The Holy Grail Setups

When you scan 100s of charts each day, looking at intraday, daily, and weekly charts you are going to easily find 50 possible trades every single day.

Let’s be real for a minute. You do not have enough money to take every good trade. If you did you wouldn’t be reading this right now. Even if you did have enough money, I am not sure that would be good practice.

Therefore, we have to identify, the best and most likely setups to take on. Ideally this only hands us a few setups each day, week, or even month.

Which is why I have created a checklist of 8 items to help you identify the best setups to take on.

Here is our criteria for an A+ Trade Setup

  1. Stock is in an uptrend. Ideally 8 > 13 > 21 > 34 > 55 EMAs
  2. Price is consolidating at or near All-time highs
  3. Strong company with strong EPS and sales growth
  4. Market cap > $10B
  5. Strong catalyst (ER, news, sentiment, etc)
  6. Strong market and sector
  7. Downtrending VIX
  8. Breakout during market hours

Note: We can reverse each of these criteria for a bearish setup, but it’s difficult to consider a short and A+ setup when trading good companies that go up 70+% of the time.

  1. Stock is in an uptrend

    We already discussed this in a previous lesson. Ideally 8 > 13 > 21 > 34 > 55 EMAs. This shows bullish momentum and is likely to result in the most explosive, sustainable moves.
  2. Price is consolidating at or near all-time highs

    Price holding recent highs, slowly pulling back, or consolidating on low relative volume usually indicates that price wants to move higher. No violent pullbacks on volume mean holders are not rushing out on recent uptrend.

    Low relative volume means that volume during the consolidation or pullback days is lower than the previous uptrend and breakout days.

    Consolidation close to EMAs is key to offering a good risk to reward ratio. Remember, price must always revert back to EMAs. On every timeframe.
  3. Strong company with strong earnings and sales growth

    The simplest way to increase your trading odds from the start is to only trade strong, growing companies. The fun in trading penny stocks is that you can make big returns. Trading the biggest company in the world, MSFT, can get you incredible returns from a 3-10% move using options correctly.

    Strong companies with earnings and sales growth are more likely to go up over the long run. Why bother trading companies which are more liekly to depreciate than appreciate? Stick to AAPL, FB, NVDA, etc.

    When in doubt, stick with the large cap tech companies.
  4. Market cap > $10B

    This goes hand-in-hand with criteria #3. $10B market cap is a large enough company to have faith in. Liquidity and volume should be strong and you are unlikely to come across pump and dumps.

    If you’ve traded options long enough, I’m sure you’ve had a bad fill when you were starting. If contracts lack liquidity (buyers and sellers) then they have a large spread. The spread is the difference between ask and bid prices or the prices you buy and sell at, respectively.

    If you slap the ask on a contract with poor liquidity, you could be starting off a trade -20% because the mark theoretical value (trading price) price is in between the ask and bid price. Not a good way to start off a trade.
  5. Strong catalyst (ER, news, sentiment, etc)

    All of the other criteria is rather easy to find if you have some patience. But a strong catalyst only comes around so often and you have to be able to identify it and nail because the moves can be explosive.

    I am going to share some examples on this because it is the most beneficial.

    The best catalyst will always be an earnings report. Ideally strong earnings and sales growth and raised future guidance. A 3/3 on the surface numbers. Regardless, you really don’t HAVE to look at the numbers or read the report. You want to see the market’s reaction and the price action.

    I’ve seen earnings beats and the stock drops 10% because it did not beat by enough or provided “cloudy” future guidance.

    This is a big reason why you wait until AFTER earnings to place your bet.

    At the end of the day, a strong catalyst is going to move price faster and more explosive than anything else. Especially in an A+ technical setup.
  6. Strong Market and Sector

    Believe it or not, this is the single most important factor to take note of when trading. In my opinion, the market is going to tell you 3 things as a bullish trader: Balls to the Wall, Tread Carefully, or Risk off.

    William O’Neil said, “3/4 stocks will follow the market.”

    Odds are your stock is NOT 1 out of the 4.

    Ultimately, the overall market and sector strength is likely to determine whether a breakout succeeds or fails.

    If the market is trending and volatility is low, risk on. If the market is choppy, and volatility is high, then risk off.

    There are many ways this can be tracked. The simplest would be to use ETFs as your risk on/off tracker. For large caps, follow the SPY or QQQ if you are in big tech.

    If you are looking to trade growth, then following ARKK or IWO would be wise.

    Word of Caution: Be careful relying to much on SPY and QQQ to determine overall market sentiment. SPY and QQQ price action is heavily reliant on AAPL, MSFT, FB, AMZN, GOOG, and TSLA which make up >40% of the indice.

    In the current market conditions (most of 2021) the indices have been flying, but most of the market is below their 200-day simple moving averages. The major indices have been led by the tickers mentioned above.

    This is why it is important to take note of smaller, market indices such as ARKK, IWM, IWO, etc.
  7. Weak VIX

    The VIX is the volatility index. In layman’s terms it measures price volatility. Volatility is usually caused by uncertainty. Investors do NOT like uncertainty. Uncertainty can be caused by ongoing news cycle such as an emergency pandemic. UNcertainty then leads to fear. Remember price moves on Fear and Greed.

    When Covid-19 first hit the United States and businesses began to shutdown, no one knew what the future economy was going to look like (uncertainty). The VIX reached levels not seen since ____.
  8. Breakout during market hours.