I have a confession…while the rest of the family celebrated Thanksgiving around the dinner table…I might have snuck away to look at some charts. It’s an obsession.
Look, after scoring big last week on Tesla for a 100% gain, I was hungry for more.
It gets a little dicey trying to find trades up here at all-time highs. Who wants to go long and watch the market make a u-turn on them? But the market knows how to crank up the fear of missing out.
That’s why I only focus on a handful of stocks, both short and long, to balance my portfolio. I evaluate each trade on its own merits…but I’m not blind to my other positions.
That’s why this week’s profit packed trades straddle both sides of the fence.
I played Costco on and off for the past few months. The stock continues to defy gravity and investor expectations. However, it hasn’t hit new all-time highs since August.
Right now, I think it’s in an excellent spot to take off to the upside. The stock took a breather, gathering its might the last few weeks.
Typically that’s a sign it’s winding up to force its way higher.
Let’s take a look at the chart for our analysis.
COST daily chart
This is a textbook TPS chart pattern if I ever saw one. I could see myself hanging this in my kid’s room.
Let’s walk through what the TPS system looks for.
- Trend – We have a clear, identifiable trend upwards that’s built up over several months
- Pattern – The solid lines connect the swing highs and lows to form a consolidation pattern on the chart. You can see how price crowds into a narrower channel over time.
- Squeeze – The bottom indicator shows red dots that identify a squeeze in the chart. That occurs when the Bollinger Bands move inside the Keltner Channel. Notice how the release of this over in the last several instances moved the stock higher.
Everything here looks fantastic for a move higher in the stock. So, how do I play the trade?
Well, my preferred method is to use options. I want to give myself enough time for the pattern to play out. That means I select expirations that go mid to late December. I prefer options that are slightly in the money. These move more with the price of the stock than ones far out-of-the-money.
Lastly, I want to use the 8-period exponential moving average and the 21-period moving average to enter the trade. That’s the ‘zone’ that gives me the best chance of success.
So how do I pick my targets? I like to use the Fibonacci extensions. This takes the swing high and low and extends it by 27.2% above the swing high. That gives me my first target.
Lastly, my stop would be when the pattern is broken with a daily close. That prevents me from getting whipped out by any intraday swings.
Here’s another textbook TPS setup that looks ripe for the picking. SAP is an ADR (American Depository Receipt) for a German company that trades on the DAX.
The daily chart shows a really nice setup forming.
SAP daily chart
You’ll notice that the stock had a much more significant pullback off its highs back in July than Costco. However, It’s resumed its uptrend, and begun to tighten up its price range.
Recently, it started to show a squeeze as indicated by the red dots at the bottom. Normally, I want to give it a bit more time to consolidate before I jump in. However, that isn’t a requirement.
Since it hasn’t spent a lot of time winding up, I might consider selling a put spread rather than buying call options outright. However, both would work in this situation.
On the short-side I like Wayfair. The stock has all the makings of the TPS pattern, just to the downside.
Let’s take a look at the daily chart.
W daily chart
You can see all the elements of the TPS setup here – a clear downtrend, consolidation pattern, and a squeeze starting to form.
However, there’s a risk here unlike the others. Betting against the market has wiped out a lot of trades over the past several months. So this comes with higher risk. You can also see that the stock stopped at an important swing low.
For this trade, I would still want to go with long put options. However, I’d make two additional adjustments. First, I want to try to grab this closer to the upper Bollinger Band to mitigate my risk. Second, I want to get a little more time with the squeeze before entering the trade.
The best trades right now are intraday
My best trades in this market happen to happen intraday. I pulled off some big winners just like this.
There’s still time to join Weekly Money Multiplier before the opening bell.