The Fishhook

The "Fishhook" is a setup I have used successfully for years to get entries in powerful stocks.  This post will cover what a " fishhook "is and how I to trade it.

The objective and Background.

Before beginning, I must make a confession--I used to trade junk stocks.

  Still, some of those stocks would make amazing moves. Remember the Ebola hazmat suit stocks, shipping stocks, and the dozens of biotech stocks?  Sure some ran for hundreds of percents but most were one-day wonders.  How could I determine what stocks had superstar potential and which stocks were done?

I then started studying big winners and noticed something interesting-- the stocks that could make a big move one day, then fall below (profit taking/ shorts) that first day close and then recover that level must have abnormal strength.  I called the setup the fishhook because it looked like a fishhook curving around.

Although I enjoyed a fair amount of success trading junk stocks, I don't like them.  The gap risk is substantial.  I have been in many stocks that were working and have had big gains that get erased in seconds after a dilution filing.  

I made a major breakthrough in my trading when I cut out illiquid stocks from my universe.  I then realized that the fishhook was a great way to get into major moves (usually following earnings) and it is my favorite way to get into an earnings move.  

Trading the Fishhook

Earnings trading is tricky--take a position before them and you take a major binary risk. Buy the earning's gap and you risk getting faded all day. The fishhook reduces these risks-- it is setup to take advantage of a  continuation of an earning's related move. The initial reaction (profit taking) gets supported by institutions who continue buying and this continued demand is what I look to take advantage of.

Step 1. Identify Massive Interest -- 

The first thing I look for is stocks that are showing massive interest.  In other words, the volume is high and the percentage move on the day is large. Earnings usually will cause this interest; however, other news related events such as FDA announcements can do the same.  Gaps are good indicators of demand/ supply imbalances.

Step 2. -- let supply dry up and buy on the reclaim

After the initial day move (the one that everyone on twitter) starts talking about, there is almost always some type of counter move.  Profit taking, at that point, I want to see a trading range start to narrow and the 5ema hold.  The stock should trade below the Day 1 High Volume close at some point during the next 2 to 4 days. A stock that trades below and then recovers the Day 1 close, triggers the fishhook.  

Examples: SNAP has been a big winner for me this year from the fishhook entry:

AAOI: This turned out to be one of my best trades of that year:

CYBR: Nice trend from the entry:

STEP 3: Manage Risk / setting stops

As with any setup, the fishhook can fail.  Danger signs would be where the stock cannot hold the day 1 close after recapturing the close at a minimum the 5 ema should hold, thats the area where I look to place my stop until a run occurs.  At that point, it's just a matter of letting the trade work.  Some will, some won't.

The "Why" of Chart Patterns.

Many beginning traders think that they need to learn what all the chart patterns: The cup with a handle, the flags, wedges, etc..    However, once you begin on that trajectory you begin seeing them everywhere.  Unfortunately, not all flag patterns are the same.

 It is far better to understand why the patterns are formed.

One stock I was asked about is $FTNT -- its a good one to analyze.

Here's the big picture view:

First - let's start with how the parabolic run up started:

This pattern might be called a Cup 

1. Starts with an excited parabolic sunup 100% move into $50 - common for stocks to fail at the obvious round number levels 50, 100, 200, 250 500 etc.. after a double.  And that's what happened.  Clear signs of a blow off, and look how distribution hit the stock.  It had progressed pretty evenly on left side, but after $50 reject, big wild swings and it rerun all the way to prior breakout.

2.  Then the base building pattern begins.  Investors with a longer term perspective start taking positions.  Nothing to due but wait for it to get tight and character to change.

3. Towards's right side of the base, notice how it starts holding the 5EMA? the volatile swings are gone and the stock starts grinding higher.  Clear sign of demand. -- Early positions can be taken in this range, The upside is stops can be tighter and your in before the breakout.

The Markup

After the breakout, at $50, FTNT then begins a nice steady markup. Nothing crazy but demand is there. The 20EMA was support for this entire move and positions could be taken off bounces.

The parabolic blow off

Gaps in a stock should accelerate the pace of the move.

1. Earnings gap big volume.  Notice narrow range after earnings day.  That means there is a ton of demand.  It's holding the earnings pop and the natural tendency to take profits after an overnight 10 pt. move is overcome by new buyers. 

