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Goal $1.4 Million: Step 2 of 4 - Selecting Growth Stocks
Plus, using charts to find the right time to buy, maximize gains, and manage risk.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
Step two of the process is my favorite part. It is time to get down to the business of finding stocks that are going to outperform and accelerate account growth.
This is what it is all about!
A quick note before we dive in. If you are a new subscriber and have not yet checked out “Step 1” I highly recommend giving it a read as well.
“Step 1: Getting Started” outlines everything you need to get your trading account on a path towards making millions:
Where to start
How much money do you need? (hint: not much)
How much time does trading take?
Gathering your watchlists
Also, a big thank you to my paid subscribers! I can’t tell you enough how much I appreciate your generosity.
I hope you get a ton of value out of the newsletter every week. Let me know in the comments if you do! I enjoy the conversations and also want to know what you’d like to hear more about.
I put a lot into every week’s post and will always keep the newsletter free, my goal for this publication is to help as many as possible for no cost.
So again, massive thanks to those showing their appreciation by signing up for the $8 monthly subscription.
Now it is time for the fun, selecting winning stocks!
We are going to get into using sectors to sort and find leaders, filtering down further using charts, and identifying ranges for trading.
I will also get into a rarely discussed but highly important topic: Finding the right size stock for a covered call strategy. Size matters.
Using Charts to Select Stocks
Now that you have your lists by sector, you want to the leaders within each sector. You may hear people suggesting reading balance sheets and income statements to do this.
I think this is a big mistake for short term traders.
First, it takes a tremendous amount of time and energy to learn and understand how to read financial reports. Unless you are a CFA, this is not ideal.
What is not mentioned in the “Reading Financial Reports for Dummies” guides is there are millions of ways balance sheet numbers can be shifted, altered, and skewed.
If you do not know what to look for, and there is an endless amount of things to look for, you could read a balance sheet and think everything looks great when in fact it is not.
You can also slightly adjust numbers for earnings projections and come up with completely different scenarios for the same stock. I am not a fan.
Everyone trades the same chart though. There is no way to change where the price has been. There is only technical analysis and taking action.
This is why I love reading charts.
There are no ways to hide price action or have a footnote disclaimer about how much volume was actually traded and what was reported was not exactly the entire picture.
The chart is the chart and when you know what to look for you can put probabilities in your favor.
So what am I looking for? It is example time!
The Semiconductor industry has been hot, and I think it leads the next bull market run. Whenever that is.
The volatility in this sector makes it both difficult and excellent for trading.
When reviewing charts across a sector I’m looking for the chart(s) that show the following:
Holds up relatively better than other stocks on drops
Moves higher before the rest of the sector
Continuously makes new recent highs, holding higher lows
Volume spikes reflecting big buying
Based on this, which charts from the semiconductor sector stand out in this gallery?
Since April 2022, both have consolidated and moved higher while SWKS, MU, and AMD all drifted lower and are only now starting to wake up.
This is why I find sorting and analyzing charts by sector so powerful. The differences between charts in the same sector is glaring and the choice becomes much easier.
It is clear to me that ON and RMBS are leading the way. Do you hear much about these two stocks or do you hear more about NVDA and AMD?
Look to the charts to find the hidden winners. Use sectors to ensure you’re comparing stocks against similar companies facing similar industry headwinds and tailwinds.
FSLR - First Solar Inc
I have been posting on Twitter about FSLR 0.00%↑ for months now. Here’s a comment from the end of February when the price was near $161.50 after making an impressive run from about $62.
This is a great example of using a chart to stick with a trade or get into a trade that continues to work.
Where does this chart tell you to sell? It does not.
Would you have put money to work in FSLR at $161.50 after it moved up 161% in 11 months? You should have.
Prior resistance became support yet again and the stock has made another big move higher. At the time of this writing it had closed at a whopping $217.50.
That is another 35% in just one month. And again, this is after a big run.
Here’s a look at the chart now. Do you see the familiar pattern taking shape?
This is the kind of chart that will make you money if you trade it correctly. Utilize the levels of prior resistance that have been broken through. They are now support.
If the support line holds, expect another move higher to follow.
If the support line breaks, cut your losses and take a step back. See what happens next.
Also note the volume spikes that stick out against the normal volume levels. That is institutional buying. A very important indicator.
When institutions make large buys they create those spikes in volume. Retail buyers are unable to create such a big push in volume.
When the institutional buyers step in, they are not done with the buying in one shot. They will continue to fill out their positions over the next several weeks or months.
This continued buying helps hold the price up and allows time for more investors to come in and move the stock higher. It is something to look out for.
There is no need to get more complex than that. You can dive into balance sheets, read analyst reports, spend hours of your day trying to understand it all. Be my guest.
I have found charts to be far more effective and a far more efficient mechanism for me to trade with successfully. That includes the stock selection process.
When to Buy and Sell
There are two primary set ups I look for when it comes to buying a stock. The first we have already seen with FSLR. But let’s take a closer look.
When a stock has pulled back to test a prior resistance line, the potential for a quality trade set up is there.
I refer to this as the “Prior Resistance is Now Support” trading strategy. Not a very catchy name but definitely describes it perfectly.
