Playing High-Volume Breakout Trades

Hey There Income Hunters,

During earnings, high profile stocks can trade on explosive volumes.

Big moves above or below the 200-day moving average on high volume provide excellent opportunities to trade with massive institutional flow.

And certain guidelines help when trading technical patterns …

Especially the inside scoop on volatility and unusual option trading patterns.

This is where Option Pit CEO Mark Sebastian can add tremendous value to your trading. His Robinhood Trader program is a must-have subscription if you want to have the full insight on what stocks are primed for big moves.

Here are other key fundamentals you need to know …

4 Pattern Recognition Fundamentals

• • • Know the overall trend in the market. If the trend in the S&P 500 is up, then look for breakouts above the 200 DMA on higher volume and vice versa. The 200 DMA pattern works well because it is so widely used by institutional investors 
    • Look for minimum volume increases of 50% or higher.
    • Plan your trade and trade your plan. Create your entry rules, exit rules and trading goals beforehand.
    • Always use stop losses and honor them no matter what …

These fundamentals will help you put the odds in your favor and make your trades simple to manage.

Today we’ll look at a couple of growth stocks that will benefit from the infrastructure bill, and I will share option strategies I am deploying in these names.

I Limit This Strategy to Stocks That Meet the Following Requirements …

• • • New and existing institutional buying
    • High profitability (net Income)
    • High/stable earnings per share
    • Low total liabilities
    • Strong corporate insider buying
    • High Quarterly EPS estimates

 

Here are two stocks that meet the criteria and are ripe for a sustained move higher …

 

SolarEdge Technologies Inc. (Ticker: SEDG)

Falling costs have made solar energy the most cost-competitive versus fossil fuel-based electricity. Plus, costs are forecasted to continue to dramatically fall in the years ahead.

SEDG is the best of the bunch for solar. The company is less dependent on contract manufacturing because it has some of its own capacity and is adding to it. SEDG also has greater inventory levels, both on their own and in the distribution channels.

Like most companies they dipped a bit in 2020 but are expected to grow EPS 35% next year and 205% over the next five …

Let’s take a look at the action since the Q2 earnings report …

So, you can see that, even though earnings were off by 8%, SEDG rallied by more than 20% on 3.8 million shares of volume, which was triple the average.

Now, SEDG is correcting and many times when you break the 200 DMA, correct a bit and maybe even test it, it allows more institutional money to get in and then the stock makes new highs.

One trade to consider is a credit spread to a Sept. 17 expiration (42 days). You could sell the 270-strike puts and buy the 250-strike puts for a $4.80 credit.

The higher 270-strike sits just below the 200 DMA at 273.75.

The ideal scenario is to have SEDG grind a bit lower into expiration, book the credit and then switch into a call spread for the move to new highs.

Check out these recent analysts’ ratings:

eXp World Holdings (Ticker: EXPI)

Real estate firm EXPI has a one-of-a-kind business model built around one of the best agent incentive programs in the industry. The number of agents and brokers increased 87% y-o-y with entry into 5 new countries in the past year alone.

In Q2, EXPI revenue surged 182.9% y-o-y and total transaction volume jumped 210% to reach $40.1 billion. CEO Glenn Sanford forecasted growth into 100 new countries within five years.

EXPI has earned their 136 price-to-earnings ratio based on the sharp upward trend in sales …

Global inflation and active movement out of high tax states/countries into low income states/countries will continue to drive higher transaction volume in the years ahead.

Now let’s look at the stock technicals ….

Volume surged 700% on their 100+% beat on their Q2 earnings announcement …

Let’s take a look:

EXPI is an awesome growth story and, after running the analysis through Option Pit’s Edge Hunter Optimizer, Andrew Giovinazzi and I selected a call vertical option strategy as the play …

I bought an EXPI 55/65 call spread to Jan. 21 for $2.60.

I also bought a 37.5-strike put to Sept. 17 to capitalize on a possible test of the 200 DMA in the short term.

Here is a look at the risk profile …

I like this trade because it gives you the ability to pay for your call spread if we get a short-term test of 200 DMA. You could close out the put prior to expiry and let the call spread to run into January expiry.

If EXPI just keeps rallying, you have the opportunity to capture a max profit of $1,000 (strike differential), minus your total debit of $335, which comes to $665.

Bring It Home

Making sure all the variables affecting a trade — i.e. macro trend, stock trend, price, volume and volatility — line up significantly increases your probability of success …

The Edge Hunter optimization tool is an extremely valuable addition to your strategy selection analysis, and I will be adding it as a Power Income tool in the near future to optimize the trades I execute and write about

Have a great day everyone and always …

Live and Trade With Passion My Friends,

Griff