In this video lesson, we teach in step by step detail an effective trade setup in BABA, a Consolidation Breakout, triggered by Coronavirus fears.
View Video Transcriptcoronavirus fears trigger excellent
trading opportunities hi I’m Mike
bellafiore co-founder of SMB capital and
we’re proprietary trading firm located
in midtown Manhattan and I’m most of the
off of a trading classic one good trait
and the PlayBook in this video lesson we
teach in step-by-step detail an
effective trade setup in baba
a consolidation breakout triggered by
coronavirus fears
[Music]
this is a consolidation breakout scallop
on baba the big picture today was that
Baba was gapping sharply lower on
coronavirus fears after equities drop at
their single day biggest loss since
October on the prior Friday global
markets were following on fears that the
China’s piranha virus would continue to
spread the death toll for the virus was
now up to 80 with 3000 global infections
and five infections now in the United
States just as a reference our city
killed 770 people in about nine months
and coronavirus had been around at this
time for two months this shows that this
is no longer a foreign problem and baba
specifically was gapping down more than
the overall market because it is both a
Chinese stock and technology stock those
two sectors were especially weak because
of this news so Baba’s gap was 55.7%
down and in the pre-market had done 16%
of its average daily volume on this day
that’s extremely high I like to see
anything that has pre market volume
greater than 5% of its average daily
volume so 16% especially for a market
stock is extremely significant Baba also
had more free market volume than any of
the other market stocks on my scanner
that day and so that showed me that it
likely was gonna be more in play than
any other option on any other stock that
I could have used to trade this idea our
ball was also 3 that’s also very
important for breakout trades and then
some statistics about Baba or that it
had it has an ATR $5 does 12 million 12
million shares of volume a day on
average it’s 40 47 % institutional
ownership a short flow of 12% on the
high timeframe Baba has been in a
long-term uptrend since the start of
2019 and you can see that prior to this
day it has been overextended from its
2019 view op and 200 daily moving
average it’s so a yeah it’s been it’s
been very overextended on the high time
frame and a pullback scene that seemed
imminent on the lower time frame we can
see that sellers have been taking
control bhava since mid-january we are
now opening very overextended from the
2020 Biwa which on this day was sitting
at 221 we were opening close to 200 and
so this this over extension from two day
from 2020 be walk shows that on the
shorter timeframes a bounce is pretty
likely because generally when stocks
extend away from their view ops they
tend to have mean reversion back to them
and so a bounce that this really was a
strong check in favour to be looking for
a bounce idea today so are you playing
around with figuring out ways to measure
when something is overextended from view
up I’ve just been thinking about a TRS
so whenever something where there’s many
a TRS away from a longer-term view ah in
this case 480 yards away from the 20/20
view ah I think that’s significant but
it depends on the time frame so this is
a medium timeframe view and when if
you’re looking at like a weekly view wat
than just something as short as being
one or two eighty hours away can be
significant
have you guys tested that at all we
haven’t done any formal back testing but
two ATR is away from to debut walk with
a parabolic move is something that we
have archived many times in our in our
playbook yeah that’s good and that’s how
I want you to be thinking about this is
systematizing when you really have edge
as opposed to it’s sold off a lot so
with FX i FX i was gapping down five and
a half percent below major yearly
support of the two hundred daily moving
average and the 2019 anchored view op
it’s also worth noting that the Shanghai
index and the Hang Seng Index were
remaining close this week due to an
extended New Year holiday and so whereas
epic site generally is checked tracking
China those
those markets were closed which maybe is
what’s contributing to heightened
volatility in Chinese equities at this
time if you want to learn three
real-world setups that our traders use
including the simple setup that we teach
all of our new traders and the set up
that turned one of our traders into a
seven-figure big money earner check out
the free webinar that we’re currently
running just go ahead and click the link
that should be appearing right now at
the top right hand corner of your screen
that’s gonna open up this free
registration page in the new window so
don’t worry you’re not gonna lose this
video you’re gonna learn more in a
couple of hours from this trading
workshop then from years of online
education now at though with US equity
as you can see spy was relatively strong
compared to Chinese equities it was only
