Catch a Bottom – Not a Falling Knife on Top Stocks
Although we have seen many big moves this year out of large continuation patterns on the best stocks, bottoming patterns continue to work well on the top small cap and even larger cap stocks.
Today I am going to share with you a great trade on a top bottoming pattern setting up now and also go over a couple other trades so you know what to look for.
Several weeks ago we talked about the large rounding bottom pattern on NPTN on our blog. We were able to nail a great entry point with a small downside risk and huge upside potential for customers of our Weekly and Daily Alert.
Our Youtube video on the rounding bottom pattern gives you a great primer for this very bullish price pattern.
In real-time we showed the explosiveness of the rounding bottom pattern, giving you the next ideal technical entry point before it soared more than 60% within a couple months after the video was published on Youtube. Nearly 80% from where it was featured to customers in our newsletter who received the trading setup a few days earlier.
Another example of a great bottoming pattern in 2016 was NTES which was featured to customers before it exploded more than 70% within 4 months.
NTES was in our classic swing trading pattern (talked about on our home page) and it gives a great example of a quality bottoming pattern. Today I plan to take you through my thought process on why this was such a good trading setup and also talk about another setup that is very near a good technical entry point as I write this.
Its likely too late for NPTN and NTES for now, but other great opportunities will inevitably come up in the future on quality stocks.
Now the first thing we noticed before finding NTES is that the market had a bullish signal in late January and then again on the first day of March. This signal generally occurs during the early stages of a new market uptrend. This tells us to become more aggressive on long swing trades and to close out short positions.
Another key to this successful trade was identifying all the strongest sectors and industries in the market. Money was starting to move back into emerging markets because fund managers perceived that those markets hold the best profitable growth opportunities.
Large institutional money managers set the trajectory of the market and industries with their enormous buying power. When swing trading and day trading, you need to know where they are putting the most new money to work by checking the RSI of various industries.
We noticed the strong trend of putting more money into Chinese stocks such as XRS which we had already featured earlier in the year.
But one thing we noticed about NTES was the strong long-term uptrend over the past several years with the wide swings. Earnings growth had averaged over 22% per year over the prior five years. Sales growth had nearly doubled in 2015 and was expected to grow strongly based on projections and their income statements.
Return on equity was nearly 32%. They also have a large cash position relative to their debt. They also had a strong track record of blowing away earnings expectations when they reported.
Here is the chart featured to customers back on March 21rst. Lets review what we liked about the all-important technicals.
You can see on the chart that the stock is developing a large symmetrical triangle pattern with both higher lows and lower highs. At the same time, there is a very consistent, long-term uptrend support that actually goes back several years to the left of the chart.
The company was getting close to its earnings release. We generally get out of a trade ahead of earnings except when the company crushes expectations consistently which was the case with NTES.
So all the factors that we look for were in place – strong sales and earnings growth along with other important growth stock characteristics, a strong long-term uptrend for years, a large bullish pattern while the stock was bottoming near the uptrend support, and a strong tendency to beat estimates with rising future expectations. They even paid a 1.73% dividend yield.
After featuring NTES it broke out of the bullish symmetrical triangle pattern and went from about $140 to over $240 last week. And this is with a lot less risk than a penny stock.
A couple weeks ago we featured a trading setup with a lot of similar qualities – LGND. Earnings growth has averaged over 50% per year over the past five years. Sales growth has been strong over the past few years and is expected to be over 60% this year and nearly 40% next year. Return on equity is over 100% and the PEG ratio is .73.
Now this stock had another very interesting bottoming pattern just before we featured it to customers. A pattern that along with an oversold RSI usually leads to very nice gains over the next week or so on quality small caps and top growth stocks. We also recently called this pattern on AMBA and CBM.
LGND jumped more than 10% within a few days after featuring it to customers which is typical with this pattern that I will be going over in detail in future videos. But for now, I would put LGND on your radar and look for ideal technical entry points in the weeks ahead.
The pattern we played on this for the short-term trade has very specific rules and takes advantage of a truly oversold condition on a quality small cap and even mid to large caps.
We are developing a new training series for this and other bottoming patterns because when found on top stocks this pattern has a very high rate of success while using a tight stop-loss. 4% to 10%, often within a couple days, is the norm with this pattern as long as the market is not too volatile and trending sideways or higher.
But when you find this pattern also within strong, consistent long-term uptrends on top stocks, you can hold a large portion for much longer while putting a stop-loss at an ideal technical entry point. For a terrific high reward – low risk swing trade similar to NPTN and NTES.
Very large bullish continuation patterns have worked great this year, but these oversold bounces should be your bread-and-butter trades.
Done right, they are very profitable over time and will inflate your trading account. Done wrong, its just catching a falling knife. The video training series being released soon will explain exactly how to catch a bottom with a higher percentage trade and a great risk/reward ratio.