In this week’s edition of the Stock of the week I’d like to go over a ticker that we recently broke down during a StocksToTrade Pro Strategy Session. ViewRay, Inc. (VRAY) is a recent interesting stock that made a very nice all week long move up after coming up on our scanners. In the current market environment we have identified that the best and most consistent setup is buying strong stocks at or around the 52 week high. Animal Spirits are very high right now and traders as well as investors are all scanning for the next big breakout. If you can line up these criteria you can set the odds squarely in your favor to trade a stock before the big move comes.
Notice above the very simple Screener+ criteria I employed to locate VRAY Monday night after the market close during our Strategy Session. After market close I like to scan for the stocks in my price range with volume that are at or very near 52 week highs. Why? Again, we are in the middle of a very powerful bull market and stocks that high 52 week highs tend to continue higher. So after I’ve ran this scan and found a handful of tickers that are interesting, how do we take the next step and decide if the stock is worth trading? Then if it meets our criteria as VRAY did, how do we actually make a plan to enter and exit the stock. Whether that be for a stop or a profit goal.
Download a PDF version for this post.
I realize my handwriting is VERY sloppy and rushed, but that’s what happens when you spend 10 years using a mouse and keyboard, and quickly making notes. 🙂
Since I know the notes may be very hard to read, I will step you through each criteria and my thought process behind them. The sheet above is a very simple template we use in StocksToTrade Pro to break down a stock and develop a plan of action.
Recent Earnings: Y
We are in the middle of earning season right now, so I want to know if earnings are already out or coming soon. Ideally as in the case of VRAY earnings we out the week before. I try and locate “earnings winners” so I will never trade going into earnings. VRAY is a great example a stock moving up AFTER earnings were out a couple days before.
Earnings are always a catalyst so that nets bonus points but beyond that several analysts had upgraded this stock recently. All of this information can be found in StocksToTrade by the way. I prefer to go long stocks that have a reason for the move versus random pops that tend to quickly fail.
At or around 52 Week High: Y
My screener criteria determines this of course, but this sheet is universal and I use it for other trades that I will discuss in the future. Again a yes is a very positive technical indicator.
Chart break with clear support: Y
This is determined by the one year, daily chart, you will see below $6.00 was a key multi week, multi month and yearly breakout. Technical chart breaks are frequently based around whole dollar and half dollar areas, VRAY is a PERFECT example of that.
“Good” Company: Y
I frequently trade lower priced speculative stocks. Notice the quotation marks around “good”. It can be very difficult to find companies that are strong in the small cap market. That of course does not mean they are not good trades. Just always know what you are buying. VRAY is by no means the worse stock I have ever traded in this space. But notice (if you can read my handwriting) I put “barely” next to the Yes. They have a product and actual sales, which is more than many speculative biotech/medical stocks. I struggled with the yes in this instance, so I did add the “barely” note.
“Good/Hot” Sector: Y
This is used to decide if a stock is in a trending sector, whether that be a new technology or a natural resource, think solar stocks, or marijuana stocks. In VRAY’s instance they are medical related, which is almost always “hot” to a certain extent.
Whole dollar/half dollar break: Y
This is strictly a technical indicator but something many traders target and use for potential entries. As mentioned above, not only was VRAY a 52 week high at $6.00 it was also a technical breakout around a whole dollar area. Which tends to add technical support to the stock price.
Clear support to set risk: Y
Again technical based, I want a key level to set my risk. If you cannot calculate risk you do not have a trade, you are gambling. I always think about what I would like to risk BEFORE I enter the trade. I NEVER get caught blind sided trying to panic exit a trade. Again refer to the daily chart below. I determined a very solid support are around $6.25 sets to set risk against if I could get an entry buy at $6.50.
Those are the main criteria I use to determine Go/No Go on whether or not to pursue a trade opportunity. Many times I get to this point and the No’s outweigh the Yes’s and I scrap the sheet and onto the next stock. In VRAY’s instance, every idea was a Yes so I proceed to break down more criteria and build a trade plan.
Low float stocks are very hot right now, while 50M is not particularly low by most standards it is also not a large float. It’s a low enough number to keep me interested. If you are trading momentum speculative stock you should always know the float or have a quick reference. I keep this sheets on my desk while in a trade so all my notes are accessible quickly.
Support area for risk: $6.25
This was based on the initial idea of an entry at $6.50 if the stock dipped the next day. Typically this value lines up with the date further up on the sheet, but I like to duplicate it in the “Trade Plan” section of the sheet.
How “good” is the catalyst (1-10): 7
This is very subjective and based on my experience, something you will get a feeling for as you get more experienced. Earnings were solid and coupled with several analyst upgrades I determined the catalyst was a 7 out of 10.
Good Entry: $6.50 or $7.00
These are prices that i would look to enter the trade. Again notice they are keyed around whole dollar half dollar areas.
Setup Grade: B+
This was a very good setup, not ideal but very good. I for sure would look to entry this trade if my plan was exercised.
The next section is filled out upon entry, though since I was doing this live in STT Pro I went ahead and filled in a couple scenarios. Normally I would enter the actual data of the trade entries and exits here. I think it is VERY powerful to write your entries, goals and exits down. I have found I am so much less likely to let a stop slip if I take the time to put it in writing. Very powerful tip there in my opinion.
I detailed two potential entries, a dip buy at $6.50 with risk on $6.25 and a goal of $7.25. Notice I aim for 3-1 risk to reward. If I am willing to risk 25 cents a share I want to target at LEAST 75 cents a share. The second scenario came in play if the stock opened strong the next day. Entry at $7.00 with risk set at $6.50 and a goal of $8.50, again 3-1 risk to reward. Risking 50 cents to make $1.50 a share.
I then also make a few random notes to myself at the end of things I want to remember or highlight.
So now that we have done the due diligence how did the trade play out?
Above is the 52 week 1 day chart. This is what I refer to as the “big chart” or the 10,000 foot view, you can see that the stock hit entry targets at $6.50 and never hit the risk stop out area. And then later in the day had you been unavailable or busy you could have entered even higher per the plan at $7.00
Next is the “intraday” 5 day chart. Highlighted in red is the close on Monday. And shows the timeframe of when the above analysis was done in StocksToTrade Pro. Green indicates the potential entries both at $6.50 and $7.00 per the plan. You will then notice today “Friday” just four trading days later the stock hit the target goal of $8.50. That is an almost 25% move in just a couple days, with very low risk or scary moves to the downside. Some investors wait YEARS for those type of gains. With the proper due diligence and risk management we locate these types frequently in StocksToTrade Pro.
Great ideas all week, it was actually difficult to settle on only one stock to cover. But VRAY turned out to be great setup and very realistically could keep going next week.
Lead Trainer for StocksToTrade