I often write that “XYZ stock is showing a good set-up” or “is set up nicely.” What exactly do I mean? That’s a question I’ve gotten a few times during the past couple of weeks, so I thought I’d add some color to it here.
A set-up is simply a chart pattern that often (but not always) leads to higher prices for a stock … all while being just above meaningful support, which allows you to place a tight loss limit after you buy. Thus, these set-ups offer a good risk-reward ratio—the risk is limited to just a few percent in most cases, while the potential reward is huge, especially if the stock catches fire and the market remains strong.
These set-ups come in many flavors. Some are huge base-building efforts over many months. Some are tight consolidations of three or four weeks after a big-volume upmove. And some might be formed by just a few days of pullbacks after a persistent advance.
To be fair, these patterns aren’t predictive, per se: Sometimes the best looking set-ups fall apart, especially if the market gets rough. But right now, I’m seeing more solid set-ups among growth stocks (my specialty) than I have in a few months, which is encouraging.
The first example would be MobilEye (MBLY), which, after a big IPO correction, soared for 11 days in a row off the bottom, a sign big investors were finally piling in. During the past 11 weeks, MBLY has etched three higher highs and three higher lows, and this week, found support near the 50-day line (the smooth blue line in the chart) eek. A push above 48.5 or so would be bullish, and a stop could be placed just below 45 (where the 50-day moving average stands) if you buy on that breakout—8% risk with the potential for much more upside.
The second example is Tableau Software (DATA), which gapped out of a two-month consolidation on earnings; volume on the gap was the heaviest in more than a year and pushed the stock to all-time price highs (above its March 2014 zenith). Since then, it’s nudged its way a bit higher, but generally DATA has traded constructively between 108 and 115, catching its breath for another run. This is a set-up where you could consider buying a small (half of what you’d normally buy, dollar-wise) position around here, maybe with a stop in the 103 to 104 area, below the low of the earnings gap day. And then, you could consider buying a bit more if the stock and market kick into gear on the upside.
Lastly, take a gander at Amazon (AMZN), which gapped to an all-time price high on earnings in April, and has now formed a new base—i.e., a multi-week, calm consolidation that often serves as a new launching pad. AMZN has even tightened up between 420 and 440 in recent weeks and looks ready to push higher. A decisive push above 440 looks buyable to me, with a very tight (percentage) stop near 410.
As I wrote above, these (and the many other) set-ups aren’t necessarily telling you the market is ready to get going on the upside. However, it does say that, if a new rally gets launched, there should be plenty of leadership to sink your teeth into. No predictions, but make sure you have your watch lists ready!