Hi Folks!
I wanted to make a follow up post on our most recent educational post "How to Anticipate a Breakout". In that post we reviewed $AFRM, a recent breakout momentum trade that AoT members traded. That post contained all the tools and education a trader would need to spot the next big breakout trade!
I like to use real world trades and examples to help traders become more educated, confident and ultimately self sufficient. In this follow up post we're going to review the recent Top Pick of the Week and seperate swing trade idea that the Art of Trading members took and participated in along with me, $UPST!
Before getting into the technicals of the trade I just wanted to highlight something I've taken note of over the years of my trading. I think its important point because we're seeing this effect in full force this year. This was pulled from an old blog post that I wrote in 2011 titled "Things I Learned After 15 Years of Trading"
"In December, small caps and micro cap stocks (junk stocks) come alive. many will double or triple in a few days."
Now 12 years later and 27+ years in the market this point still holds very true. It could be for several reasons that this occurs. It could a combination of short covering from instituations to balance out books into year end and rotational play in value / growth stocks for the new year. I'm sure this is something you could add to your playbook to watch out for in the future!
Art of Trading members took the $UPST trade as a swing trade on December 8th @$35.72
$UPST was also the Top Pick of the Week for the week of December 11th - Here
Ok lets get into the trade! The technical aspect of this trade is very much the same as the $AFRM trade we reviewed 2 weeks prior, which is fine because it shows how these Art of Trading educational step by step walk throughs can turn into real world, tangible results.
The first order of business was identfying the setup! $UPST first popped up on my recent scans on December 1st when it traded up +21% on the day accompanied with much higher then average volume. Trading 17.6m shares that day while the average daily volume sits around 7m, a 150% daily increase. A strong point to take note of. Accumulation volume patterns were starting to make their presence in a VERY BIG way!
The next step was taking a look at the short interest in the stock. Was this stock showing early signs of a potential BIG short squeeze brewing? This could be a potential technical catalyst to the trade! You can quickly look up short interest of any stock by visiting Finviz.com , searching the stock ticker and viewing the stats spreadsheet under the chart. Short float is what you're looking for! This is what it looks like here:
$UPST has 43.55% short interest making it a great candidate for short squeeze behavior!
What is considered high short float %?
The higher the short float %, the more likely the stock has the potential for a short squeeze. The higher the percentage, the bigger the potential move or squeeze may be. In the case of a news catalyst or a technical catalyst that caused the stock to trade up, price movement higher could become rapid as part of the move would be attributed to "short covering". Large instutional funds create big volume fueling the squeeze rapidly!
I have a "Hot Pepper" Scale for this! --->
Now, since we must wait for the stock to develop a technical setup I add the stock to a watchlist and monitor it closely each day! I start to look for technical patterns like bullish flags or pennents along with smaller ranged inside day candles and / or dojis. As I like to say:
"From contraction, comes expansion!"
We now have all the ingredients we needs for a high quality swing trade!
Accumulation volume patterns
A technical pattern (bullish pennant)
Small ranged candles (Inside days and Dojis)
40%+ Short interest (Short squeeze candidate)
Art of Trading members went long December 8th @$35.72 with a Stop loss @$33.00
As the trade progressed the stock slowly pulled back from the entry with low volume consolidation days.
This is why it is important to set your stops wide enough to allow the stock to move within its expected and normal trading range! Stops that are set much too tight for a trade, often stop out prematurely and spoil strong positions. Patience within a trade is a very important to develop too. New traders get increasingly impatient if they don't see money immediately roll in. Practice patience!
The market and $UPST ignited off of the dovish FOMC later that day. The squeeze was on!!!
We took advantage of the squeeze to sell half of the position!
Selling half of a swing trade is a strategy that I often use upon a strong breakout. Doing so reduces built up emotion traders may start to feel as PnL grows within the trade. It can help you see the trade the rest of the way through without the added emotion.
The squeeze continued on into the close. We sold the GAP UP open early the next morning!
The trade in total produced a 22.73% return! On a $25k position that equates to $5683.09!
I hope part 2 of this step by step educational post helped you understand what goes on behind a trade like this! In short, strong technical characteristics, accumulation volume, and high short interest can create explosive short term moves!
To Revisit Part 1 click the thumbnail!
Learn to spot and trade these setups and make them your very own!!!
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