A Look Back at 11 Stock Trading Setups

11 Stock Trading Setupsa review

Some Quick Background

About every Wednesday morning, I’ve been posting trade setups to TraderPlanet.com

This has allowed people to see my approach and what’s working in the market.

And my setups have been working very well.

About Me

I help people become great options traders.

(who doesn’t love corgis?)

Keep in Mind

These ideas are not “hindsight” trades. They were posted LIVE on TraderPlanet.

That means there is plenty of uncertainty when these ideas are shared.

How this is Structured

We will go over the trade setups posted, the reasoning behind the trade setup and how the stock looks right now.

I’ll then provide a lesson with each one so you can use it in your own trading.

Setup #1: UNP

Setup #1: UNP

“Late-cycle areas such as energy and utilities have been doing well, and one area to watch in the next month is rail stocks. On a fundamental basis, these names tend to do well when there is demand for their services -- and if commodity prices and volume continue to rise, the demand will rise as well. UNP just broke out of a broadening triangle formation, and is now a clear market leader.

The stock is a little extended from the recent rally but watch this name for a pullback opportunity in the 190-187.50 area. ”

How It’s Trading Now

Lesson

On super liquid stocks like this, a failed breakout doesn’t always mean failure. A second retest and breakout is still a good setup.

Setup #2: NSC

Setup #2: NSC

“NSC is completing a base on base pattern with a key level of resistance at 98.

This level will most likely hold the first time around but if it completes a higher low and breaks out, it's a quick move to 100. This stock reports the morning that this article comes out so price volatility could change the pattern.”


Lesson

If a breakout doesn’t happen after an earnings event, keep the level on alert to see if the momentum can continue.

Setup #3: VVIX

Setup #3: VVIX“Is it really that quiet out there?

You would think that the market would be a little more scared, that investors would be buying protection as we head into the summer.

But that’s not what we’re seeing.The traditional "fear" index is the VIX, which measures

the supply and demand for SPX options. With a reading of 13.71, it puts it in towards the lower end of its six month trading range.

But let's go down the rabbit hole just a little more.

The VVIX measures the supply and demand for VIX. I feel that this chart is just as important as the VIX because investors are not just using SPX puts to get protection-- they're now using VIX calls. [continued…]”

Setup #3: VVIX“The current reading in the VVIX is in the 65's, which

puts it almost near six month lows.

What does this mean? Very few people are using the options market to protect themselves. And you think that they would, with FOMC minutes due out, along with jobs numbers and economic data.

The trade here is to get long "vol of vol." That simply means buying straddles (a combination of a call and put) on the VIX or VXX before the fireworks start on Wednesday afternoon.

If we get a ripper of a rally, the VIX will tank further, and if things start getting ugly, the VIX will spike. The only bad outcome would be a non-move, but given the way the market's been trading, "movement" is a high odds bet.”


Lesson

When you see the “vol of vol” get too low, that’s a great time to buy straddle spreads on VIX options.

This is a hilariously advanced trade, but really really fun.

Setup #4: IBB

Setup #4: IBB“If you find a money manager who has been using leverage to get

long tech, biotech, and all the stocks that worked in 2013, you'll probably have to talk him off a ledge.

Biotech is one of those "leading" sectors that was hard hit during the March/April pullback. And we now have a level that if broken, will make this market a lot more healthy than what it currently is.

Depending on the way you tilt your head, IBB (the Nasdaq Biotech Index) is forming an inverse head and shoulders bottom, or potentially an ascending triangle.

The most important thing here is the resistance level that has held for the past month, right at 235.

If that level is breached and we start to see upside aggression again, it indicates a resurgence of risk appetite.

Biotech was one of the areas that led this market to the downside. If 235 clears with gusto, you can make a much better bull case for the market.”


Lesson

You don’t have to “nail the bottom” to make good money on a pullback. Waiting for levels to present themselves can give you better odds at the expense of a higher basis.

Setup #5: LNG

Setup #5: LNG“Stocks that worked very well last year have been hit the hardest,

and there has been a very rotation into materials. Certainly not the most bullish part of the market cycle.

Many energy names are standouts that are much stronger than damaged.

Cheniere Energy Inc. (LNG) is in the liquified natural gas game, and judging by the stock price the game has been good. It is hovering near all time highs and has built a base. A simple breakout play should suffice here-- a move above 60 would be a clean breakout with an initial target at 65.

However because this market has seen its fair share of failed breakouts, a more nuanced trade would be to anticipate the breakout here with a stop under 55 and then sell half once the stock does break 60. With implied volatility at one year lows, long calls are a cheap way to play it-- something like the July 57.50 calls with similar risk management as stock.”


Lesson

No lesson here. Just got really lucky on some news.

Toot, toot.

Setup #6: BHI

Setup #6: BHI“One of the hot areas in this market continues to be materials and

oil service stocks.