You do not necessarily want to buy right when the stock touches the prior resistance line. You can, but there is higher risk involved.
Instead, I prefer to wait for the bounce to show the buyers have stepped in to support the price level.
The yellow arrows in this chart show where I see prime set ups for taking a long position in FSLR, trading for more upside.
It is easy to look back and highlight where the right time to buy was. I will point out that I called for buying FSLR when it was at $161.50 and had bounced off of support.
This is one set up I look for when determining when to buy a stock I’m watching.
Trading a Range
The second set up I like to utilize is identifying a range and buying at the bottom of it. If you can spot a range early you can buy the bottom and sell at the top repeatedly.
In this chart I’ve zoomed in on a recent range for MRVL and pointed out the buying opportunities that have been presented.
The key for each buying opportunity is the big move off of the bottom of the range.
If you see this bounce with strong volume, even better. If you see this sort of move on weak volume, be cautious.
What I like about buying at the bottom of a range like this is that your risk and reward are clearly defined.
If you buy MRVL near $39 you are risking about $3 because you know to cut your losses if the bottom of the range is broken, which is at $36.71. That is your risk.
The profit targets should be at near the top of the range and at the midpoint. For this example, that would be nearing $47 and $42.
I’m rounding the numbers for simplicity, but the math basically works out such that you are risking a $3 loss for a potential $8 gain with profit taking along the way at a $3 gain.
You are also trading with the confidence that a range has been defined and has been respected.
A wise man once said, “You can never go broke taking profit.” I like to live by this mantra.
For many, figuring out when to sell is the hardest part. My advice is to stop overthinking it.
You need to get over the fact that the stock kept moving higher and instead focus on the winning trade you just made and the positive returns.
When you understand this it becomes easier to hit sell when the profits are on the table and you’ll keep more of the profits you’ve earned.
When you are trading a range it is fairly simple to identify where the profit taking occurs. It is at the middle and top of the range. Fairly simple.
For other trades it is not so straightforward. When you are buying a bounce off of prior resistance sometimes you are looking to make new highs.
That has been the repeated scenario for FSLR. The key for me has been to take profits on the initial big move.
I almost always leave some money on the table because I do not hit the absolute top, but I have reduced how much I give back because I am rarely caught holding on too long.
When the market is in a clear uptrend and rallying seemingly every day like we saw for most of 2020, it is easier to hang on to a winning trade for much longer.
That is not the market we are trading in 2023. The volatility will eat you up if you do not take your profits when they are available. Don’t try to be a hero.
Stocks for Covered Calls
Next week I will get into the details behind selecting the right options for buying and selling. Mostly selling.
However, I thought I would touch on how to select stocks for a covered call strategy.
The only additional consideration is the stock price relative to your total cash available. You must be able to buy 100 shares of a stock to sell a covered call against it.
There are some interesting strategies that come into play that you should be aware of.
For example, you might have decided to put $4,000 into buying 100 shares of MRVL. This is great! I like this trade!
You can sell a covered call against the shares every week or so and collect cash if it expires out of the money.
But what if you could make multiple trades with multiple strike prices? That is something to consider.
Let’s say instead you bought 400 shares of RKT. You can now sell 4 separate covered call options and at different strikes and expirations.
Continuing with this example, the share price was at $9.06 at the time of this writing and you could sell one call option at the $9.50 strike, expiring this week for a quick 0.5% gain on those shares.
You could then sell another at the same strike but one week out and collect another 1.6% against those 100 shares while selling the last two covered calls at a higher $10 strike for another 0.5% gain on those 200 shares.
This allows you to spread out the expirations and strike prices which enables you to collect a little added premium.
One last note. The driver for the premiums you can collect is going to be volatility.
It is important to pay attention to which stocks are at higher relative volatility levels and are therefore paying higher premiums to options sellers.
Recap and Look Ahead - The CCS Portfolio
This week’s recap is a short one so I’ll mix in the look ahead as I go.
I took a position in LAZR for 225 shares but did not sell covered calls this time around and am currently holding all 225 shares.
I am targeting $7.40 and $8.30 for profit taking and using $6 as my risk level, cutting losses if it breaks below.
MRVL was a short term trade and I was able to collect over $100 in premiums quickly..
The shares are getting called away after the nice push at the end of the week and I’ll end up with a modest gain.
Next week I’m continuing the trade in LAZR and am looking at potentially taking a position in RKT if it pulls back below $9.
I’m also considering getting back into MARA and am watching for a break of the swing high above $9.12 to get in. If we see that, I like a move to $10.
Here’s a look at the daily candles for MARA.
That’s the trade I’m watching the closest this week!
Twitter Spaces - Chart Reviews, Trading Strategies
Quick Reminder and thank you to everyone that tunes in!
It is a great way to sharpen your chart analyzing skills while hearing about what we are each looking at for the upcoming week.
Link to this week’s Twitter Space: Sunday Trading Prep
I hope you find this information useful each and every week.
If you have any questions, be sure to find me on Twitter @tradernatehere and send me a DM! I am always up for talking trading.
Also, be sure to follow for daily posts on trade updates and trading strategies as I pursue my goal of educating thousands on the many ways trading options can accelerate you path to early retirement and building generational wealth.
Have a great week of trading ahead!