2. Pace accelerates - 5ema now holds for move. 

3. a sell off to 20ema would feel like a big drop -- but we know FTNT has found support at that level.  and it did again. 

Blow off and re-set

Eventually, a stock that has made a major advance will run out of demand,  

Warning signs include

1. massive blow off: -- this stock doesn't show that, or

2. tepid act after range break -- this occurred

After small dip to 20ema, it -rebroke out -- no volume and move quickly failed, profit should be taken  off failed breakout, or if did not read that more subtle signal- certainly after the 20ema failed.

The Cycle Repeats

Just as FTNT went into unwind and base after last parabolic move it starts it again.

Clues to look for in base, is a support area.  _ I find that when a stock has a big down day that looks like it is going to totally break down and then it cannot do so, is something to start watching -- note I said "watch" not "buy"  -- then watch for character change before buying. 

This one is interesting because it went into a base within a base.  -- the right side of the chart and those narrow range days -- have my interest peaked. - narrow range stores up power. -- Next move should be large. Note, however that earnings coming up..  

OR we could just say its a cup and a handle

Mystery Chart - $BKNG $PCLN

@TML Trader  a must follow on trader on twitter posted a mystery chart which a question: would you buy this breakout?

Some said yes, some said no because it was "Straight up from the bottom" SUFB.

TML Trader then posted the immediate reaction - gap down after breakout- certainly looked like a secondary or other news driven event to me-- TML confirmed it was a secondary.

I look at the above chart and get very excited.  Notice how the secondary volume and price level held at the level big volume came in to the stock-- That's institutional support.  Retail gets scared out on a secondary announcement-- institutions take the panic shares.  --

I would absolutely buy that stock -- I actually went through the list of secondaries last night hoping I could figure out what it was and buy it on Monday-- Unfortunately, it turns out it was a historic example of Priceline-- Bookings holding and not a chart from last week.

Anyway here is my annotations on how I would apply my rules and trade that stock.

AMZN

AMZN is one of the most iconic stocks -- and it must be studied to understand how it ran, where to buy and how to own it.

Infant Stage:




How I would have traded First IPO base



The Breakout of that First IPO base:




Exiting the IPO base breakout buy:

AMZN
Got really extended from the entry and well above the 10ema - That's an exit for me.




Round 2:



Exit:




Next entry and exit:






Next entry:
Slingshot, but likely would be stopped out with small loss.








AMZN Next Breakout




AMZN blow off run:

January Trading review

January:

 Assessment: B+

I did a very good job of managing my downside.  My biggest loss was only about 800 < than 1% equity -- and given I got up to nearly 200% long at times,  so that's saying a lot.  My biggest winner (COUP)  is over 5X my biggest loss (and still riding).

My mistakes were selling too early in some of the earlier trades I took this month.  Indeed one of my early positions was $CGC (Jan. 9) with a $32 entry.   I was out entirely by $37.  I go both ways on that trade, on one had that gave me some gains which provided the foundation to be able to spar with the market as it consolidated and moving averages in my stocks were tested.

I made it it a point to trim positions as I had gains on spikes.  And, I executed that plan-- although it would have been nice to have the types of gains that a full position in COUP would have provided, I have no regrets.

My absolutely worst trade- and biggest mistake was selling covered calls on TWLO.  That stupid decision cost at least $2k.

My Win rate was at 65% which is historically well above average so that's a warning for me, the correction is coming- don't get complacent. 


Feb. GOALS

Manage expectations,  Don't try to do to much,  use opportunities and rips to step off the gas.  Key into AMZN, GOOG, NFLX

Earnings Gapers to watch: XLNX, NOW

How I Trade IPOS -- The Infants

As a follow-up to my review of "The Lifecycle Trader," I thought I would share how I personally trade IPOs.

Track New Ipos

The first, and arguably most important thing, is to actually track IPOs as the come public. I put each one on a watchlist for that particular year because many will run together.

My favorite Site is Ipo Boutique for IPO research.  which lists IPOs month by month and  year-by-year.  It is a great historical resource, which I've used for my studies.

