Anticipating All Time Highs

Building set ups that are in accordance with underlying market structure can increase probability and enhance returns.  In order to find these anomalies of market structure there are plenty of white pages available.  One such anomaly is the influence of new 52-week highs and momentum.  Long before this anomaly of market structure was studied academically, traders such as Darvas were able to develop set ups to take advantage, with great success.

Investors use the 52-week high as an “anchor” which they value stocks against. When stock prices are near the 52-week high, investors are unwilling to bid the price all the way to the fundamental value. As a result, investors under-react when stock prices approach the 52-week high, and this creates a 52-week high effect.  Quantpedia

At any given time there can be hundreds of stocks making new highs so having a filtering process is crucial.  A fairly effective way to screen for candidates is to refer to public domain information and strategies.  Taking the structural edge of new 52-week highs and building additional criteria for candidates, one could take the conditions of a new high on a gap up with large volume and then stalk until price action conforms to one's set up.

A few recent examples:

SHAK

TER

These two examples highlight the two likely paths a stock will take after expanding to new highs.  A run away move or a pullback.  In both situations the same set up can be screened.  The primary difference is that in the former, one is waiting for price to pullback before squeezing towards the recent high, and in the later a rebound in price action before squeezing towards a new high.  The 10 period moving average of price is an effective means of representing this price squeeze visually.

With a fairly tight stop, these trades offer a solid possibility of catching 2-1 moves intraday.  Being aware that there are likely buyers at the new high price point, one would look to have a signal before the actually high is clipped in anticipation that buyers will step in.  Acknowledging that there may also be doubters, the swiftness with which price moves in favor of the trade is a good tell if one is on the correct side of the order flow.

How I Trade Anticipation Set Ups

Sunday through Thursday I run scans across my stock lists to find 6 stocks that I expect to have breakouts the following morning.  My objective is to enter before they trigger a signal on my breakout scans.  This process also doubles as a market awareness exercise.  If I don't find many, the process provides awareness of market behavior on my time frame.  The same if there are are more candidates than manageable.

When there are candidates found I set up the parameters of the trade in a spreadsheet.

Trade Parameters

The spreadsheet calculates my stop, targets, and distance from close to my entry which acts as a filter.  As I am expecting these to breakout, I am more stringent on the distance as there is no point entering a stock that would otherwise show up as a breakout.  With stocks between 10 to 25 I generally filter around 2%, under 10 I'll allow a little more percentage wise, and over 25 I'll start to look at the distance in dollar values. 

The spreadsheet also notes the high of the day which in the current example is at the close of Friday.  So I know 2 triggered.  When they trigger, I follow the price action over the next ten days and note whether or not price reached 2-1 or 20%.  This process also gives me information about the market on my time frame.  It informs if anticipation setups are working well in the current environment.  It informs me of the max profit potential of the trades over a ten day horizon, and whether or not my targets are being hit during these moves.  In general I look at taking half off at 2-1, trail a stop, and aim for the 20% threshold.  But, if 2-1 is all the market is giving I'll look to take more off or exit completely.  If 20% targets are being hit with frequency and the market is hot, then I'll look to push the edge to capture more.

With the parameters set, it's time to set alerts.  Of the list above I settled on 5.

Trade Alerts

Alerts also double as a market awareness exercise.  While I am willing to allow an hour from open to take these trades, ideally an anticipation trade should trigger an alert within the first 30 minutes, preferably within the first 15.  If all of them trigger it informs me about market direction for that day.  None of them triggering tells a story as well.  After the opening hour stocks that didn't trigger anticipation will be followed for triggering a break out later in the day.  This is a FIFO process and I predetermine how many I will take based upon current held positions.

After one triggers and I enter the trade, I'll set my stop and target alerts.  Within the first 30 minutes this is the price action I expect.

Expected Price Action

At no point after entry is that price point challenged.  This indicates that I am on the correct side of the order flow for my time frame. 

By the close the daily bar confirms the trade and is therefor held.

