Of course, I could talk about stocks for hours on end — all the bullish and bearish setups, indicators, moving averages, screeners… you name it… but the thing is, I always go back to my two favorite patterns — the fish hook and rocket.
With the event-driven market environment we see nowadays, my fish hook pattern comes up a heck of a lot more often…
There are traders out there who panic and are quick to pull the trigger, causing overreactions.
Now, when I look for my fish hook pattern, I look for oversold conditions… and then I place my bets. However, I’m not randomly picking bottom, I actually follow a three-step process — and the best part? It’s repeatable.
So today, I’d like to walk you through one chart setup that could help you uncover massive bounce plays after a major overreaction.
It’s actually super simple to find oversold stocks. The first thing you have to do is look for beaten-down names, and there are scanners out there that allow you to do this. For example, you can head on over to Finviz, and screen for stocks down say 10% on the week.
You can even filter for market cap, average volume, and RSI… the key ingredients to finding the “perfect” reversal play.
So with the fish hook pattern, all I’m looking for is three things:
Sounds easy, right?
Well, it is.
Let me show you how it all works with a recent winner that I reeled in using the fish hook pattern. Check out the daily chart in Overstock.com Inc (OSTK).
You’ll have to use a bit of imagination for this one… but if you look at the chart above, you can see the pattern kind of looks like a fish hook (almost). Basically, OSTK suffered a massive drop… found a support level right around $7.
Thereafter, it started to catch a slight bounce, and the Relative Strength Index (RSI) broke back above 30. That’s a clear signal the stock could rebound and finish the fish hook pattern.
Now, it also helps to have a thesis with these plays. For example, with the Overstock.com Inc idea, I figured the stock was beaten down during the last few months of 2019… and the “January effect” idea could materialize.
Guess what happened a few days later?
OSTK actually made the move and “finished” the fish hook pattern, allowing me to reel in $12K profits in total.
The stock hit a high of $8.83 not too long after I got in… and I sold when the stock gained some momentum. That was good for about a 10% overnight, a $9,000 profit overnight!
I didn’t want to get greedy, so I sold ¾ of my position, and let the rest ride.
Now, for the rest of my position, I actually put a stop-market order. My order got hit… and I locked in the rest of the position for $12K in profits.
In this market environment, trading small-caps is where it’s at… and I expect my fish hook pattern to come up more very soon. The pattern is not only repeatable, but it’s also scalable too. But that’s not even the best part… I have another go-to pattern.
If you want to learn how I use 2 simple wealth patterns to consistently find winners in any market environment, click here to below to watch this training session.
U.S. markets are closed on Monday for MLK Day, so I hope you get to enjoy a long weekend.
Last week, for my paid Weekly Windfalls members, I outlined a key chart pattern to identify stocks on the verge of a breakout: the fish hook.
However, I warned that you don’t want to “bait your fish hook” too early, so to speak, because sometimes what looks like a bullish pattern forming can quickly turn into another…
The bear flag.
^^No, not the cute kind^^
Now, clearly there aren’t a whole lot of bear flags forming in an outrageously bullish (some would say too bullish) market.
But that doesn’t mean they can’t be found!
And when you spot a stock diverging from the broader market like that — making a bearish pattern while the rest of the market assails record highs — it could signal extra weakness in those shares.
So today, I’d like to outline this pattern for you and take a look at a real-life example of a FAANG-related stock on the cusp of a possible bear flag.
The bear flag is one of the most popular formations in trading.
It’s a continuation pattern, meaning it happens in the middle of a downtrend.
Here’s what it looks like, in a nutshell:
The bear flag is characterized by three things:
Ideally, bearish traders will initiate short positions right after the downside break of that narrow trading channel (the flag), as this typically precedes a steeper sell-off.
If you don’t wait for a breakout to the downside, you’re at risk for a false signal — which could turn into a fish hook (a bullish signal that I trade a lot in Jason Bond Picks).
Also, the flag portion of the pattern consists of a parallel support/resistance range. If the lines converge to the downside, it can signal a falling wedge pattern, which often indicates a trend reversal to the upside.
The flag portion will also run counter to the longer-term trend, or at least sideways, but not to the downside.
That said, let’s take a look at an actual stock that could be forming a bear flag.
While the rest of the stock market has shown an absurd amount of strength to start 2020, Apple supplier Broadcom (AVGO) has left much to be desired.
