until the closing bell.

You ever talk to those spazzy momentum traders that say “I only trade the open, that’s the easy money, the mid-day is a grind.” You roll your eyes… yeah buddy, you just don’t know how to trade real positions. Well. Today, I wish I was that guy. Sometimes you’ll see that the spazzy open-only momo trader has a point.

How (Not) to Short the Bounce

So we see this a lot. There’s an initial move and a morning low, and then a bounce. If you determine that this is one of the best, high conviction trade ideas–you must continue to stay short on this bounce for the next leg. I don’t make the rules. The best turning points aren’t just one quick move, they often provide more opportunities later.

My mental template on shorting the bounce is based on the h-sell pattern because the price action resembles the lower case h. Some may call this a bear flag.

There are little h-sell patterns. And there are a big h’s.

Little h is easy. It never bounces that much. It’s revealing so much weakness with how pathetically meek the bounce is. It stays below VWAP from open, it stays below the midprice between the morning high and low ⁵(example, if high is 8 and low is 6, the 50% pt is $7), and then it trades in a tight range. It’s clean.

Here’s an example from my best trade of the year, the SMCI trade.

Somehow I did not capitalize that great on this move… even though the little h-sell pattern is so easy that you would think backside trading is the easiest trading in the world⁶(this is the first technical pattern Clockwork and I would spam short on, at our early days at MBC Securities) I’ve had some meta-thoughts that, based on my historical performance this year, I have been A) too scared of giving back early profits and B) overthinking during the 2nd leg of my best trades. So I didn’t want to do that on this RGTI. I wanted to crush this 2nd leg and turn a $30k profit into maybe double that amount.

Next, there’s Big-h. Big h is more complex because the arch of the h is really wide and wonky, maybe even extending, in terms of time, over more than a day of price action. You have to go through some serious shit on the tape when it comes to trading the Big h for continuation lows. It will go through the blue line, the pink line, and the yellow line. It will make higher-lows and higher-highs and fool you into thinking the worst is possible–the full reversal stop out. The existence of the Big h is why we can’t all just print money trading little h with a tight stop and clean trade management. We have to roll up our sleeves and get ready for drawdown and pain. ⁷Or you could be a piker who commits to a hard trailing stop and then moves on entirely when it doesn’t trade clean. I certainly wish I was that trader today!

Sometimes you think you’re positioning into a little h and it evolves into a big h. That’s when the mindfuck begins. And here where I introduce to you the four levels of a bounce trade.

Clean: holds below every possible guideline you use to determine intraday trend (50% H/L mark, vwap, SMA, etc) trades in a tight range before resolving lower decisively. See SMCI chart.

Uncomfortable: Starts to rotate over your trend guidelines, trades in larger rolling pullbacks rather than tight ranges that snap clean. Bounce is strong enough to have you thinking maybe the easy money is over? Your pnl will have 50% retracements.

Dirty: establishes what you think is a clean trailing stop price level i.e. a little h, then violates that level. then after violating that level, it trades “better” and then there’s continuation.

WTF: I can only show examples.

The existence of those WTF trades where even the big-h traders with the stop at the absolute highs get taken out… these are the bane of my trading memory bank. When a bounce gets into the DIRTY category where it starts to get a little too far, my worst fear is that it will be a WTF bounce where it actually tags the very highs–even though I know these are considerably much rarer outcomes. Which will mean it’s either squeezing further for a new leg or it’s only going to tag everyone and THEN waterfall the next day without a new leg, like that TLRY 2021 chart above. Which fucking sucks. So I start to get super emotional and worried and anxious.

After the morning lows, RGTI slowly… VERY slowly…. bounces almost all the way back. It doesn’t seem possible as it inches along 5 cents at a time but it just somehow keeps going with zero downside volatility. And I scaled back into full position thinking it would DEFINITEL;Y swing lower by the close.

It’s grinding above vwap around 6.75. I’m left with a dilemma… take my medicine now or let them stop me out at highs? Somehow I landed in between. I didn’t take the medicine when the little h failed and I didn’t want to be stubborn for the absolute highs at $8 and take a potential loss. So I get taken out here. You can see the 5min green candle with more volume and more range… it’s me and a bunch of others shorts wondering the same thing–why isn’t the piece of shit going back down?

These are the worst spots to get taken out. I personally never get closure being out there, it was probably purely an emotional cover on my part. Then even after I’m out, I’m constantly checking the price to see if I really was the idiot who top ticked it or if it went higher.

The best sense of peace I can get from this trade is if RGTI has a real leg higher to $10 or even $20, rather than just a probe of random levels that somehow took me out. Then my stop out will look prudent rather than stupid. I know–it’s 100% results oriented and not the mindset a good trader should have⁸I DON’T CARE, IT’S JUST HOW I THINK OK????.

Here’s my advice–find your trader identity and commit to it. Be the clean stop guy who won’t give it all back or won’t tolerate wider swings.

Or pick the slightly scarier option–be the stubborn guy who holds positions like a man with a stop at the absolute highs. Just don’t have all this cognitive dissonance, like me, wondering what the fuck should I do??? for hours on end. All in all, I still left the day with $10,000 in PnL on RGTI but honestly, it’s not even the PnL. I’ve had these moments where I over-scaled the bounce and went from +50k to -50k. It feels the same. It’s the very experience of being in this grinding move where I’m internally screaming until I’m a hollowed husk of a man by the end of the day. All these thoughts running in my head as my PnL declines.

Why didn’t I take my successful trade at 5.7? What did I really want, another 30c? WHO CARES?

Why didn’t I take my medicine at 6.75 and lose another 40-50c on my exit basis?

Why didn’t I just “trade perfect”, get out 100% at the lows and then re-scale and maybe lose 10% of the profit at the end?

What if this is a WTF move in the making and I go red on the trade? Why not preserve what I have left?

Now the trade is over. I’m out and I refuse to get back in. I check it on my phone afterhours to see it start a gap down move below $7. I’m seething. I knew they’d do that. They always do that.

As I write this on Thursday December 12th, I see RGTI has since breeched the closing highs of 7.6, to a high of 7.88, but it failed to break the $8 opening highs. The only consolation I take out of it is that, in all likelihood, this was just a run of the mill “good not great” trade where I was never going to make 100k and maybe I mis-assessed the probability of a monster all-day fade type move.

Who cares anymore. I don’t know anything.