3 TIMELESS setups that have made me TENS OF MILLIONS!

I have made tens of millions the past few years trading 3 simple, timeless setups. These setups occured last year, 10 years ago, 50 years ago and 100+ years ago. They occur over and over again. They occur in the Japanese market, they occur in the Swedish market, they occur in the Indian market. The U.S. stock markets are the biggest and baddest of them all and therefore the best hunting grounds if you have a setup with an edge.

These 3 setups are:
*Breakouts (if you want to learn this setup this is a mandatory video: https://www.youtube.com/watch?v=xx8GvtAxilk&feature=youtu.be&t=1
Note: that’s one of my moderator Youtube channel, not mine)
*The Episodic Pivot (EP)
*The Parabolic short (or long)

Before I go into detail about where to buy, lock in profits, position sizing and stopping out of a losing trade, I want to talk a little about position sizing and risk.

I don’t believe you should ever have more than 30% of your account over night in any stock or ETF. Intraday you can do more since you don’t have to deal with potential over night gaps.
Most of my positions are 10-20% of account size.
My risk on most trades is usually 0.25-1%. I rarely risk more than 1% of my account on any trade.
When my accounts were small, less than a few million, I risked more, maybe 0.5-1.5%.
At the very beginning I risked more still, but honestly I had not a great grasp of the concept risk and position sizing in the beginning.

Okay, let’s get to the setups!

Breakouts
If you study thousands of the biggest winning stocks over the past 100 years they tend to move in stair steps. Meaning they will make a 20-50%+ move, pull back and go sideways for a while, then make another move. This is how most leading stocks act.
This pattern is something we as traders can use to our advantage, to get an edge.
How to find these setups?
Scan for the 1 or 2% of stocks that are up the most over these 3 timeframes
1-month
3-month
6-month
This is how you find the stocks that are leading right now.

There are 3 steps to this setup:

  1. A big move higher sometime in the past 1-3 months. This move can be anywhere from 30-100%+ and usually lasts a few days to a few weeks.
  2. An orderly pullback and consolidation with higher lows and tightening range in the consolidation phase.
  3. A range expansion (breakout) out of that consolidation. The consolidation phase is usually 2 weeks to 2 months. During the consolidation the stock price “surfs” the rising 10- and 20-day. and sometimes toe 50-day moving average.

How do you trade this setup?

  1. Identify the setups. You need to have a watchlist ready before the market open. You should also probably have alerts set, and know how many shares you want to buy.
  2. Enter on the opening range highs. The opening range highs can be the highs of the first 1-minute candle, the 5-minute candle or the 60-minute candle (on the 60-minute timeframe the first candle is always only 30 minutes, 9.30-10 AM). You can use whatever timeframe or a combination of them. You don’t even have to use any intraday chart, just look at the daily chart and enter when the stock is starting to break out.
    This method can also be traded by anticipating the breakout but I don’t find it as effective and more skill and experience is needed.
  3. Stop is always lows of the day and stop should not be wider than the ATR or ADR of the stock, to prevent the risk/reward mechanics getting out of whack. So if the ADR of the stock is 5%, your stop shouldn’t be wider than 5%. If the ATR if 50c, then stop should not be wider than 50c.
  4. You should sell 1/3 to 1/2 of the position after 3-5 days, and then move the stop to break even. The rest of the position should be trailed with the 10- or the 20-day moving average. Depends on how fast the stock is. If a beginner stick to the 10-day. You wait for the first CLOSE below the 10- day.

    In a bullish market it is very common to get moves that are 10-20x+ your initial risk if you are good at setup selection.

There are variations of this setup but the premise stays the same.
I am a swing trader and use the daily chart to find these setups, but this setups also works on the weekly chart and the intraday (1- and 5-minute) charts. On the intraday timeframe this setup is called Holy Grail by some on the daily it can be called a hight tight flags sometimes. It’s pretty much flat channels, symmertrical and descending triangles. I’ve even drawn the lines to illustrate this on 2 of the examples below.
I am providing 3 examples of breakout setups with 5-10 years between them.