After peaking north of $325 in late December, it was downhill for AVGO shares — which would be the flagpole, if it pans out.
The stock fell to the round-number $300 level recently — an area that acted as a ceiling several times in 2019 — and could now be forming a bear flag.
If Broadcom stock breaks the lower half of that consolidation range (the lower blue line on the chart below), and especially if it falls back below the $300 level, downside selling pressure could resume, confirming a bear flag pattern.
Plus, as I’ve said several times, the stock’s divergence from the broader market’s strength could be a warning sign in and of itself.
And a round number like $300 getting breached can often switch roles to act as resistance.
Once you get confirmation that the selling has resumed — meaning the stock has fallen south of the “flag” range — there are several ways to trade a falling stock without having to actually sell the shares short.
If you want to get aggressive with it, you could buy a put option that coincides with resistance, like I do in my Smoke Signals service.
If you’d rather take a safer and (usually) cheaper route (at the expense of some possible profits), you could use the “casino strategy” that I implement in Weekly Windfalls.
The vertical credit spread is called the “casino strategy” because it has a high probability of making you money — about 70% of option trades resolve in the sellers’ favor. So, you’re essentially the house at MGM Grand.
That’s because the credit spread has three ways to profit:
The only way to lose with a credit spread is if the stock makes a big move against you, and both of your options move into the money.
To put on a bear credit spread, you would:
By default, your lower-strike call will be sold for more than the cost of your higher-strike call, resulting in a net credit on the trade. Hence the name, vertical credit spread.
This amount is the most you can possibly make, and requires the stock to stay below the sold call strike through the options’ lifetime.
Of course, you don’t have to hold an options position until expiration — most spreads are closed before that date.
The worst-case scenario is for the stock to rise above your bought call strike by expiration.
Your risk, meanwhile, is the difference between your sold and bought call strikes, minus the net credit.
Therefore, the closer your call strikes are to one another, the less money you’re risking on a max loss.
So, let’s say you put on a bear credit spread on Stock XYZ because it’s formed a bear flag and just broke support.
You think the $100 level will hold as resistance, so you initiate a bear credit spread by selling 100-strike calls and buying 102-strike calls, for a net credit of 90 cents.
You will make money as long as XYZ stays below $100.90, which is your breakeven (sold call strike + net credit).
Meanwhile, your risk is capped at $1.10, which is the 2-point difference between your sold and bought strikes, less the 90-cent credit.
In closing, guys, and gals, I hope this helps you identify potential candidates for bear trades.
I have a feeling we’ll be seeing a lot more bear flag patterns before too long…
And if you’re new to options and still nervous to trade, upgrade to my premium Weekly Windfalls service and watch over my shoulder for a while!
Next week will be a short one for U.S. markets, with Wall Street shuttered Monday for MLK Day.
Hopefully many of you get the day off and have a chance to relax.
As far as this week, well… traders continue to pump up this overinflated basketball of a market, despite some cracks at the seams.
It appears no matter what happens, stocks are making record highs every single day.
And while I fully expect this decade-plus bull market to run out of steam sooner rather than later, I’ve learned that stepping in front of the tracks when a locomotive is set to pass—costly and dangerous.
So against this backdrop of all-time highs, I thought I’d outline one way to time your profit-taking — and show you how it worked on a pair of FAANG stocks — as well as how to identify entry points.
Because while I’m no longer a poor elementary teacher swimming in student loan debt, I will always be an educator at heart, and I only want the best for my subscribers — of Weekly Windfalls and other services — like Sean here (thanks, man).
No, Leonardo Fibonacci (aka – Leonardo Bonacci) is not a RagingBull guru… but he damn well could’ve been.
The Italian mathematician was born around 1170, and as a young man traveled throughout the Mediterranean learning how various merchants did math.
He discovered that the Roman numeral system was much more difficult to calculate than the Hindu-Arabic numeral system, and said as much in his Liber Abaci book, which introduced the decimal place system to the Western world.
Studying the growth of the rabbit population, Fibonacci popularized his now famous sequence of numbers.
The Fibonacci sequence begins with 0 and 1, and each subsequent number is the sum of the two previous numbers.