The IPO Infants  1-8 Months from trade date

IPO infants are very temperamental.  They very rarely make for a successful buy and hold. But they can make incredibly powerful moves.  Better yet, on the whole, the majority will make at least a +30% run, so they give great opportunities.   It's important to treat these like swing trades,  Trim on the rips. 

AAOI was a very tradable infant. - Largely ignored by the crowd vol came in, which gave you a 30% move though the IPO day close and then another move from 13 to 16.  

Another common pattern:

An IPO, that holds its IPO price and then has enough vol. come in to hold a gap, is a great sign of strength 

The "Hype" Fade

It's pretty common for IPOs that are hyped products to fade over the next week or so.  Also, a big opening day trading range is a caution.  But that doesn't mean that the stocks don't show them self for profit opportunities. 

SNAP for example was considered a loser IPO by most,  I did well on it, trading it exclusively on the long side.

It faded hard from the opening, but notice the range contraction right at the 13 days in after it hammered the day before -- That should put it on the watch list. I bought the next day as volume came in but perhaps.  It worked ok.   It then gave another opportunity finding support at the previous level.    I didn't have any confidence to take it in to earnings so I sold the day of and missed the carnage. 

PI:

Like AAOI - held the initial range. So basically the buy signal is range expansion + Vol. 

BE:

Buy signals, narrow range follow pull back then expansion. Vol came in above the average days. 

TME:

One I'm holding now,  the initial Dip could have been bought but wasn't crazy about the vol. at that point.  I waited until it moved above IPO close price and took the position. I got lucky on my trim as it turned out because it looked like it was going to go a lot higher.  Sell in to strength in these. 

QTT:

Volume comes in as price picks up through IPO open and day 2 close. 

The Lifecycle Trade -- Book Review

Alright! I got my copy of the "Lifecycle Trade" How to Win At trading IPos and Super Growth Stocks. As many know, IPOs has been a topic that I have extensively researched. So I was excited to see how the book would compare to my own findings.




Overview.

The book is short--its only about 100 pages but it is a good resource.  It went over 1,679 stocks and categorized them into six categories:

1. Late Bloomer
2. Pump and Dump
3. One- Hit Wonder
4. Rocket Ships
5. Stair Stepper 
6. and Disappointments. 

The books then categorizes the different phases:

IPO - Advance Phase

Institutional Due Diligence

Institutional Advance Phase.

I've  personally talked about the phases as "Infant" and "Toddlers."  Infants can make big runs but they are not sustainable: TLRY  ACIA, SHAK, GPRO. Toddlers make the most epic moves. ESPR, AAXN (TASR) and become true market leaders.. 

Praise & Criticisms

One of the stated goals of the authors of the book was to find the "next Amazon."  I think that misses the point of IPO trading.  An Amazon is a 1 in a 5,000 stock and its not necessarily the best buy point to get it right from the IPO breakout move and ride it forever. -- AMZN had a 90% drawdown from 2000 -2001  The buy/sell rules aren't necessarily that effective for the majority of IPO trades and there is a lot of survivorship basis. Can you ride out a 50% drawdown? I'm not interested in trying.  Also, hundreds of IPOs have either gone belly-up or have gotten bought out. 

The book has some very nice chart examples of the different phases and provides nicely written explanations of the different characteristics of IPOs.  Some of the Stats were particularly interesting 20% of IPOs. Within a year 20% of IPOs will make a 100% run.  While a 100% is a great goal, 80% don't get there so are they worth trading?  My research shows that 80% will make at least a 30%+ run which is pretty easy to identify when it its coming and that, in my opinion, is the advantage of IPOs

 I agree with their conclusion that buying on the IPO day is a not a good strategy. 

Point being, I think you need to have different "trigger" rules for different phases. Until an IPO has gone through a basing pattern or wipeout its not a long term hold.   The institutional Mark they talk about is very real, but it generally occurs past the point where I would call a stock an IPO.  -- and the True Market Leaders will tell you who they are by the volume pattern.   There will be many, many other buy points in a TML that aren't necessarily as what I would call an IPO.

The trade examples and Q and A were very good.  The Authors point out trades they mismanaged as well as ones they got right.  

Recommendation

Buy it. -- its a great little resource to provide a framework for the various stages. 

That said, the book is a good resource but no substitute for going through the charts one-by-one and noting buy points. -- that's the only way to really gain conviction.