A Tuesday Trade Edition: One of the most important concepts in trading is to review your work, and learn from the good and the bad. It’s critical to identify what’s working — to do more of it. Each week, you’ll get a trade from my trading journal, in which I explain my whole thought process from start to finish. Trading is all about finding something that works, and applying it, over and over again. That’s how you find trading success. So study up on this “Tuesday Trade” and let’s get to work.
I’ve received a lot of good feedback on the “Tuesday Trade” Editions lately, so I want to continue highlighting successful trades and really breaking them down to help you understand them better. The reason we’re doing this is because when something works out so well, you need to go back and review it, so you can do it again.
Now this is a trade where I made a video prior to closing it out completely, as it was reporting earnings after the close that day. What’s this ticker? Chewy.
An online pet food, pharmacy, everything you need for your pets one-stop-shop… right online.
Why’s this ticker so great?
- COVID: Everybody’s at home, and people are ordering online MORE than EVER. This has been one of my favorite COVID names during this entire quarantine period.
- Recent IPO: Chewy’s a recent IPO (within the last year), and typically my analysis has shown me that we’ll see a lot of movement in these recent IPOs, and particularly when we get close to Earnings.
- High short interest: Yep it’s here again!! And if the other two are already present, and then you find out that a ticker has high short interest, typically you see a lot of explosion, especially as that ticker comes up to previous all-time highs — and last week Chewy reached all-time highs.
Now I told you Chewy’s been a favorite COVID stock of mine for awhile. That’s no lie, in fact 3 weeks ago (May 19th when I actually first entered this trade) I was talking about Chewy on CNBC. If you’re interested you can watch that segment here.
But back to looking at the actual trade…
Trade Breakdown: Macro View
If you’re looking at Chewy on a daily chart, you can see that the first bar we got was on June 14th. That’s how I knew this stock was a recent IPO within the last year. Now in the beginning you can see that it just traded lower and lower (which is typical for an IPO). However at some point, with the earnings report, the trend started to shift, and you can see that the pattern started to break to the upside.
You’ll see in the video above that it’s recorded on the day Chewy reported earnings — June 9th. That’s important to remember as a lot of my language in the video will be referencing “today” or “several weeks prior” meaning that timeframe specifically.
Back to the chart (which you can see in the video above)…
From that movement that we identified, we got into a bit of a bullish pattern until COVID took over… and then everyone was doing mostly everything online because they were stuck at home. That’s when it really started to explode.
Then especially after last quarter’s Earnings, you can really see that the pattern really improved. How? You can see a lot of green candles, and the price was holding up above the moving averages. I like to look for a five star trade always, but especially in a situation like this. This means I have a trend over the last 6-9 months, price is above the moving averages, there’s green candles, and pullbacks especially. Where do I like to see those pullbacks? To the 21, 34, and 50 EMAs hold.
Trade Breakdown: Trade Parameters
With this trade in particular, first of all it started with the overall macro view — I just gave you those. But when you actually want to enter a trade, you need actual parameters.
So I wanted to get in prior to the Earnings Report. Why? Because people will start buying this stock anywhere between a week to 2-3 days before Earnings because they think it’s going to explode on earnings. So I buy 2-3 weeks before to ride their wave essentially. Since my analysis has told me before that this is how people typically trade during this time.
Now Chewy reported Earnings on June 9th. And I got in with my first entry on May 19th. The technical entry for me was perfect because the price was holding the 34 and 50 EMA, and I had a squeeze. With my initial entry it traded lower, yes, but I held it because we were still in a squeeze (and my Turbo VZO Indicator showed we were still in consolidation). Then what happened? We got a buy signal on June 2nd. This is when the short interest really started working for this trade. Remember that high short interest I’m always talking about? This had almost 30%.
What makes this happen?
There’s buyers who come in thinking this trade is going to explode right on Earnings. Then there’s people like me, who are already in it a couple weeks prior. Then you have short sellers trying to get out at the last minute because of a catalyst (like the Earnings Report). This creates all that high short interest!
As you can see in the video, even though I was already in the trade, I placed another entry on June 2nd. Why’d I do that? Because this was really the first day short sellers really started to get squeezed. Why were they getting squeezed? Normally if you’re going to short something you’re going to have your stop above the previous high or all-time high. And as you can see, when the area broke we got a wide range expansion candle, high volume, and Chewy made a brand new high.
So that was a point I could enter in, not for a conservative trade, but for a momentum trade.
So really this trade happens in two parts…
- The conservative entry: The entry that’s a pullback buy entry. You have a few weeks, so naturally you have more time. That entry was $40 (so my stop would’ve been $36).
- The momentum entry: The aggressive entry that may not move as much because you’re not in it as long, but you can ride the wave still. That second entry was $47 (and my stock was still $36).
You definitely have more risk on the more aggressive second entry — but that doesn’t mean it’s not worth taking!
So where’s the target?
Typically with a short squeeze I’m looking for a pretty good explosion. I like to use Fibonacci and specifically the 1618 extension target. But the most important part is that I almost always get out before earnings? Why?
Because you have no idea if it’s going to explode on Earnings or not. You’re trading the positive bullish momentum prior to the report — not trying to predict the future. Of course, you could hold through the report, if you want to, and it could massively explode and take off, and you COULD make way more money. But those are all “coulds” and I like to trade with “wills”.
It’s up to you how you want to handle a trade like this.
But if Chewy were to have a bad report, you’d lose all the profit you’d made prior to the report. So I like to take the money off the table if I’m in before the report.
Profits (as of June 9th):
For my May 19th entry I bought it for $3.30 and on June 9th it was trading for $10.75. That’s a small trade with a solid risk to reward.
For my June 2nd entry I bought it for $1.49 and on June 9th it was trading for $2.22. Not nearly as much of a profit as my initial entry, but I wasn’t in it nearly as long.
In conclusion… basically what you have here is a high short interest, relative strength, COIVD stock that’s been doing really well that’s a recent IPO and there’s Earnings. It’s a great trade that I taught in my “Short Interest Secrets” class. Plus, it’s a perfect combination of the high short interest and five star setup I always use.