CAE Daily

The second trade I took that morning was IOVA which triggered and showed price confirming that I was on the correct side of the order flow for my time frame.

IOVA: Expected Price Action After Entry

However, by the end of the trading session price action on the daily time frame did not confirm with a breakout and closed below entry which is an exit signal for a small loss.

Price Fails to Confirm Daily Breakout

Once a trade is taken the management is as follows: 

• EOD close > Entry or jettison the trade
• Day 2 Close > Day 1 entry or jettison the trade
• Day 3 premarket move stop to BE
• Day 3 if no profit targets are hit then take half off EOD and move stop to LOD
• Trail stop to each successive higher low, take off remainder at 2-1 or stop hit
• If 2-1 target hit, continue to ratchet LOD stock and aim for 20%

2-10 Anticipation

Scanning is a balance between restricting a trading universe while capturing candidates.  Too loose on the requirements and there will be noise.  Too restrictive and there will be few signals.  When constructing scans I tend to gravitate towards complimentary signals that form a logical set up that weigh price and volume.

LK 2-10 Anticipation

One scan I use focuses on stocks that are within 2% of their 10 period moving average, have the narrowest range day in 10 days, and the smallest volume print over 10 days.  The logic being that a stock within 2% of its 10 period average is unlikely to be extended, a narrow range day shows price contraction, and a low volume print suggest disinterest.  From there additional characteristics can be used to further reduce anticipation candidates to a more manageable watchlist.

In general, when looking at an anticipation candidate I am looking for a stock where the close and high are within 2% of each other as a break of a high is the signal.  LK fits this criteria.  Additionally the chart pattern forming is constructive. Further, previous moves when this has passed the scan requirements have had follow through.

PIck 6 Quinella and Market Direction

Each trading night I look for 6 anticipation set ups for the next trading session.  Doing this for a lengthy period of time has led to a few revelations that assist in managing market risk and exposure.  First, if there aren't a plethora of setups and I'm struggling to just find a few A-grade setups then the market on my time frame is highly probable to be incongruent with my trading style.  Either too many stocks are extended to the upside or they are pulling back.  Second, if setups are found and they don't trigger, this is yet another sign the market and my time frame are in disharmony.

Slim Pickins

Lately the market has been slim pickings and stocks that I have been interested in are not triggering.  Not a single one the past two days has made a high greater than my anticipation entry.  Under better circumstances these should be firing off early in the trading session.  When the market is conducive, such as last week, the landscape looks quite a bit different.

Robusto

 

Near Idyllic Setup

SANM

One of my favorite chess quotes is by Mihai Suba.  When discussing the Hedgehog he commented, "White's position looks ideal.  That is the naked truth about it, but an ideal has by definition one drawback -- it cannot be improved."  

SANM is setting up nicely for an upside break out.  Given that I consider this a near ideal setup, there isn't room for improvement.  This makes for a simple trade.  Tomorrow there is either a breakout to the upside and a favorable resolution to the position or a reset of the pieces.

Modified Darvas Box: LRN

One of the gems I took from Darvas and Daryl Guppy's continuation of his work is the concept of a modified Darvas box.  I focus not on the original concept but a version where price consolidates between the high and low of a significant price bar. I wait for a period of price contraction, preferably in the upper range before setting anticipation or break out triggers.  One pattern that stands out right now is LRN.

LRN

Sometimes a stocks past characteristics can lead us to clues about it's future potential.  LRN has had similar patterns in it's recent past.  I've already drawn up my plan of action for this over the weekend and just waiting to see if I'm priced in or not.

Plan of Action

Improving Execution and Consistency Through Habits

As a tournament chess player there are a number of openings I know up to a depth of 20 moves.  When playing blitz I can rattle these by route in seconds with little to no thought.  I have a level of competence that allows me to do this with confidence consistently and repeatedly.  In trading things aren't so black and white, but the ability to execute consistently without hesitation remains true.  In order to improve my execution I've looked at a number of different techniques, but one I've found most useful is filtering my trading plan through a habit.