gapping down 2% on this day it was
maintained it’s still maintaining a much
stronger uptrend with higher highs and
higher lows on the high timeframe and
it’s still opening well above its
200-day moving average in 2019 Viwa so
it definitely made sense that there was
going to be more volatility with Chinese
names on this day rather than US
equities on this day my morning game
plan with Baba today was to watch for a
consolidation to develop after 10:00
a.m. and I wanted to trade a potential
consolidation breakout above the 204
area which was right around pre market
high on this day I wanted from a risk
management standpoint to use 20% of my
daily stock with a tight 50 cents to a
dollar stop-loss when I saw the breakout
and my targets for the breakout
initially where was the 50 daily moving
average at 207 and then I had an
aggressive target of 211 which was the
prior trading sessions low and that
would be a full gap fill my plan also is
to add size on the pattern on a retest
if that would hold so when you have an
expensive stock like this and you have a
stock that’s particularly volatile on a
day
it is a good idea to be thinking about
hey maybe I’ll just let it settle down
maybe I’ll just let the levels set up
maybe I’ll just look for a tight
consolidation and if I can get a tight
consolidation and something that’s in
play and a high beta name and something
that maybe it was down too much or up
too much and I get you know some people
fighting in that consolidation area I
can get myself a a really good risk
reward set up that materializes so you
know when you’re in the room for the
a.m. meeting and you see something
that’s really in play like ba ba and
scalping down a lot and you you start to
feel maybe anxious that you really need
to be in it and take a step back and be
like well where is the real money gonna
come from maybe I don’t need to be in an
opening drive maybe the opening drive is
too difficult for me maybe I’m not fast
enough to catch it maybe it’s gonna be
too whippy in the first 15 30 minutes
but but but but maybe after it settles
down
maybe after it shows me this pattern I
can find a really good trade and I would
encourage you guys to be thinking that
way and that’s specifically when you’re
thinking about some of these high beta
names thanks Armand moving forward
so my pre trade checklist for breakout
trades like this are that I need to see
up elevated our ball above 1.5 ideally
and I need to see our vault increasing
and up ticking into the breakout showing
that new volume is coming in and volume
is increasing I also like to see on the
tape on a pace speed-up and the change
of the level too with large offers for
an upside breakout being lifted I also
like to see light pullback volume and
when we do get pullback so I like to see
the bid stacking and holding I don’t
like to see the price flashing down and
lastly I like um breakouts that are
above important whole dollar levels I
think that shows that the most the
highest number of participants are going
to be looking at the breakout and it
increases the odds of the breakout
working I also with regards to the
consolidation pattern it needs to be
clear and it needs to be tight and
it should last for more than 30 minutes
for an intraday pattern and I like to
look at similar patterns that I’ve taken
before in my archive a book of charts uh
and so these were actually two patterns
that I was looking at on this day from
my playbook um there was a couple
patterns and Netflix and one and Beyond
on that both I think are great examples
of price getting very tight and then
having a nice explosion on a clear pick
up in volume from the breakout area so
these are these are just patterns that I
kept in mind prior to taking the trade
Armon have you tried to define what
tight consolidation is so that you can
build a filter for it I have not yet
that is one of the top things on my yeah
have you done yeah yeah so so look I
would highly recommend that you all have
a filter it looks like this elevated
árbol tight consolidation for a
significant period of time intraday and
have that pop up as an alert for stocks
that you guys should look at that
pattern that consolidation pattern with
elevated árbol and a stock that has
elevated arvo that consolidates for a
period of time those offer some of the
best risk reward opportunities that
you’ll see that’s that wedge pattern
right that’s that that’s the Big Dawg
consolidation trade right great pattern
so let’s get that done and share with
Arman here’s my own an unplanned chart
you can see the pre-market high area at
200 350 to 204 and you can see that we
were gapping down right onto this $200
level that my thesis was was saying
should hold for a gap fill setups top
side so on the open baba immediately put
in a low at $200 and it drove $6.00
upward about an ATR
then it began to consolidate the stock
tightened for an hour and 45 minutes and
got extremely tight and around 11 a.m. I
began to notice that Boeing started
picking up which is a big clue that a
potential breakout is coming soon so
that was when I turned my attention
