Monday, February 26, 2018

From Contraction Comes Expansion

Art of Trading members and also long time twitter(@TraderStewie) followers have probably heard me say the words:  "From Contraction Comes Expansion"

..... well today, we're going to discuss in detail what this means exactly and how this simple concept can be so incredibly effective!!

So here we go!

Last Thursday evening as i was doing my NIGHTLY scans for Art Of Trading(AoT) members, WATT caught my attention as i was scanning my 'Power Earnings Gaps' watchlist.

Here's the original setup that caught my eyes and that's the exact setup that was sent to AoT members Thursday evening as a stock to watch the next day! And actually i liked this WATT setup so much, i actually made it the 'AoT Top Pick'!

...."From Contraction Comes Expansion" .... 

What does that mean? And why does this "simple" concept matter here for this WATT chart??

Well, let's analyze this WATT chart closely for a minute!

First of all, notice the HUGE, almost ridiculous 2 powerful spikes up(huge "volatility expansion") in late December 2017. Major news was announced for that company!

After such a big 2 day move, WATT needed to digest that huge move and it did that by pulling back quite a bit in Jan. 2018..... And come Feb. 2018, WATT went into a "volatility contraction" period as the price action on the intra-day ranges became smaller and smaller, contracting into smaller and smaller minuscule candles.... in essence, the stock became more "BORING"!!!


Perhaps it become "boring" to the untrained eye!!

Experienced traders know fully well that "From Contraction Comes Expansion!"

Especially note, the trading action in that WATT chart in the last 3 or 4 days in the above chart! It almost appeared as if WATT went into a "coma" like state....

Doesn't get more "BORING" than that!! Am I right?? 

Well, guess what, this's actually the exact time to PAY ATTENTION to that WATT chart and NOT SWITCH OFF!! 

Why? What is so interesting about that "Boring" ass chart, Stewie?!! 

Why on earth would you even make this stock the "AoT Top Pick" for that matter?? 

"Stewie has officially lost his damn mind!!"

It's time to pay attention because "FROM CONTRACTION COMES EXPANSION"! 

In other words, after the last few days' mini, sideways, smallish and "boring" price movement in WATT, this stock is about to wake up in a big way!

Keep in mind, after periods of mini, coiling and narrowing price action(aka, low volatility), stocks will often explode or surge in volatility!!

This trading concept is actually similar to that last Blog Post i made called:

**Keep in mind, WATT has over 30% short interest!** 

When a stock with over 30% short interest goes into "CONTRACTION" mode and is gearing up for "EXPANSION" mode.... get ready to see something awesome!!

Fast forward to Friday's opening bell !!

10 minutes after the opening bell on Friday morning, I sent out this tweet to AoT members....

WATT just triggered a long entry. Stop loss goes to just under today's opening lows($19.90)

WATT triggered a long entry once it broke over $20.60 , roughly 10 minutes after the open....

Look at that BEAUTY!! Not so "boring" , huh?!

As soon as WATT triggers that $20.60 entry, we immediately put a stop a few pennies under the day's lows(so in this WATT case, stop was $19.90) ... Target is $24.00

About an hour later, and after seeing WATT continue to steadily climb strongly higher, it was time to move stops up and protect some gains!!

So this tweet was sent to Art Of Trading members:

Can move stop loss to $21.00 now .... You'll be exiting this trade with a nice gain even if $21 gets tagged today!

For aggressive DAY TRADERS...

WATT offered a new entry intra-day as it formed a BULL FLAG pattern....

WATT starting to create a BULL FLAG intra-day

A few minutes later....WATT took out that intra-day BULL FLAG and never looked back!

Breaking out thru that "bull flag"... Stock looks very hyper and angry today!

Move WATT stop loss to $22.00 Locking in roughly +$1.40 or about +7% gain if stopped out

And for those of you who are still holding WATT(AOT Top Pick) for today...the stoploss has now been moved to $22.00 and as long as we don't stop out today I do intend to swing trade this one into next week! If you missed it, don't beat yourself up just be ready for the next one!

As you can see, WATT had a nice strong move the whole day from start to finish pretty much after 3 or 4 days of "CONTRACTION" exploded into an nice "EXPANSION" move higher which was good for a cool +12% move!

Entered WATT long at $20.60 and now have a raised stop loss at $22.00(target $24.00)

Finishing up this post on a Monday morning since we were swinging WATT ....

WATT, gapped up to open on Monday morning and ran up to $23.45 before fading back lower.....

WATT has stopped us out at $22.00! A very nice gain even if it couldn't get to $24.00

So we stopped out WATT for a cool +7% gain in only 2 days! 

Really wanted that "$24 target" to exit WATT but you gotta take what the market is willing to give you! You don't get to make the rules or tell the market what it should do. We take what she's willing to give by moving up the stop losses along the way and be grateful(humble enough to accept what she's willing to give at that moment)! 

Now, we focus on the next trade! 

As usual, my favorite part of all this is the feedback i get from 
Art of Trading members and also my twitter followers!!

Replying to 
Thanks. Glad I joined AOT. Totally worth the knowledge you spread around in this community. Lifetime skills.

Replying to 
EC and WATT my two first trade with you guys(Art Of Trading). Nice... 👏

Replying to 
Thanks Stewie - (lots of Love !!) Calling this a win

Replying to 
I got in later but still up of 5.5% great call. Almost paid for the year on this one trade

Replying to 
you called it, and should get the credit! nicely done, and glad i saw this “in time”😎👍

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