Names like HAL, HES, and SLB have all seen clean breakouts and range extensions to new 52 week highs, and news driven plays like LNG have rewarded investors several times over.

One oil play that hasn't broken out but looks ready to is BHI.After a strong gap higher on earnings, the stock has been in an

ever-tightening range with compressing volatility. This means that for about two months, buyers and sellers have been agreeing on price, but this cannot last much longer.

As the major trend is up, when there is volatility expansion it will most likely follow the uptrend as well. Watch for a break and hold of 71, with a measured move target of about 74-75 per share.”


Lesson

Price acts differently on a breakout versus a pullback. The “energies” are different so don’t expect the stock to trade the exact same way at a specific level.

If you don’t trail your stops, you’re looking for a world of trouble.

Setup #7: EA

Setup #7: EA“PEAD is short for "Post Earnings Announcement Drift,"

where a stock sees a strong move on earnings in response to improving fundamentals, and then the stock continues to rise in price due to steady demand for the company. EA (Electronic Arts) is in such a setup.

After a strong breakout on earnings, the stock ran from 32 to 36, and then pausing for a month. During this month volatility has continued to contract, but on Tuesday it saw a breakout of the pattern to new highs on increasing volume.

A long here with a stop under 34 is a good position trade, with initial targets at 37.”


LessonPEAD stocks can be absolute grinders, meaning that there

isn’t a ton of momentum or that it fades quickly… especially if it is a larger cap stock.

The target was hit on this stock pretty quickly, so trailing stops would have worked.

Also, looking for a pb2bo (pullback to breakout) pattern off that level is a good setup for a PEAD stock.

Setup #8: QCOM

Setup #8: QCOM“Qualcomm (QCOM) has been in a basing pattern for

nearly four months. The proper name for this pattern would be an "ascending triangle" because the pivot lows have been decreasing and the pivot highs have been at the same level.

A simple way to play it would be to wait for the breakout above 81 and then buy the Aug 80 calls, with a target of 85 per share. A "trickier" way to play the stock would be to look for the resistance level of 81 to act as a magnet so you can get a better basis on your position. Buying calls on the breakout of 80 and then scaling once the stock hits 81 would be a way to stick around in the position for a little longer with less risk, especially as earnings approaches.

A breach of the lower trendline would signal that the pattern is broken.”


LessonAnticipating the breakout as a stock

approaches earnings is a very powerful setup as investors may start looking to position themselves into a bullish fundamental idea.

Also, failed breakdowns (like this one) can be a great pattern in and of themselves.

Holding through earnings, however, can be pretty stupid.

Setup #9: N

Setup #9: N“’Dregs’ stocks are former high flyers that have not had a

particularly good run of things. This can be due to a drop in earnings growth or just bad luck from a lack of momentum.

Either way, dregs stocks become beaten down and shorts start getting greedy. If these stocks start basing out, there will be buy stops hit from shorts as well as those looking to initiate new positions.

N (NetSuite) has had a rough go of it this year. Once trading up to 120, it saw a 50 point selloff during the momentum "blowback" from March to April.

It has now undergone a technical consolidation known as a triangle pattern. If it breaks to the upside, it will retest the June highs at 90 in short order. Odds are it will pullback from that-- if it makes a new higher low and clears 90, then it will be a longer term trend change that you can milk for months to come.”

How it’s Trading Now

LessonBasing patterns can easily evolve. A symmetrical triangle

pattern can morph into an ascending triangle pattern, which can then morph into a cup and handle or something else.

And if the market doesn’t fall apart this month, this sucker is running to 100.

Setup #10: WDC

Setup #10: WDC“After a very strong rally from May to July, the stock has

done nothing besides settle down in a three- point range.

The important thing to note is that the stock didn't break its range to the downside while the rest of the market was selling off in August. This indicates a good amount of relative strength provided by convicted buyers.

A move to 103 would confirm the breakout, but an anticipatory long here with a tight stop is a good trade as well. “


LessonIf a stock fails to see a hold with volume

above an “obvious” level, tighten up your stops because a failed breakout will take the stock all the way back to the bottom of the range.

Setup #11: GMCR

Setup #11: GMCR“Over the past four earnings events, Keurig Green

Mountain (GMCR) has seen strong moves higher in response to improving company fundamentals.

And because of the continued aggression by buyers, the stock often fails to fill or break below that earnings gap.

I'm expecting a similar pattern to develop this quarter. As GMCR fades its earnings move, it will come into levels in which buyers aggressively come in and defend the stock from coming lower.

A straight stock position is not the best way to trade this. Instead, an Oct 120/115 put credit spread is a bullish play that takes the bet that GMCR will be above 120 by October options expiration, which is good odds and good risk/reward.”


LessonI freaking LOVE pb2ma (pullback to moving

average) patterns after a strong move higher on earnings.

Bull put spreads are an option strategy that allows you to make money as long as the stock doesn’t breach a key level. That’s what happened here.

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A Look Back at 11 Stock Trading Setups