Recently, while the market has been in a corrective mode, I've returned to a trading idea that I couldn't make work but now believe I can.  As with any setup I had to clearly define the parameters of vehicle selection, entry, stop, and exit.  The first thing I do is write them down as clearly and concisely as possible.

Setup

Once I have my setup defined I turn to this diagram to assist me in filtering.

French Defense

This is a position I know very well and have played thousands of games from.  I can execute this blindfolded.  In order to improve execution and consistency in my trading I've experimented with transferring this habitual knowledge into habitual trading.  To do so I structure my trading plan as chess moves.

Trading Moves

The key for me is to chunk a couple bullet point concepts within each move as opposed to drawing out each step.  If bullet points get up to 5 I'll place the next steps under a different move.  Crucially I look to avoid going too deep into an opening where there are 5 to 6 moves with 5 bullet points each.  Reaching 25 to 30 steps in the process informs me to prune back the tree.

The steps exemplified:

Find High AH Volume

Catalyst

URBN Trade

#STUDY Gap and Crap, Gap and Go

A pattern worth watching is when a stock hits its historical low and churns over on gigantic volume which I loosely define as a turn over of float or close to it.  This is the gap and crap capitulation part of the pattern.  The follow up is the gap and go which signals the stock has undergone a change of character.

One recent stock of note is ELF with a float of 18M, 13M of which turned over at the historical low price during the week of August 10th.  50% of the float turned over on the day of the gap down.

ELF WEEKLY

On the daily chart the magnitude of the gap down is more clearly pronounced.  After the gap there was a sharp rebound followed by a pullback before a gap up on large volume. The gap low has held and price action tightens.  This signals the gap and go part of the pattern.  

ELF DAILY

Besides the backdrop of the overall pattern, the current price structure is exhibiting characteristics of a high probability upside breakout and continuation.  I tend to laser in on stocks that are within 2% of their 10 day average price, print a narrow range day, and have the lowest volume over a 10 day period. While this trade is in my wheelhouse, the drag of the overall market makes me circumspect.  

Anticipation Entry

Today I took a position in HAR in anticipation of a break out within the next 5 trading days.  Today was a very narrow price range day on the smallest volume after a sizable move.  Although the previous break out failed price has been contracting within a tight zone.  My expectation is that if this gains interest it can make a 5-10 point move from here with with a stop at yesterdays low giving a 2-1+ R/R trade potential.

HAR

The action on LNKD today stopped me out of a recent position for a loss.  One of the points of anticipating breakouts is to avoid potential traps like today where price moved favorably in my direction only to give up all the gains and then some.  Had I the opportunity to pay more attention today it is clear in retrospect that moving my stop to BE after giving up four points in my direction would have been wise.  Although my stop did not get hit officially I closed the position at the end of day as the price history shows this can trade with wild swings and with my stop was not much further below today's low so closing it was prudent as my risk/reward ratio is now inverted.

LNKD

One positive trade from my list yesterday was ORLY which after taking some heat yesterday, made a clean $2.68 move today, closing near the highs and with volume behind it.  As a price target I don't see why $214 isn't achievable on this.

ORLY

Buying Before the Break Out

One set up that I continue to explore is anticipation entry before a break out, however rather then waiting for an actionable price entry signal I've been honing in on buying during price contraction.  The inspiration for traversing down this path was the lack of follow through on my vehicle selection through much of January and early February.  As with most investigations, the market wagging the dog and potential style drift should be acknowledged.  Whenever exploring new ideas it is important to filter them through one's trading philosophy and determine whether or not it compliments current set ups or not.  I've done this by reverse engineering my current set up and focusing not on ensuing price action after entry, but rather the action leading up to it and one of the immediate benefits was recognizing where better triggers or price patterns were available.

An inherent problem to address with entering prior to a break out is having capital tied up in a stock that is not moving.  It's of paramount importance to be exceptionally selective in vehicle selection and awareness of price action and stocks that have a higher probability of putting on the jets in the near term.  As I test this out my current willingness to hold is ten days without movement but market dependent I'll be looking to drop this down to five because in a strong environment like last week, holding for a prolonged period results in missed opportunities cost elsewhere as capital is not available.