$TSLA from 2020 before and after:

$MNKD from 2013, before and after:

$AAXN ($TASR) from 2004), before and after:

If you look closely, there are additional setups on these stocks.

Episodic Pivot (EP)
When unexpected good news hits a stock, especially if that stock is neglected, that can trigger multi-month, and multi-year moves.

There are many types of EPs:
Earnings and earnings guidance
Government regulations, political stuff
Biotech related like drug trial results or FDA decisions
Macro and political related
…and many more!


The main ones I focus on are earnings and earnings guidance. When a stock reports unexpected good earnings and guidance, that is often a catalyst for a big and prolonged move.

Let’s take a look at $NVDA from 2016 and 2017.
Look at what happened at the leftmost red arrow. The stock gapped up on big earnings numbers and a big beat to analyst expectations. A big surprise. Look at the volume, it ended up having several times average volume that day. Look at the move it made over the next few months.
Now the middle red arrow, the stock gapped up slightly but sold off. This is not an EP. The earnings were big, the analyst beat was big but this didn’t matter.
An EP needs to be a gap of 10%+ and big volume should be there, if not in pre-market then the first 5-10 minutes after the open.
Look at the last red arrow. The stock had essentially been going sidewats for 4 months and had another huge quarter, with EPS and Revenues growing 126% and 48% respectively. Another big beat with EPS of 85c vs analyst expectations of 67c.
Scroll down to see what happened next.

$NVDA in 2016 and 2017:

That earnings report started a move that lasted 6 months and where the stock almost doubled.

Next one is $FSLR in 2007. I don’t have the exact numbers on that earnings report as I did the work on it 10 years after it happened but the earnigns and revenue were close to triple digit, if not triple digit. Look at that gap up and volume.

Same thing with $BB ($BBRY) in 2004.

Learn this setup, it takes 4-8 earnings seasons (1-2 years) to get good at this setup and understand it.
Once you learn it, you need to do very little work to find these. You literally let them come to you.
Create your own sell rules. You can trail these with the 20- or 50-day moving average, or whatever you find to work the best.

The steps to this setup are:

  1. Gap up 10%+
  2. Big volume. If the volume is not there in premarket, it needs to come in at the open. Many times the best ones have traded their average daily volume in the first 15-30 minutes after the open.
  3. If an earnings or earnings guidance related EP, there has to be big growth numbers, preferably mid/high or even triple digit EPS and revenue growth and a significant beat to analyst expectations. Many times the smaller stocks don’t have analyst coverage, you just have to trust the numbers and volume.
  4. It’s best if the stock has not rallied over the past 3-6 months. If the stock has already made a big, multi month move into the gap-up, is it really a surprise to the market? It’s your job to figure it out!
    Happy hunting!

How do you trade this setup?

  1. Identify the setup, this can usually be done in after-hours or pre-market as we are looking for stocks gapping up on news/earnings.
  2. Enter opening range highs. ORH can be the highs of the first 1-, 5-, or 60-minute candle. Stop is at the lows of the day.
  3. Trail your stop with the 10- or 20 day moving average once they surpass your initial stop.


The Parabolic Short (or long)
Think of stocks as rubber bands, if they get really stretched short term, they can have powerful snapbacks. This is by far the riskiest setup if done wrong or if you have issues with not obeying your stops.
Most of these are short setups, but sometimes there are also good long setups but they don’t occur as often.


These are the steps for this setup:

  1. A stock up 50-100%+ in a few days or weeks (if larger cap) or 300-1000%+ (if smaller cap).
  2. The stock should be up 3-5+ days in a row. Many times you have examples where a stock trends higher for weeks or months and then starts speeding up, some just explode from nowhere.

How do you trade this setup?