completely to Baba as you can see here
here’s a video of my first entry in Baba
when Babak clears a large offer at the
205 area this large offer here at 49
alright I actually entered as soon as I
saw that large offer it’s cleared and
then I wanted to see a retest hold on
the bid and you can see that comes
shortly price can’t even get back below
205 10 and then it holds and drives
higher taking out another large offer
right here at 20 also if you notice that
our ball is slightly increasing it’s
even though it’s only by a little bit
two point nine seven three then two
point nine seven three five that’s
significant enough to me because when
the breakouts aren’t working that number
is generally decreasing and so just the
fact that that’s increasing a little bit
a little bit shows me that more volume
is coming in and that’s generally a good
sign and so here in this video we see
the breakout accelerate above 205 50 and
so here’s where I enter full size with
the stop below to a five area and
initial target of the 207 area where the
50 daily moving averages
so the bid is trying to hold above to a
550 I’m waiting for the bit to hold
above 2 or 550 for more than just a few
seconds and once it does once it does
that I enter the remaining size and have
my stop tight but below 205 50 so here’s
a visual of my average entry versus
where my stop is and where my target is
you can see this is a really tight risk
for trade my stop is just below the the
previous hole dollar number and I when I
say my initial target is 207 I I don’t
want to take any size off before 207 and
then once we get past 207 if I see a
lower high or some sort of high-volume
selling then I would be willing to take
off my position otherwise I want to hold
till 211 if you’re making a trade where
you are buying out of a tight
consolidation that’s the reason why you
got into the trade do you need a loose
stop or a tight stop for me when I’m
using a consolidation breakout it’s a
tight stop yeah it should be a tight
stop right because you’re basically
identifying a setup the pattern and it
should because of this pattern and
because it’s breaking out of this tight
consolidation it should work right away
for you right that’s the whole point of
looking at this tight consolidation so
you don’t need you don’t need a wide
stop which means what for these
particular trades you can really size up
and them that’s why they’re so powerful
tight stop you can you can really set a
tight stop and you can really get big
and a trade like this it’s an effective
pattern but it’s also a pattern where
your risk is very controlled and de
minimis so with my exit
I initially exited a quarter of my
position as we started to get above the
50-day moving average at 207 and then
once I saw Baba start making lower highs
that’s when I started to get nervous
about the position and actually when we
made a lower a lower high and then a
lower low here that’s where I
did my my full position uh I this it was
still forming a very tight pattern but
because it was a a breakout trade um I
didn’t want to I didn’t want to be
lenient here and I’m at the position run
um my habit is with breakout trades once
we cross the initial target I really
should be looking for any any signal to
get out my regions to exit the list is a
lot bigger when it is breakout trade
above the initial target so this lower
high here it is right at the full
position here are the executions on
trader view so on trader view I tagged
this trade as a scalp trade as well as a
consolidation breakout and a gap gap
fill reversal what I could have done
better with this trade was that I didn’t
do a very good job of over sizing the
trade that’s something I’m working on
with my breakouts like Mike said when
the stop is very tight you can generally
put on quite a bit of size and so I’m
working on risking a little bit more
than I’m comfortable with um maybe
taking one half times two two times what
I’m expecting to risk on breakouts and
then cutting that extra piece at near
breakeven if I notice that something’s
wrong with the tape and so that’s
something that I failed to do here even
though I did get in the total size that
I had planned I also I’m happy with how
I held my full size to the initial
target I didn’t make what is generally a
recurring mistake for me of taking off
my size before the target without a
reason to close and then lastly I could
have fought for entry better here I
think I in hindsight it definitely was a
better it would have been better if I
entered everything when I saw the break
of 2:05 because that would allow me to
have a more protected entry and rather
than entering the other half at 200 550
I could have waited to see that 205 50
would break and then if it didn’t I
could have taken some size off but
giving me a much more protected entry
and help me out and making more and
surviving potential small pullback now
it’s your turn have you made effective
trades triggered by the coronavirus
fears if so please share them let us
know by leaving a comment below right
now
* no relevant positions
