How to Spot an Ideal Swing Trading Opportunity
Talk to an experienced retail trader and they are likely to tell you that one of the best ways to do better swing trading is to focus on just the A+ setups.
There are plenty of OK gap and go patterns most days, weaker earnings breakouts, and bull flags that are nothing to write home about. Trade these generic patterns, especially on lower priced stocks, and its not likely to go well overall. After you add in typical trading errors and you are generally losing ground.
Instead of doing this, you may want to try trading a lot less but only the A+ swing trading setups. This is a great way to get your account going in the right direction.
But how do you spot an ideal swing trading opportunity? Which ones have the ideal technical and fundamental characteristics? Today we will talk about one of the best technical patterns we have seen all year that also had great fundamental qualities as well.
Why SEZL Sizzled
SEZL has been red hot since its recent earnings report.
We talked about the stock in 2 of our services the night they crushed earnings and sales expectations and raised guidance.
We said it was a newer issue and would likely need a 5.5% stop below the ideal technical entry point we like to use. It reached the entry trigger the next day, held the tight stop and then doubled from there within a month.
Today I want to talk about how to spot more of these incredible opportunities. The difference between a good swing trading opportunity and an A+ setup. And also the risk/reward factors with any trade using SEZL as a good example.
The Most Bullish Chart Pattern is Not What You Think
Several years ago we blogged about the most bullish chart pattern.
This pattern is pretty rare but you want to always be on the lookout for it.
No, its not a reverse head and shoulders. And its not some MACD indicator combined with a jillion other indicators that are often way too lagging.
No, the most bullish chart pattern is multiple very bullish chart patterns as explained in our article from years ago. And SEZL is a classic example of multiple bullish chart patterns.
2 Very Bullish Chart Patterns
On the chart below you can see how SEZL looked ahead of an enormous breakout that has lasted many weeks.
Charts courtesy of StockCharts.com
The 2 very bullish chart patterns are a high tight flag and bullish double bottom pattern. In this case, the double bottom is on an intermediate-term time frame. The classic entry trigger (a move above the center point) is also a bullish trend change signal.
So if the stock reaches the double bottom entry trigger, the intermediate-term trend is now aligned again with the longer-term trend and short-term trend. We want to be in trades where the trend is higher on all time frames. This is referred to as multiple time frame alignment.
One of the drawbacks to this setup is the overhead resistance just above where it was after hours when we told subscribers about it. In this case, we want to see the stock reach new highs and not reject the 52-week high the next day for a potential longer-term home run trade.
If not, it may form a bullish earnings flag or even a high tight flag days or weeks after blowout earnings are announced.
Rapid Account Growth in the Current Market
We continue to notice a lower win rate on stocks with overhead resistance. This is why we want to look for stocks near 52-week highs (preferably all-time highs) with the fundamental factors to support a much higher price.
There are so many high tight flags setting up right now that its best to wait for those that are breaking into at least 52-week highs. These have a much better win rate. We saw this again with SEZL, OKLO and DAVE over the past week and a half. And had another nice winner yesterday on CRCL. 4 high tight flag breakouts into all-time highs.
As we discussed in a prior article, we do not want our trade to be held back by overhead resistance when trading the best breakout patterns. We generally want to see the stock within 30% of all-time highs before entering a trade. Right now, its more hit or miss when the stock is below 52-week highs when using a tight stop-loss.
There are so many high tight flags coming up and the big momentum money can only trade so many of these to push them up further. So we are really focusing more on stocks breaking into new highs when trading high tight flags.
The ones with no overhead resistance also tend to play out much more quickly without the overhead resistance. Another big advantage of trading ideal high tight flag breakouts into new highs.
Fundamental Factors to Look for in an Ideal Swing Trading Opportunity
So the the stock was very near all-time highs, had 2 very bullish patterns on a daily chart, and was breaking out of these patterns after hours with a large gap developing after hours. All good technical signs.
When swing trading, we are trying to find stocks with both ideal technical AND fundamental factors. Why? Because we can and they tend to have a better win rate with more explosive upside potential.
SEZL had not just strong growth but triple digit sales growth in their latest earnings report. It also had a rare but very bullish trend: both very strong and accelerating revenue growth into the triple digits.
SEZL reported revenue growth of 123%. The prior quarter they reported right around 100% revenue growth. The quarter before that they reported 71% revenue growth.
So we have a very strong and accelerating trend in the business. These trends tend to persist if the company has a history of very strong growth. New product adoption and this kind of business momentum tends to play out over multiple quarters.
The company is also growing their earnings quickly with earnings growth averaging over 706% over the past three quarters.
A lot of stocks can pull off 1 or 2 great quarters of earnings and/or sales growth. However, the trend of ever rising sales growth is a very bullish sign.
The annual return on equity, a favorite metric of Warren Buffet, is 120.4% according to IBD.
In a prior blog post, we talked about the technical and fundamental factors we look for in an ideal swing trade. SEZL ticks most all the boxes.
The Risks of Riding SEZL
In a prior blog post we talk about a good time to sell a big earnings breakout after getting in shortly after we send out the alert. SEZL has already tested the 20 EMA and we would be raising the stop each day to a little below a 2 day low in this case.
It probably needs a little more room with the Fed on deck this week which should introduce a little more volatility on Wednesday especially.
The big drawback to this trade is that SEZL has only been trading for less than 2 years. These newer issues tend to have a lower win rate and drop quickly when they turn over. It would be better if it was already trading for a few more years.
The other downside is that its a buy now/pay later stock (BNPL). These carry more risk if the economy and job market starts heading south or if there is another big spike in inflation and interest rates.
The long-term prognosis is not good on BNPL stocks. Its likely to eventually crash back down to earth. That being said, they have a subscription service and shopping service that is taking off with the average dollars purchased per customer increasing.
So it could be worth a shot for a multi-quarter or multi-year hold. But it looks ready for perhaps a blow off move and then a retracement to some key moving averages.
Its likely ready to finish off this move higher that started after earnings for now and come back to the 50 day moving average which is more than 40% below where the stock closed today. This will be an interesting test and potential entry point for those who like this high risk/high reward investment.
A Detailed List of What We Look for in a Great Swing Trade
How to Rapidly Grow a Small Trading Account
Limiting Beliefs Holding Most Traders Back
Our Latest Top Trading Setups with Great Technicals AND Fundemantals
