Hi Folks,
I just wanted to make a step-by-step educational guide on a recent swing trade Art of Trading private members made, $UPST! We will breakdown each step that made this trade what is was from starting stages of spotting the trade, what made it an A+ setup, & all the way into managing the position and capturing the gain!
This guide could be considered part 3 or our "Anticipating a Breakout" guide series.
Part 1 of the series here: [LINK]
Part 2 of the series here: [LINK]
In this guide we will cover:
What made the setup a top quality A+ swing trading candidate?
Applying technical analysis to the trade & calculating price targets
Guide summary with study resources & references used in the guide
*QUICKLY NAVIGATE TO EACH SECTION BY CLICKING THE SECTION YOU WOULD LIKE TO READ!
Lets get started!
How did I spot the initial setup?
The highest quality swing trading setups often come from my Power Earnings Gap system. This $UPST setup was no different! What is a Power Earnings Gap?
A "Power Earnings Gap" (PEG) is basically a stock that gaps up after reporting strong earnings and closes the day by printing a very strong candle. A candle that closes at or near HIGHS of the session is the most ideal and perfect 'Power Earnings Gap' candidate!
Volume will be automatically huge, since it's coming on news of an earnings report, so that's going to add even more conviction to the move, since institutions are piling into the name! Remember, us small fish need to follow the foot steps of the big fish, the Insiders, The movers and the shakers.... They know stuff we could never dream of knowing but luckily for us, we can see their "foot steps"(via stock price action and volume patterns) and following these foot prints can be extremely profitable if you know what to look for!
The Power Earnings Gap strategy is a reliable way to put the strongest stocks on your radar. Providing actionable technical setups to trade. I have a public Power Earnings Gap watchlist here: PEG Watchlist.
What made the setup a top quality A+ swing trading candidate?
Keep in mind a single Power Earnings Gap Candle isn't often enough to take a swing trade off of. Multiple technical factors must be brought into consideration before initiating a new swing trade. Lets break the chart down!
The first technical attribute to note is the Power Earnings Gap! The PEG is what put $UPST back on the watchlist. It isn't common to have a Power Earnings Gap candle rally for 3 consecutive weeks after the initial PEG is put in. This is where patience and waiting for the best setup to come into play is important. Chasing a stock or a PEG candle usually doesn't pay in this manner.
The second technical attribute to take note of is the accumulation volume days during and after the PEG candle was put in. What is accumulation volume?
Accumulation Volume is also known as Institutional Accumulation or Institutional Buying. Institutional investors are what's known as the smart money. These are the the highly paid individuals who roll up their sleeves and do thorough research about the companies they're about to invest money in. Keep in mind, these people aren't investing few thousands bucks, they're investing millions and sometimes even billions in some of the companies they decide are worthy. So when they "click the buy button" their footsteps can be clearly seen via the VOLUME of shares traded on that specific day. The "Smart Money" know stuff most of us small fish don't. So when they are showing huge interest in a stock/company you better pay attention!!
The third technical attribute and potentially the most important one in relation to this trade is how the pullback phase acted during the first week of September. There are a few important points here. Do you notice how the stock pulled back but stayed well above the Power Earnings Gap low? Not only did it stay above the PEG low but it also found support on the 50 Day SMA. This is what I would consider a "smart" pullback!
Out of this "smart" pullback the stock went on to build a set of higher lows after higher lows, never once breaching below the 50 Day SMA trend. Slowly building strength and ultimately building a strong technical pattern!
The fourth technical attribute is the technical pattern itself. Through the higher lows discussed in the last point $UPST formed a classic Cup & Handle pattern. This is where applying technical analysis to the trade & calculating price targets comes into play.
The graphic below depicts a Cup and Handle pattern, the technical attributes, & how to calculate price targets. You measure the range of the Cup depth and then add it to the top of the neckline of the Cup & handle pattern. That price point is your target area.
Lets apply the attributes of this technical pattern to the $UPST chart to calculate a price target on the chart below!
Just like there is an art to trading, price targets can be subjective as well. Setting conservative targets and expectations on a trade is an important skill to build. This will help with seeing more trades through and ultimately hitting more targets.
Now this next technical attribute is more "under the hood" if you will. I like to check "short interest" on a stock. The higher percentage short interest the more likely a stock is to "squeeze". High percentage short interest can really put the pressure on bears to cover their position when and if the stock breaks out. To read more about that I have an entire step-by-step educational guide on the subject here: Spotting a Short Squeeze!
$UPST had 30% short interest at the time of this setup!
I like to use www.finviz.com to find these numbers. Its easy to do – here’s how:
1. Go to www.finviz.com
2. On the home page search your stock symbol, we will use $UPST for example:
3. On the stock symbol page, you will find a spread sheet with the information you need:
*CLICK THE CHART TO GO DIRECTLY TO THE PAGE
Ok, now that we've covered the technicals of the setup in depth lets take a look at how we executed on this trade!
How to manage the position & complete the trade
Using all of the technical information I gathered I was confident that this was an A+ setup and a breakout was imminent. Anticipating the breakout prior to the big moves gives advantageous entries with tighter downside risk. Ultimately decreasing risk and increasing potential reward.
I sent an Art of Trading trade alert to AoT members on October 8th at 11AM. We went long at $42.20 with a stop just below the 2 day range at $39.80. The target on the Trade was $50, just as explained and outlined in the target calculations chart earlier!
Over the next few days the trade began to progress and $UPST officially broke out! Anticipating the imminent breakout paid off with a fantastic entry price!
The stock continued to gain momentum. I noticed the stock was set to gap up big during the pre market session on Monday, October 14th. So I let Art of Trading members know in the daily morning tweet that I intended to sell half of the position shortly into the session.
The official Art of Trading alert went out 3 minutes into the session that day.
Selling half of the position allows the trader to reduce risk by capturing a 1/2 of the unrealized gain. This can also help with the emotional side of the trade because the daily price action only swings the P&L half as much as it did with a full position on. This can be very helpful for getting the most out of a strong momentum breakout!
15 minutes later we closed the remaining position into strength selling the second half at $51.60. Here was the alert sent to Art of Trading members:
The initial entry was $42.20. The position was sold at an average of $50.50.
In total a 19.67% gain was yielded over a 4 day trading period!
This is a textbook example of an A+ trade!
Study Resources
For further study and understanding into the step-by-step trading guide here are all of the official Art of Trading sources and references used in this walk through.
I hope this step by step educational post helped you understand what goes on behind a trade like this! In short, strong technical characteristics, high short interest and anticipated catalysts can create explosive short term moves! $UPST was the perfect candidate for such a trade!
Learn to spot and trade these setups and make them your very own!!!