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There are a few reasons why I love momentum trades so much, and moves of high magnitude are just some of them.

The other – possibly the most important one – is that many of these setups are repeatable.

In my lessons from last week, I explained that if you understand the supply and demand dynamics behind the lines and shapes on the chart, that may give you an upper hand.

You won’t find two identical setups, but similar demand patterns can lead to identical price moves.

Let me give you a recap of one exact pattern I’ve seen repeat over and over throughout my career and share two stocks that are shaping up nicely…

Bull Pennant and my PROG Trade

Last week I spoke about a classic Bull Pennant setup and how I traded it in Progenity, Inc (PROG).

A classic pennant looks something like this:

A trader can distinguish one from its sharp move up, followed by a tightening consolidation that, in a perfect world, results in the next leg higher.

This next leg higher is the result of excessive demand even at high price levels.

There are a few places this demand can come from, therefore, before I get into a trade, I’d like to see some boxes checked off…

For me, these are:

Short Trap: A stock has previously provided an entry to short traders – if it starts edging higher, they’ll be forced to cover causing a break higher

Small Caps: Smaller names need significantly less of actual money poured in to have a major reaction.

Stocks under $10: Cheaper stock attract more attention and are easier to buy: any pop in such names may cause many traders to chase an up move, providing additional demand

So, that’s when I saw PROG pop on my screen, with a classic pennant + all 3 of the above:

I entered the trade at $3.19 and well, see for yourself how it went…

Look, as I mentioned, there are no blueprints in this game…

But here’re 2 names that have very similar charts:

Alfi, Inc – ALF

  • Market Cap: 76M
  • Free Floating Shares: 4.39M
  • Short Interest: 2.80%
  • ATR: 0.96

Summary: ALF is a recently IPO’d AI name that checks off every box – it’s a very small cap, it’s holding up & flagging well following a recent push higher.

I like that it’s given plenty of short entries over the past few days – outsized pops on high volume always get some shorts involved. If we get moving – they’ll be in trouble.

The stock is trying to break out of a flag as we speak – if the trade was to work, I don’t want it to ever look back.

I’ll consider a long into any consolidation above $6.80 for a move into the $10 area.

Holicity, Inc – HOL

  • Market Cap: 408M
  • Free Floating Shares: 30M
  • Short Interest: 3.82%
  • ATR: 0.42

Summary: HOL is a shell company that doesn’t have many fundamental reasons to go up, which makes me like it even more: shorts get involved big in names that should be up, and if they keep higher – short traders get caught.

After its most recent move, this name doesn’t tick off the “under $10” box, but the chart and the reasoning above make me a big fan.

I really want to see the $10.80 area hold. If it does – I’ll consider getting long right on the break above $11.80 resistance for a potential full-on reversal move into the $16 area.

Look guys, when I say setups are repeatable, I don’t mean that you can copy and paste.

But if you see charts shaping up for similar reasons, why not utilize something you already know?

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

 

With to-the-moon emojis at all-time highs, there are many trading examples showcasing the power and opportunities small float stocks offer.

A stock’s float represents the number of shares that are available for public trading.

While small float stocks are popular vehicles for traders seeking asymmetric returns— trading these stocks can also bring about sizable losses just as quickly.

That’s why it’s so important that traders know some of the ways they can improve their odds of success when speculating in these stocks.

Today I’m going to share with you the mechanics in-play, how they work, and extract information to make better trading decisions.

 

How is a stock’s float calculated?

 

A stock’s float is the number of shares of stock available for public trading. The figure does not include shares held by controlling investors or company owners.

Instead, the number is derived by taking the total number of shares of a company and subtracting any restricted shares.

Restricted shares represent stock granted to company executives and directors as a form of compensation.

These shares are non-transferable and must be traded in compliance with special Securities and Exchange Commission (SEC) regulations.

The amount of floating stock a company has can also change over time, as companies might sell more stock to raise money, or company stakeholders might sell their holdings.

