[dc]O[/dc]ur trading ideas, “setups”, if you will, must change with market conditions. Certain types of trades are more relevant at certain times. For instance, if the market is dramatically overextended, maybe we look for Antis, trend termination trades, or points to fade overextended individual names. If the market is strongly trending, maybe we look for pullbacks in strong stocks in strong sectors. One pattern that might be a bit more timeless–applying in a wider range of market conditions–is to look for stocks that are consolidating near price extremes. (This is one of the stock screens we publish in my research with Waverly Advisors. If you think you might find a list like this useful, why not give our research a free trial?)
Here are some individual stocks that are showing tight consolidations near recent highs (or, for the short idea, recent lows). How do you actually execute these? Well, there are many possibilities: perhaps you could simply buy them (or, for the short, short) at current prices with reasonable stocks under the consolidation area. Another possibility would be to wait for an upside breakout (or, for the short, a downside breakdown) and enter with the momentum of the market. The second choice sacrifices trade location for confirmation–perhaps a reasonable trade off, but one that must be understood. If you trade options, there are other possibilities: Patterns like this are ideal because implieds often crater when stocks consolidate like this, so simply buying calls (or puts) can be more attractive. Call spreads are a good idea for longs, and put spreads (made particularly attractive by higher skew) are also a reasonable alternative.
These are interesting patterns that combine several technical factors: pullbacks or consolidations, relative strength, and volatility compression. The end result is a set of patterns that have a statistical edge, and may point out stocks that are ready to somewhat “disengage” from broad market direction. Here are four ideas for your consideration:
Long idea: Digital Reality Trust (NYSE: DLR)
Long idea: Royal Gold Inc (NASDAQ: RGLD)
Long idea: Vipshop Hldg Ltd (NYSE: VIPS)
Short idea: Finisar Corporation (Nasdaq: FNSR)