So, 0, 1, 1, 2, 3, 5, 8, 13, 21, etc…
The sequence can be found in several unexpected places, including in architecture and electrical networks, and the Fibonacci spiral can be seen all throughout nature, like in the structure of pineapples and daisies.
It was even incorporated into the plot line of The Da Vinci Code and an episode of “Criminal Minds.”
But enough about that underachiever! (I kid.)
If you’ve been with me a while, you already know that one of my favorite patterns to trade is the Fibonacci retracement.
When a stock makes a huge move higher in short order, and then stalls, it will often retrace — or backpedal — to support near the key Fibonacci lines, usually giving back 23.6%, 38.2%, 61.8%, or 76.4%, with 50% an unofficial (but important) level.
For example, if Stock XYZ rallies from $100 to $200, it might eventually drop back to find support near $177, which would be a nearly 23.6% retracement of that rally.
Take a look at good ol’ Apple (AAPL).
Shares of the iPhone maker started 2019 on an absolute tear, rallying from around $140 at the start of the year to well above $210 by late April.
You can see on the chart below that I’ve placed the 0% Fibonacci line at the top of that rally, and the 100% line at the bottom.
Therefore, a 100% retracement would mean AAPL forfeited all its gains.
As you can see, after peaking in the second quarter, the stock took a dive, with the bleeding ultimately stopping around $170 — a 61.8% Fibonacci retracement of that rally.
The rebound subsequently stalled again back around AAPL’s previous highs, before the shares ultimately broke north of the range in September.
On the flip side, stocks that have taken a beating could also bounce into Fibonacci retracement or other key percentage levels.
For instance, during the fourth-quarter 2018 drubbing, Amazon (AMZN) went from being north of $2,000 (my 100% marker) to falling to around $1,300 (my 0% marker) in short order.
The stock’s early 2019 rebound hesitated a bit in the $1,700 region, which represented a 50% retracement of that sell-off.
Once the shares got beyond that area, gains once again were capped just above $2,000, and subsequent retreats were contained around $1,700.
Now, AMZN is struggling to get past the $1,900 area — a 78.6% Fibonacci retracement — indicating that even more than a year later, these levels are still in play.
Now, how do you use Fibonacci levels to set profit targets?
While there are two points you need to set for Fibonacci retracements (0% and 100%; the rest should auto-populate beyond that on most trading platforms), on many platforms there are three data points to set with extensions, assuming you’re measuring an uptrend:
This should populate Fibonacci extensions for you — or at least one of the most-watched extensions, at 161.8%.
In platforms like ThinkorSwim, and many others, you can manually set additional Fibonacci extensions.
Now, I’ve seen different traders plug in different sets of numbers. But it should be noted that most traders use Fibonacci levels in reverse order above 100% to calculate extensions.
So, in the example below, I included the 123.6% level and the 161.8% level, and while it’s not a Fibonacci extension, I included the round 150% level, too.
That said, let’s take a look at Mattel (MAT) stock.
The shares went from single digits in August to peaking around $13 by the middle of the fourth quarter, with help from a big-volume bull gap.
They then went on to retrace 50% of that surge by December, testing support just above $11.
As you can see, the shares subsequently moved beyond their former peak before the start of 2020, though upward momentum once again ran out of steam, this time just shy of $15.
This level represented a 138.2% Fibonacci EXTENSION of the initial rally.
It’s also the same region as MAT’s mid-2019 high.
As such, it seems some traders took profits at this level, as the stock has since taken a breather.
Of course, some of the recent losses were due to dismal holiday sales figures from Target (TGT), which said toy sales were particularly lackluster in December.
Looking at it another way — using the same 0% marker from August, but adjusting the 100% level to MAT’s recent high around $14.72 — one could surmise that if the stock can get past $15, the next area to take profits might be just above $16, which is a 123.6% Fibonacci extension of that longer-term rally.
In conclusion, guys and gals, I hope this lesson helps propel your trading, and aids you in identifying where stocks might stall — to either the upside or the downside.
The important takeaways here are twofold:
As with any other indicator or form of technical analysis, the Fibonacci sequence shouldn’t be traded on alone.
Make sure you’re using other tools to help identify trends — like overbought/oversold scans, for instance — and don’t go into a trade unless the SETUP and the PLAN are concrete.
That’s my philosophy in Weekly Windfalls — and if you upgrade to the premium version today, you can watch me trade these indicators and more in REAL TIME.