Any shares that are purchased, sold, or even shorted by investors in the open market do not affect the float because these actions do not represent a change in the number of shares available for trade.

They simply represent a redistribution of shares. In addition, the float is not affected by the creation and trading of options on a stock.

How to approach trading in low float stocks

 

A float of 10-20 million shares is generally considered to be a low float.

In contrast, a company like Apple (AAPL) has a float of around 16 billion available shares for the general public to trade.

Stocks with low floats are popular with day traders because they can be used to earn relatively large profits throughout a single trading session.

When searching for low float trading ideas, there are certain key questions that a trader should ask his or herself before committing to a trade. They are:

1. Is there any kind of catalyst that is expected in the near future?

2. Is there ample liquidity in the stock?

When it comes to the first item on this list, other than pre scheduled earnings announcements it is impossible to accurately predict when company news is set to be released.

Therefore, it is important to understand that before some sort of news-related catalyst potentially sparks an upward surge in a low float stock there is often a dearth of liquidity in these stocks.

Under such conditions, traders often use scans to identify situations where volume has increased significantly during overnight and pre-market hours, to find situations where “the market” senses some sort of catalyst may be close at hand.

The type of relative increase in volume that should be sought by a trader using this method is a minimum of 1.5 X greater than the monthly average.

For example, if stock ABC shows average trading volume of 250,000 shares over the past 30 days and pre-market activity is shown to be 750,000 shares, the relative volume would register at 3 times the average amount.

This type of trading is favored by day traders that look to scalp fast intra-day moves for quick profits.

Scalping is a popular form of trading that requires a trader to have the discipline to either take small profits when a stock moves quickly in their favor, or to stop out when the stock moves against them.

Some traders, however, may prefer to employ a strategy like swing trading to profit in these stocks.

In contrast to the very short-term holding periods and almost split second decision making process required by scalpers, swing traders will look to enter a trade in anticipation of the stock rotating in their favor and keeping them in the trade for anywhere from 2 days to a few weeks.

A key part of being successful when using this strategy with low liquidity stocks, though, is to be able to gauge whether the stock is being accumulated, usually as prices are falling or moving within a range for an extended period of time.

 

Traders are equipped to find stocks that are secretly being accumulated

 

One thing you might not realize about these small companies is that many actually have institutional ownership from some of the most well-known mutual fund families.

For these large institutions to be able to take positions in these stocks, it can often take several weeks-to-months of buying small amounts at a time to prevent the stock from rising too much during the accumulation process, which can cause unwanted attention from retail traders.

A real-world example of this could include an institutional analyst that recognizes the potential for a certain drug to have favorable trial results, causing him to make a recommendation to his Portfolio Manager to build a position before the trial results are due.

Now, while they certainly aren’t foolproof, there are a few ways retail traders sniff out when a stock’s shares are being accumulated.

One popular way is to use volume.

Whether it be via dark pools or specialized volume indicators, volume is an ideal tool for uncovering what’s going on beneath the surface.

Specifically, most charting services offer the Accumulation Distribution Line as part of their charting packages.

This indicator is somewhat complex in its construction, so it behooves you as a trader to become more familiar with it on your own time. Details regarding its construction and practical application can be found here.

In the meantime, we can look at an example of how it can be used to detect the stealthy accumulation of a company’s shares simply with the understanding that it is a volume-based indicator designed to measure the cumulative flow of money into and out of a security.

Based on the theory that volume precedes price, a trader who is in search of stealthy share accumulation can look for positive divergence by this indicator against a stock’s price.

An example of this is shown below, where, just last month, shares of Ocuphire Pharma (OCUP), a biotech company with a small float of just 10M shares, were testing the all-time lows set back in November ‘20, but the Accumulation Distribution Line was showing signs of accumulation as it made a series of higher lows against lower prices.

