Stocks have been trading in a pretty tight range this week, which is actually a good thing for us.
Because the type of trades we focus on are penny stocks that have catalysts. If the rest of the market gets dull, traders who typically trade mid and large caps will start jumping into small-caps because they’re dying for some action…
That said, small-cap penny stocks are a different animal and if you don’t know how they trade you can get whipsawed…churned and burned.
However, you don’t have to be a rocket scientist to be able to trade patterns like the Rocket…
(I provide actionable trading alerts in real-time, just like this trade in ATAI, click here to get started)
I teach my clients how to primarily trade three chart-setups primarily.
The setups alone don’t make for a trade, each stock needs to have a catalyst, and the risk/reward needs to be lined up correctly before a trade can be placed.
For example, yesterday I was able to alert clients on ATAI, one of Wall Street’s most active movers on the day…
And you know what?
It shot up in the after-hours, reaching as high as $3.40.
You could have returned 40-60% on this one single trade in just a few hours…
Now, here is the really cool part. The pattern and catalyst that drove ATAI higher are recognizable, and the trade is repeatable. Furthermore, I’d like to walk through the mechanics of this trade, so next time see it, you’ll be able to take advantage of it too.
Break Out Pattern and Momentum Trade Example
Now, the rocket is another one of my money-making patterns. Basically, we look for the stock to break out above a resistance level. Then, we identify an area to buy the stock.
Here’s a look at ATA Inc. (ATAI) on the daily chart.
As you can see in the chart above, ATAI had resistance around $1.20… the stock opened just below $1.20… only to continue higher. That’s what we call a break out. With this specific set up, it’s also known as a gap and go.
However, with gap and go setups (when the stock gaps up and keeps running)… you want to be patient and not chase it. You see, when you buy stocks right around the open (9:30 AM EST)… you don’t really have a high probability setup, because the stock could just gap and fill. In other words, if a stock gaps up, it could retrace the whole move… and fill the gap. That said, you don’t want to just buy a stock that’s gapping up right on the open… it’s better to wait until the dust settles.
Continuation Pattern in ATAI on Shorter Time Frame
Now, yesterday, ATAI had some mergers and acquisitions (M&A) news. The company is exploring potential opportunities to expand in the international education market. Moreover, it entered into an agreement with ACG for a proposed acquisition. This caused the stock to more than double at one point yesterday.
However, just buying the stock on this catalyst and no pattern to pair it with would’ve just been gambling.
For example, with ATAI… it made sense to wait a bit before buying… because later in the day, the stock formed a bullish pattern on the shorter-term time frame.
Check out the 15 minute chart on ATAI.
Does this pattern look familiar to you?
If not, it’s the bull pennant – sometimes called bull flag – pattern. This is considered a bullish continuation pattern. Basically, the stock runs up higher… consolidates (trades within a range) – you can think of the stock taking a breather… before running higher.
If you buy in the consolidation area, you have clear areas of value – support levels.
As you can see, I bought the stock, and was looking for the stock to get around $2.50’s to sell half of the position. Thereafter, I was looking for the stock to break above $3.
Here’s what ATAI did after the stock opened this morning.
Keep in mind, the stock was trading well above $3.40 during the pre-market trading hours (right around 7 AM EST.
As you can see, sometimes with momentum stocks… it’s better to wait until the dust settles to identify a clear bullish pattern, and areas of value to buy the stock.
Source: JasonBondPicks.com | Original Link