Blue-Sky Breakouts and Levels to Watch When Stocks Get Nuts
I’m still on vacation, as you know, but NOTHING can stop me from dropping those sick VWAP verses in your inbox!
Now featuring the “1-Minute Multiday VWAP Reversal (REMIX)”
While this week has been all about the start of earnings season – and the potential opportunities to fade gaps on bank stocks – there’s another group of stocks that are ALWAYS on my radar:
Low-dollar stocks making Blue-Sky Breakouts.
Anyone who’s watched me on Money Morning LIVE or during my usual 9:30 a.m. trading hour has likely heard me talk about Blue-Sky Breakouts, but what are they, and why should they matter to YOU?
We’ll go over that today, as well as the importance of round- and half-number breaks, particularly during earnings season when volume tends to increase.
In fact, we’re seeing a LOT of unhinged trading activity these days, and while that’s like shooting fish in a barrel for VWAP day traders, it also gives me pause for concern… And I’ll tell you why right now.
Knowledge Bomb: Stocks Making All-Time Highs Can Go Higher
So, what is a Blue-Sky Breakout?
In a nutshell, it’s when a stock moves above its previous record high and there’s only blue sky overhead.
This moment can be one of the most exciting for bullish traders, and one of the most terrifying for short sellers (i.e. – traders risking a LOT to bet the stock will go down).
That’s because stocks assailing new heights will often rocket even higher on a short squeeze… especially in this INSANE trading environment.
Now, when a stock moves into uncharted territory on the upside, short sellers usually don’t give up right AWAY… they often wait to see if it retraces.
And if the shares DON’T come back relatively quickly, that’s when the squeeze ensues.
A short squeeze is simply a rush of short sellers scrambling to buy back their borrowed shares before they get too deep into the hole. The panic-buying begets more panic-buying, and it’s a vicious cycle – one that can pump a worthless garbage stock to the proverbial moon.
I mean, remember Orphazyme (ORPH)?! That’s a REAL CANDLE on the chart below, stretching more than $70!
Because once ORPH (and you have to bark – not speak – that ticker, if you’re saying it aloud) hit blue skies, it was off to the races.
A 9-month/2-day chart of ORPH(!!) – courtesy of Thinkorswim
Watch for Those Round- and Half-Number Breaks
But, not only can a Blue-Sky Breakout spook savvy short sellers… So, too, do those key round- and half-number breaks.
For instance, take fellow “psycho stock” T.A.T. Technologies (TATT) – remember that one from earlier this month?
When a stock gets above $5, it’s not uncommon for it to then make a break for $7.50…
Once it’s above $7.50, look for a move to the round $10 level…
And a break of $10 will usually get you $12.50…
TATT knocked on the door of $12.50 shortly after topping $10
In addition, when you see a stock breaking north of $20 with momentum – LOOK OUT, as you saw with ORPH earlier.
Or you might remember Marin Software (MRIN), which – like many of these insane names – remains on my list of revolving go-to stocks.
But in case you forgot, MRIN basically came from the 9th Circle of Hell, and look what happened when it got above $20 (the top red line on the chart below):
MRIN was off to the races after climbing above $20
And when you find an optionable stock, these round and half numbers often become even more relevant.
That’s because some stocks still have options listed in $2.50 increments, like back in the old days. So available options strikes to trade might be $50, $52.50, $55, and so on.
Heavily populated option strikes can act like magnets as the contracts’ expiration date approaches, and since options expire at the close on Fridays, this magnetism can become intensified on Thursdays and Fridays – especially during earnings season, when volume tends to run hotter.
That said, I’ll leave you with yet another warning about chasing these maniacal stocks:
Most of these pumps eventually get dumped!
So yes, we are living in crazy times; there used to be maybe one or two of these monumental one-day moves per session, and now there’s a whole slew of stocks going nuts every single day…
But this environment is extremely atypical, and should be traded with caution!
In other words – don’t get caught holding the bag, Blanche.
Unlike trading, say, the Invesco QQQ Trust (QQQ) or a blue-chip stock like Intel (INTC), there’s a chance that if you get caught on the wrong side of these no-namers, you may never recoup your investment…
I mean, does anyone even know what ORPH(!!) does as a company? No!
And as day traders, WE DON’T CARE ABOUT FUNDAMENTALS… but if you’re stuck holding the stock because you didn’t obey the VWAP, well, then you’re NOT a day trader, and you might watch that “investment” go to $0.
If you don’t believe me, I’ve got a story to tell you about Funko…
Until next time, kids!
Kenny “The Warlock” Glick
One response to “Blue-Sky Breakouts and Levels to Watch When Stocks Get Nuts”
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July 15 2021
I have been watching your show……and we have had a similar life course only my is longer in historic duration…..most stocks are pump and dumps…..I believe when friends ask about my portfolio they don’t understand why I always say “CASH”…….good luck with your new endeavor…….