 

Figure 1

 

Like all indicators, the Accumulation Distribution Line doesn’t always work.

That’s why it is important to use it in conjunction with other indicators to identify situations with a higher probability of success.

In this case, the positively diverding Accumulation Distribution Line, when combined with the test of November support and positively diverging RSI momentum was the kind of favorable indicator confluence that traders should look for when seeking these high probability setups.

 

 

 

 

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

I love BIG breakouts and I cannot lie!

And look, I’m not selling you on anything…

I genuinely believe breakout setups have a lot going for them: your risk is usually well-defined, your reward is solid when they work – they move fast, far, they never look back.

But…. What happens when they don’t?

The ugly truth is, a failed breakout will go against you just as aggressively as a successful one will go your way.

And even a stop (if you didn’t have one – next time you should!) may get slipped quite a bit and make your loss wider than you intended.

A failed breakout is no fun place to find yourself in, just have a look at the Cellect Biotechnology (APOP) chart from yesterday:

Today, I want to teach how you can better your odds, but first, let’s deal with the basics:

 

Basics of Breakouts

Breakouts can be defined as violent moves through and above priorly respected resistance levels.

They result from explosive upticks in demand that are caused by 4 key factors in the order of their significance:

  • Demand from actual long-term buyers
  • Long traders buying the breakout for continuation
  • Short traders covering their positions
  • Short traders getting stopped out right above the resistance level

In a perfect world, this leads to significant advances in a stock price.

In the real world, though, these very same market forces may lead to a disaster – imagine all the long traders who just aggressively piled into the breakout, only to see the stock dip right back below resistance. What happens now?

They all have to stop out and the APOP chart from above will show you how this may end.

Well, here are some best practices to help you find quality breakouts:

 

Follow the Trend

My general rule is – a trend is your friend.

I don’t see a point in fighting something, unless it gives you a solid reason to do so.

If the overall trend is down, the stock has been a steady sell and is really struggling to hold higher – why would I try and buy a bullish breakout?

I want the market forces working for me, not against me.

I’d much rather ride the underlying momentum, not fight it.

 

Trade Big Picture

The more significant your level on the longer-term chart – the better.

If you’re shopping for a breakout trade, try to find one that is breaking out on multiple time frames at once.

In my view, breakouts above the resistance of the past month, or 6 months, or a year work better than a breakout like APOP.

Longer time frame move means that the market has truly absorbed and priced in all the available information.

This ensures the pre-breakout value is justified and further move higher is warranted and supported by big players.

You want to be in breakouts with strong demand on all levels – not those bought by a few traders looking at the lines on a chart.

Which brings me to…

 

Check the Volume

Do you recall the discussion of what drives the breakout moves?

I put “Demand from actual long-term buyers” as the most important factor.

The reasoning here is simple – market participants who are in for the long term will provide continuous bid at different price levels.

Whereas a trader might buy a breakout only to sell a few points higher, an investor will be adding a few points higher and then some, in hopes of eventually selling a few hundred points higher.

These guys have deeper pockets and unlike traders, their buying power rarely exhausts – they will be able to support moves higher.

Obviously, there’s no certain way to tell if big players are buying, but volume is a good place to start.

If the volume of the breakout far exceeds anything the name has seen before – this may signal a lot more people and money are involved and determined to take the name to where it belongs.

 

Buy the Confirmation!

The goal of this exercise is to ensure a breakout doesn’t fail.

So why not see it “not fail” before you decide to buy?

I talk about confirmations a lot – in a nutshell, it’s some type of price action that validates your thesis.

It differs for different setups, but if you’re trying to buy a move above resistance that will never look back, why not see it turn the resistance into support first?

Remember, you don’t have to be the first one in! At this job, patience pays off more often than it doesn’t.

Don’t buy the first candle – see that handle not fail, and then get in accordingly.

I hope this clears up some smoke and helps you next time you trade breakouts.

Author: Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.