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Everybody out there talks about trading patterns these days: it’s a flag, it’s a wedge, it’s a triangle…

And I don’t blame them – I, for one, am a big advocate of patterns: I’ve seen some of my favorite setups repeat over and over, and over again.

But look, let’s get real, lines and geometrical figures on a chart don’t make a stock move!

Supply and demand for shares do!

Understanding what forces create those figures and what effect they have on the supply and demand may stack the odds in your favor when trading an “obvious geometrical pattern.”

Allow me to recap one of my recent “pattern trades” and showcase what I mean.

Basics of a Bull Pennant

This past Friday, I had a great trade based on something I’ve seen repeatedly over the years – a setup called a “Bull Pennant.”

A Bull Pennant is what many may consider a classic trading pattern, and from the lines and figures standpoint, it looks something like this:

A trader can distinguish it from its sharp move up, followed by a tightening consolidation that, in a perfect world, results in the next leg higher. Such a chart is a fairly common occurrence that many of you have likely seen and even traded.

But not every such image will result in a move higher. So what gave me confidence in my trade?

And how do you tell a pennant that may work from the one that will likely fail?

What Creates a Pennant?

To answer the questions above let’s break the chart pattern down into its 3 key pieces:

  • The Pole / Initial Run up:

This one is straightforward: an influx of buyers takes a stock to a new range higher up. Run ups may come from anything: a catalyst, a continuation of a momentum move, or a chart breakout.

  • Tightening Consolidation:

This next part is essential, and what I like to call the battle. At this point the stock tries to establish itself in the new range: sellers and short sellers sell all pops, buyers buy all the dips. Eventually the weaker group ends up underwater and has to give up – the winner defines the next move of a stock.

  • The Breakout / Fail:

The end move resulting from the battle.

So clearly, when it comes down to the battle, I want to make sure the odds are in my favor.

Now, how do you know who wins the battle?

As with everything in trading, there’s no sure answer, but if I want to go long a Pennant – here are a few things I’d like to see:

  • 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

None of these come with warranty, but they surely may improve your odds!

My PROG Trade

So here’s how it all unfolded: Progenity, Inc (PROG) popped on my scanner early in the morning – the healthcare name was getting a bid in sympathy to many other stocks in the sector.

On the daily chart, the stock was trying to crawl out of a consolidation of the past 2 months:

Intraday action was even better: PROG attempted a run on big volume in the morning, but multiple pops got rejected – perfect environment for short sellers to stay short.

The day went on and up until about 2PM, the stock looked completely finished.

And then, it gave a Bull Pennant:

PROG popped from the $2.8 area right into the $3.10 area, where it wiggled around, as long traders battled short traders.

Now I had a trade decision to make. Does this Pennant have a chance to continue higher?

I went to my checklist:

  • Short Trap? Check!
  • Small Cap? Check! – at the time of entry, PROG had a market cap of ~$140M.
  • Under $10? Check!

I knew if longs were to prevail, a rush of demand would pour in, ranging from people chasing a breakout higher to short traders fussily covering their positions.

Thus, I bought in at $3.19 right as the name started moving higher into the close, intending to be out below $3.10.

The rest was history: Some half an hour later the stock moved to $4.20 in the after hours, which gave me my exit at $4.01.

I’m not suggesting you use my specific rules – they will not work every time, and they may not fit your trading style.

When you’re trading a pattern— you’re not trading the lines on the screen.

Understanding what they are and how they work may make a world of difference.

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’ve been focusing a lot on momentum trades over the past few weeks and for a good reason – they’ve worked well.

I’m always excited when momentum gets hot: such names are capable of moving fast, moving far and, if you’re patient with your setups – your risk is well-defined, which is my key focus in trading.

And if there’s one thing I love even more than momentum trades in and of itself, it’s when they work to a tee.

My one recent momentum trade turned out as textbook as they come and I’d like to teach you a detailed account of what exactly happened…

Basics of Momentum Trades

The key driving factor of any momentum trade is explosive demand for shares – this is exactly what makes the stock go up, and then higher up, and then some more on top.

Demand can be broken down into two components:

  • Natural demand: investors actually buying up shares for appreciation.
  • Supplemental demand: forced covering by short traders; long traders buying breakouts; rookie traders chasing a hot stock at any price point.

As you can imagine, an ideal momentum trade is a mix of the two: without the natural demand a stock would just “pop-and-drop”, and without supplemental demand shares would never move as fast and as far.

So how exactly does this workout in practice?

RAPT Setup Background:

Up until this Monday, RAPT Therapeutics (RAPT) stock has lived a pretty boring and obscure life: it has spent the past 8 month in $16-$24 range trading very lightly.

And then, news hit the wires: the company’s drug candidate for treatment of Atopic Dermatitis has delivered promising results in a Phase 1b Trial.

Is that news enough to get people running for the shares? You tell me:

Some market participants were clearly excited: the stock jumped right out of its 8 month range and what’s more important – it advanced some more and held higher.

Natural Demand? Check!