  1. When you think you have identified a candidate you can short on the opening range lows (1-minute, 5-minute candles). You can wait for the first red 5-minute candle in case the stock goes straight up from the open. You can wait for the stock to have the first crack, bounce back into VWAP (the only intraday indicator I really use) and if it fails at VWAP you can enter (or add). The fail could be the first red 1- or 5-minute candle into the VWAP. The stop is highs of the day or if VWAP fail, a reclaim of the VWAP. The key is to get relatively tight and defined stops.
  2. The target area is the 10- and 20-day moving averages, that’s where these stocks usually bounce.
  3. Don’t be too early. WAIT for the right setup. Let the amateur shorts get run over, that’s where your edge comes in.
  4. This setups is not like the Breakout or the EP where you can sometimes get a 30-50x+ risk reward on your trade. This setup is more like 5-10x risk reward, but if you wait for the perfect setups your win rate is probably going to be higher.

$LAZR in 2020, daily and 5-min intraday:

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$AIG in 2009, daily and 5-min intraday:

$AMTD in 1999 daily and 5-min intraday:

Let’s take a look at a parabolic long setup. These are not very common but any time a successful parabolic short goes down 50-60%+ in a few days, that’s the premise for the long setup. Entry is opening range highs or the first green 5-minute candle or any range break to the upside if the stock doesn’t rally out of the gate, which they usually do. These things can bounce 50-100% in a few days.

$GBTC in 2017, daily and 5-min intraday:

All of my setups are about finding low risk entries on fast moving stocks. It’s all about finding tight, high probability areas to enter, so you can have high risk/reward on your trades. It’s all about making 5-20+ times your initial risk. You can be wildly profitable with having just a 25-30% winrate, it’s all about having small losses and big winners.

I have an Evernote database I worked on for 7-8 years where I track these setups and I have a collection of thousands of them. Most of these charts are from my Evernote database. I have probably spent 1000+ hours building it and went back decades on thousands of stocks to find these setups.
Be creative, there are at least a couple of other setups I can think of that you can trade with great success but I have chosen these three for myself.
You need to look at every stock in the US stock markets as far back as you can and look for reoccurring patterns. I personally have also checked the biggest stocks in every international stock market.

If you want to become financially independent and change your life, if you want to be filthy rich or just want the security and the freedom that comes with it – you have to put in the work!
Good luck!

“There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. – Jesse Livermore

NASDAQ comparison late 90’s vs today

There are 3 instances in the past 25 years where the NASDAQ first crasched and then had a huge, relentless V-shaped recovery, up 40%+ in 3 months, surfing the 10/20 SMA for the whole move.

1998
2009
2020

Since the 2009 instance was after a multi-year bear market I will not include that one.
The 1998 and 2020 scenarios are very comparable since both occured after 10 years of a secular bull market.

Let’s look at the charts. Again, 1998 and 2020 look very similar in both duration and magnitude of both the down and up moves.

What am I trying to say here?
Since n=1 we don’t have much data to go on but the main thing to take away from this is the market doesn’t HAVE to crasch or even have a significant pullback just because “we are up too much too fast” or “it all doesn’t make sense” or “look at the macro” or this or that. We’ve been hearing those same arguments for 10 years now.


The pullbacks could be limited to 5-8% for a long time. Look at 1999 and how well the NASDAQ digested every pullback and found support on the rising moving averages.
I’m not saying things are going to play out exactly like this and I definitely don’t think we are going to have a parabolic like we had late 1999 to early 2000.

Now obviously we could have a second crasch around the corner, that’s why we always use the 10/20 SMA as our guide on the leading momentum stocks as I repeat daily on the stream.

It always pays to study historical moves in the markets instead to be clueless and let your emotions, biases, fear or anger guide you.
I see some people on Twitter, a few with huge following that are angry, frustrated and bitter that the markets keep going higher.

Good luck!

Natural gas multibaggers

I stumbled upon a pretty interesting trading thesis today about natural gas.

Most oil wells contain some percentage natural gas. As the amount of shale wells has increased over the years, as much as 40% of of the gas produced in the US today is a byproduct from shale wells.
This has lead to an increased gas production to the point where most dry gas producers are losing money.
Thanks to the multi year oversupply of oil combined with the recent demand glut due to COVID-19 leading to crashing oil prices, many unprofitable shale wells are being taken offline as mass bankruptcies in the oil sector has begun and also there is not enough room to store all the oversupply.
This will lead to decreased gas production and since the gas demand hasn’t dropped due to COVID-10, it -should- lead to higher gas prices – $UNG.

