Now and then, I see a theme play out. Whereby a sector or group of companies gain traction, momentum, and trade higher together.

Typically, these themes involve one stock, the leader, and other stocks, the followers.

The stocks which move in sympathy to the leader are usually in the same sector and industry as the leading stock and share similar characteristics. These characteristics could be float size, technical setup, short interest, and market cap.

The followers are what I refer to as the sympathy plays.

To better paint the picture, let’s look at an example.

At the beginning of the year, GME went from $20 to $483. As a result of this wild move, many other names ran in sympathy to GME. AMC went from $2.50 to $20 during this period. BB went from $7.50 to $28. Other names to move in sympathy during this period also included: KOSS, NOK, and BBBY.

Usually, sympathy plays will pop up once the main stock in-play has solidified its position as a significant short squeeze. In the chart above, you can see that AMC (pink line) began popping up and squeezing a couple of days after GME had already gained momentum.

Sympathy plays follow the leader. Therefore, as soon as the leader tops out, the sympathy plays also top out. This is also apparent in the chart above.

Alright, so by now, you should have a solid understanding of the concept I am discussing. But why am I covering this topic?

Sympathy plays present unique opportunities

Even though the GME action at the beginning of the year was incredible, It was not unique. On a grand scale like that, we have encountered exceptional opportunities before. During these times, there is an unbelievable amount of opportunity and risk: reward. Especially with the sympathy names.

Just off the top of my head, I can think of a couple of past situations similar to the meme stock run we saw earlier in the year. The cannabis sector, led by TLRY, and the shipping sector, led by DRYS. Both situations were very similar to the meme stock run.

How sympathies present unique opportunities:

  • Trading a sympathy stock is often easier than trading the leading stock.
  • The sympathy stocks are usually less volatile than the leading stock, allowing for better risk management.
  • Once the main stock tops out, you have time to adjust your trading plan in the sympathy stock and potentially capitalize on the short side as well.

Identifying potential sympathy plays

It would be best if you always were on the lookout for potential sympathy plays when a stock is in the process of a squeeze.

Take CEI and NAK, for example:

As CEI approached highs yesterday and looked to be potentially gearing up for a move over $2, interest grew in NAK. NAK was being spoken up on popular online social media platforms like Twitter and Stocktwits.

Many online cited a similar technical chart in NAK and CEI, a similar industry, and the potential for the stock to go up if CEI were to continue higher.

The comparison and increased attention, increased the share price of NAK by 7.93% yesterday.

This is certainly not a significant theme play or sympathy play yet, but it is a good example of a potential one.

As is often the case, the sympathy play will only continue to rise if the leader continues. So the NAK bulls would be hoping for CEI to climb higher.

More often than not, there are many failed attempts to identify the next stock to go.

That is why, when attempting to spot sympathy plays, it is essential to remain patient and let the stock show you that it is trading above key resistance and experience abnormal volume before you rush to get involved.

Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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