Currently I've developed two scans to narrow down my opportunities.  I've isolated stocks that are up 25%+ between 20 through 40 days ago, stocks that are up 25%+ the past 20 days, and stocks over $100 that have moved $15+ in the past 20 days.  I'm focused on stocks that have had strong price/volume moves and have recently shown exceptional strength.  Further refinement is focusing on stocks that have had a near term catalyst, particularly earnings.  In addition I'm narrowing my list down further by sectors that have been rotated into as well as probability stacking through low float/high short interest stocks.  Essentially this is a mealy-mouth means of stating I'm looking for stocks with oomph.

Unlike break out trading where I am looking for expansion with high volume, in this set up I am looking for narrow range days with the some of the lowest volume during the consolidation phase.  I'm also looking to buy within the average price zone over the past ten day period.  One of the main principles behind the logic of this set up is to buy a momentum stock with recent velocity when others have lost interest.  When a stock is in a quiet period it is easier to get one's price and one's size while being able to maintain a fairly tight stop that isn't adversely effected by slippage.  If the stock is truly under high demand the expectation is that there will be buyers on a higher magnitude absorbing at price, and our advantage is when algo and shorter time frame players bid up and assist the the ensuing burst while being positioned early to withstand volatility and potential fading of intraday price hitting a low of day stop on the break out.

The following list is a few recent candidates that fit the set up.  This is the price action I'll be looking for in the future.

ORLY

AMZN

LNKD

NFLX

EBIX

SWHC

BA

Additionally, by preparing for anticipation entry, my watch list gets refined to locate and foresee potential break out trades setting up.  Having confidence to enter these trades before a break out gives me greater confidence to enter these trades on an actionable price trigger of actual break.

Open Window, Go With the Flow

During the correction I've been keeping a list of stocks holding up well.  Many of them are recent IPOs that have broken out of flat price consolidation to new all time highs.  A few of these are also showing follow through which is a desirable quality.   If this is a rally of duration I'll be paying particular attention to how these stocks behave and if they offer an entry on pull back.  Thus far I consider this price action promising and conducive to begin exploring opportunities on the long side should they present themselves.

CMCM BO

GRUB BO

KANG BO

LQ BO

TEDU BO

TRUE BO?

ZEN BO

Now that there are some signs of life in stocks I'm following, focus returns to those yet to break up such as UA and TWTR while waiting for the market to reveal it's hand.

UA

TWTR

RVLT Model Book

Today I'm adding RVLT to my model book and have already drawn up the tentative plan of action on how to trade this.  RVLT shot up nearly 51% today on an earnings related catalyst, trading nearly 10 million shares --approximately 30% of it's float.  After such a large sized move I have no doubt that price may very well continue north without me but from a risk/reward situation I can't justify entering this yet so will wait patiently for price to either flag or pullback and hug the 10 period moving average.

RVLT Model Book

Stepping up in time frame, RVLT has exhibited strong volume bars, nearly turning over its float for 4 consecutive months.  Widening out the horizon it is clear that this volume is the highest in it's trading history.  Around the time this spike occurred there was news release relating to a new product --an energy efficient LED light. (source)  So there is a new product launch and earnings catalyst at play here along with massive volume with increasing prices suggesting accumulation.  If there is any substance to this, price confirmation and increasing momentum will be the clues I will pay attention to in the near term and make a decision as to whether or not this will just become a swing candidate or one I will look to trade on a longer term basis.

RVLT Monthly

12 Pack

Constructive price patterns and long set-ups are still bountiful in this market.  These stocks build the case that regardless of whether or not the general market is a bit extended here in the near term, there are plenty of candidates ready to resume the next leg up should money rotate into them.  

ARWR

ASTX

CAMP

CGEN

CMLS

DXCM

JASO

KFY

KONG

MKTO

TQNT

YGE