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How To Find The Best Stocks To Buy BEFORE They Breakout

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Using a simple, but highly effective trading strategy, find out why the Wall Street mantra of "Buy Low and Sell High" is not the best strategy for momentum swing trading stocks.

Published in: Economy & Finance
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How To Find The Best Stocks To Buy BEFORE They Breakout

  1. 1. How To Find The Best Stocks To Buy BEFORE They Breakout
  2. 2. 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)
  3. 3. Momentum-based strategies work!
  4. 4. Momentum-based strategies work!
  5. 5. Momentum-based strategies work!
  6. 6. Buy stocks at or near 52-week highs
  7. 7. Buy stocks at or near 52-week highs
  8. 8. 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
  9. 9. 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%
  10. 10. Basing Pattern #1 – Cup and Handle
  11. 11. 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 5- 10% 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.
  12. 12. Basing Pattern #2 – Flat Base
  13. 13. 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 40- week moving average.  A flat base should be at least 5 weeks in length.  Flat bases usually correct no more than 15% off the highs
  14. 14. Main characteristics of a valid base
  15. 15. Main characteristics of a valid base
  16. 16. The breakout entry
  17. 17. The breakout entry and follow-through
  18. 18. The breakout entry (example #2)
  19. 19. The breakout entry (example #2)
  20. 20. The breakout entry and follow-through (example #2)
  21. 21. 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.
  22. 22. Visit MorpheusTrading.com to learn more Questions? Email us: editors@morpheustrading.com

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