I don’t know anything about the energy sector but the thesis sounds reasonable and logical to me and could lead to some epic bounces in some beaten down gas stocks. It has already started as many have doubled or more the past month.

My main play is probably going to be the 3x ETF $UGAZ. This one went up over $300% in late 2018 and I will take a starter position today with a wide stop with the plan of adding as the thesis plays out over the next few weeks/months.

The run in 2018.
Could it do something similar this year?

In 2018, $UGAZ broke its downtrend/sideways range and the 10/20-day moving averages started acting as a support. Then it flagged for a month until it broke out and went parabolic

Some extremely beaten down gas related names are $RRC $AR $SWN. We may see some $300-500%+ moves here.
A few higher quality names $CNX $EQT $COG.
Obviously will have to wait for setups first and not blindly chase.

My main focus is still going to be waiting for buyable bases in my favorite growth stocks but this is a thesis I will track closely as many times cyclical commodity/turnaround stocks make bigger moves than the growth stocks because they are priced for bankruptcy.

Lessons from a $140K loss

The markets had a big gap up today and premarket $W was one of my top setups to short as it is up 240% in 2 weeks and gapped into some resistance areas and I reasoned
a 15-25% fade back over the next 2-5 days would not be unreasonable.
The markets could not hold the gap and faded soon after the open, bounced a little bit mid day and the faded into the close.
Unfortunately $W never broke lower, instead it traded in a “range of death” all day where it looked like it was going to break lower several times, instead ripping higher back into range. I scaled in and out several times during the day – with some size, hence the $140K loss I accumulated.
Looking back, there were many stocks in the casino, cruiseline and airline industries that had very clean fade charts intraday, I just happened to focus on the strongest one.

Below are $W and $QQQ daily and 5-minute charts where you can see the “range of death” in $W and the clean and defined ranges in $QQQ.

The lesson from this is that sometimes you just choose the wrong trading vehicle and that’s that. Need to have a short memory and move on.
Praying for another big gap up in the markets tomorrow for some new opportunity on the short side, probably something other than $W though.

The Rate of Return on Everything

There’s an interesting study from several years ago that looked at the returns of some major asset classes over the past 150 years (where there is data).
One of the main takeaways from the study was that higher risk does not equal higher return, as housing showed slightly better overall returns with less volatility than equities.
The standard deviation was 10% from housing and 22% for equities.

Trends in Real Returns on Equity and Housing

The interesting thing is that bonds had similar volatility to housing yet much less returns.
Why did housing and equities perform the best? Because both are cash flow generating assets, not only appreciating in price, but also paying rent and dividends.

Sources:
https://academic.oup.com/qje/article/134/3/1225/5435538
https://qz.com/1170694/housing-was-the-worlds-best-investment-over-the-last-150-years/

Different stages and types of a company

I’m writing this post to help me find and identify stocks to invest/trade in.
I found this table of the different stages of a company:

Source: https://twitter.com/BrianFeroldi/status/1245720168912826370

Peter Lynch classifies stocks into 6 groups:
1. Fast growers. 25%+ earnings growth.
2. Medium growers (stalwarts). Steady 10-12% earnings growth.
3. Slow growers (sluggards). No or very little growth but they often pay generous dividends.
4. Cyclicals. Sales and profits fall and rise in regular but not completely predictable fashion. These do well when economies come out of a recession and begin to expand.
5. Turnarounds. Stocks that go through deep troubles and their survival may come into question. If they manage to fix their issues they can have big rebounds that are the lest correlated to the overall market.
6. Asset plays. Hidden assets.

I want to operate in stages 5-8 on the table and mainly in the fast growers among the Lynch definitions. But I can’t rule out operating in turnarounds and cyclicals occasionally.