How To Find The Best Stocks To Buy BEFORE They Breakout

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This was a live presentation delivered by Deron Wagner, Founder of Morpheus Trading Group, at the 2014 New York Traders Expo. Using a simple, but highly effective, trading strategy, Deron shows you why the Wall Street mantra of "Buy Low and Sell High" is completely wrong and does not usually work.

Transcript of How To Find The Best Stocks To Buy BEFORE They Breakout

  • How To Find The Best Stocks To Buy BEFORE They Breakout Deron Wagner Founder, Morpheus Trading Group
  • Overview of core beliefs Swing trading in the near to intermediate-term timeframe Trading with the intermediate-term trend Momentum-based strategies work! An object in motion tends to stay in motion Stocks trading near 52-week highs have the least amount of overhead resistance Cheap stocks are cheap for a reason We buy high and sell higher, not buy low and sell high Human nature is to underestimate how long a trend can last Main structure of every uptrending stock is: base, breakout, pullback (rinse and repeat)
  • Momentum-based strategies work!
  • Momentum-based strategies work!
  • Momentum-based strategies work!
  • Buy stocks at or near 52-week highs
  • Buy stocks at or near 52-week highs
  • Primer To Buy Setups Before a stock makes our breakout watchlist, it must satisfy two key criteria: 1.) Stock must be in a clear and distinct uptrend 2.) Stock must have a valid basing pattern
  • Base Building The Key To Successful Breakouts! Base building is like the foundation of a house Base is crucial to an uptrend, as the stock builds a strong foundation to launch the next advance Before a stock can launch a big price run up, it must first have a solid base pattern to build upon Bases typically form after a stock/ETF has already experienced a substantial price increase of at least 30%
  • Basing Pattern #1 Cup and Handle
  • Spotting A Valid Cup And Handle Must form within an existing uptrend, AND stock must be at least 30-40% off the lows The best cup and handle patterns form near 52-week highs 50-day moving average should be above 200-day moving average, and 200-day moving average should have already been trending higher for at least a few months The base typically forms on a pullback of 20-35% off the highs (deep correction), and is at least seven weeks in length As the base rounds out and price returns back above the 50-day moving average and holds, look for the handle to form (usually 510% below the highs of the left side of the pattern) Handle should drift lower, and is typically 5-10% or so in width. Handles that retrace more than 15% are too volatile and prone to failure. Handles should be at least 5 days in length and NOT form below the 50-day moving average.
  • Basing Pattern #2 Flat Base
  • Spotting A Valid Flat Base As with the cup and handle type pattern, a flat base consolidation must form within an existing uptrend. Typically, it will form after a breakout from a deeper correction (such as a cup and handle). The best way to identify a flat base is by using the weekly chart timeframe. The majority of the base should form above the rising 10-week moving average (or 50-day moving average on daily chart). The 10-week moving average should be trading well above the 40week moving average. A flat base should be at least 5 weeks in length. Flat bases usually correct no more than 15% off the highs
  • Main characteristics of a valid base
  • Main characteristics of a valid base
  • The breakout entry
  • The breakout entry and follow-through
  • The breakout entry (example #2)
  • The breakout entry (example #2)
  • The breakout entry and follow-through (example #2)
  • Secrets Of A Valid Basing Pattern A base (or zone of congestion) is anywhere from 1 month to 1 year in length. For our style of trading, we prefer bases that form in a 1 - 3 month period that find and hold support of the 50-day MA. We want to see tight price action in the base, especially during the last two weeks before the breakout. A valid base should pullback anywhere from 10 - 30% off the swing high. Once a stock retraces 40 - 50% or more, we begin to question the strength of the uptrend. We must see a higher low form within the base. This is crucial to the pattern. Without a higher low forming, we have no way to set a stop and therefore can not define the risk. Volume should be declining during a base, or at the very least, not heavier than average. If there are too many days of heavy volume selling in a base, the base could be faulty.
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