But as I mentioned, natural demand isn’t enough:

  1. I’d like to see some supplemental demand, to help sustain momentum
  2. I need an actual trading setup where I can control my risk; I’m not buying for a leap of faith

My Trade Explained

Here’s what the 1-minute intraday chart looked like following the announcement:

What you see above is a very classic example of a trading setup called a “Bull Flag”.

A Bull Flag consists of two things:

  • The Pole: the initial upmove in the pre-market from $17 to a high of $42
  • The Flag: a series of higher lows against clean resistance (at $40) and with clean support – right at VWAP. The Flag consolidation serves as confirmation of demand.

The idea here is simple: the pole takes the stock to a new area and the flag proves that the new area – how-ever high it might be – still has plenty of demand for the stock.

Seeing all of this was a no-brainer: I knew there was plenty of natural demand in the $35-$40 range, and I knew a move above resistance at $40 would bring in many long breakout buyers and chasers.

Supplemental demand? Check!

Plus, as promised, a patient entry gave me a clean risk to trade against – I saw support at VWAP and would’ve been out below $36.

So, long I went, right around the last pullback in the $38.50 area:

“Textbook” Bull Flags aim at a move of ~50% the Pole.

In my case it meant:

($40 – $17) / 2 = $11.50

This trade gave me a risk/reward of about 1 / 4.5 and a target in the $50 area.

The rest was history – history made in about 15 minutes of after-market session.

RAPT broke above $40 nearly immediately and played out exactly how I planned it to.

This trade was worth a detailed walk-through.

Not all your trades will work like this, but the good news is – they don’t have to!

There’s no need to aim for perfection: just stick to setups you know well and employ strict risk management, and your odds may get a good boost.

 

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.

Happy Monday Everyone!

The so-called Meme stocks – with AMC and GME being two absolute superstars – gave incredible opportunities both ways…

Then there was the small cap action: MEDS, LEDS, AMST are just a few out of many!

I often say – stick to what’s working.

Momentum names have so far not shown any signs of exhaustion, so why would I reinvent the wheel?

Here’re 3 small cap stocks I’m keeping on my watch this week:

 

Novan, Inc – NOVN

 

  • Market Cap: 137.11M
  • Free Floating Shares: 14.07M
  • Short Interest: 2.18%
  • ATR: 1.72

Summary: After a major crash following a disappointing trial in early 2020, NOVN, a biotech stock, has lived a life relatively obscure and forgotten.

There was an attempt at a run up in February – March, but that didn’t really lead anywhere either.

All of this changed last week – the company put out promising updates on 2 of its ongoing trials: Phase 3 trial for treatment of Molluscum Contagiosum and Phase 2 trial for treatment of COVID-19.

This could be what I like to call a “changing fundamentals” trade. The name speaks for itself – a new piece of information comes out that gets investors excited about the company. I also like the fact the stock just had a 1:10 stock split, reducing the number of shares in circulation.

The action will likely be wild – to consider a long, I’d like to see clear support above $17 for a potential move into $25.

 

Vinco Ventures – BBIG

 

  • Market Cap: 129.11M
  • Free Floating Shares: 19.08M
  • Short Interest: 23.92%
  • ATR: 0.63

Summary: I’ve been keeping the name on my watchlist ever since the incredible move in early January: the stock jumped from ~$1.5 to a high of nearly $10 in a matter of 1 day. It’s given most of it back, but gained some traction over the past 2 weeks.

The company has historically been pretty active putting out PRs – coupled with its short interest and current position on chart, this can be one explosive combination.

I don’t want to get ahead of myself and need confirmation first – if the stock holds the $4.5 area well, I would consider a long position for a move into the $7 area.

 

TRxADE Health – MEDS

 

  • Market Cap: 54.20M
  • Free Floating Shares: 3.28M
  • Short Interest: 0.1% – likely, inaccurate given last week’s action
  • ATR: 0.76

Summary: Similarly to NOVN, MEDS is a name that likely hasn’t been on many watchlists.

Last week the company announced it’s COVID-19 Health Passport App and it sent shares ecstatic – from $4 to a high of $10.82 in a matter of one session.

While one may argue how significant the news is, I do need to go by price action – the stock has retraced a lot of its gains very quickly and I won’t be surprised to see at least a bounce from current levels.

I like any hold above $5 and then above $5.50 to consider a long trade against these levels with a target at $7.

 

Pro Tip: Confirmation is Key

Even if this is the very first time you’re seeing a watchlist by me, you might’ve noticed common language between all three picks – to consider a trade I want a stock to “hold above” a key level.

In trading we call this “confirmation” – the key decision making component that may convert a name from one of the many you’re watching into an actual trade.

Confirmation “validates” your thesis.

If you would like to go long – seeing all dips get bought and a stock hold a support area cleanly may “Confirm” to you that there is significant demand

Conversely, if you want to be short – failure to hold higher and continuous push backs from a resistance area may rightfully confirm there’s overhead supply.

Patiently waiting for confirmation vs entering just because something looks good – is one of the keys to becoming a skilled trader.

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.