Objective: This method is based on Jesse Livermore s IPO breakout setup. It is conceptually a range breakout swing trading strategy with an objective of profiting from the momentum market anamoly during favorable market conditions, using stocks that have had their IPO within past two to three years. We are looking for stocks that have been between the 2-3 year highs and lows since the IPO for the past year and are about to break out to highs above the 1-2 year range. Tools Needed: To trade this method, you will need the following: 1. Telechart software I use TC2007. I also have Stockcharts.com for use through my office firewall during market hours. 2. Broker I use Interactive Brokers. I have the web page as well as the app on my ipod. 3. Stockbee membership for access to Market Monitor. Operation Costs: The total operating costs sans commissions of this method are: Telechart Platinum 1- year = $900; Stockbee membership 1-year = $250; Total = $1,150. So on a $20,000 portfolio for example, annual return of 5.25% would be required for the operation to be profitable. Market Timing / Favorable Market Conditions for Trading when to trade and when to not trade this method: This method should only be utilized in a market where breakouts are working. Typically breakouts work when the markets are trending in the same direction as the breakout. I use technical analysis in conjuction with Market Monitor to determine the favorable times to trade this method as follows: Only trade this method when all of the following conditions exist: 1. Market Monitor a. All primary Market Monitor indicators are bullish. b. Primary and Secondary indicators are NOT at buillish extreme simultaneously. 2. Market indices charts Track Dow 30, Nasdaq Comp, S&P 500, and $RUT. a. All should be above the 200-day sma. b. All 20-day ema should be rising and above a flat or rising 50-day sma. c. Prefer indices above a rising 50-day sma if not coming out of bear market or deep correction. If the favorable market conditions exist, we have a green light to trade.
Stock Selection setup: Before selecting the stocks to trade, Telechart must be set up to scan the market for stocks that have had their IPO in the past 2-3 years with high momentum that are near highs and have not yet broken out. 1. In Telechart 2007, pull up the watch list US Common Stocks. 2. To find stocks not listed 2-3 years ago: a. Create the following two pcfs, and add a column for each. i. C104; Price 2-yrs ago, Time Frame WEEKLY Finds weekly close 2 yrs ago. Stocks with no price are the IPOs. ii. C156; Price 3-yrs ago, Time Frame WEEKLY Finds weekly close 3 yrs ago. Stocks with no price are the IPOs. b. Sort the list by Price 3-yrs ago. Scroll down until you get to the first stock with a for the price 3 years ago. Flag that stock. Right click on the stock and select Flag all below this item. c. Sort the list by Price 2-yrs ago. Scroll down until you get to the first stock with a for the price 2 years ago. Flag that stock. Right click on the stock and select Flag all below this item. d. Right click on the watch list and select Copy Flagged To Other Watchlist. Select (or create) the watch list titled A Livermore IPO Watchlist. 3. Create the following pcfs, select time frame of WEEKLY: a. MAXH52<MAXH104 OR MAXH52<MAXH156. This will find stocks that made a high 2-3 years ago that was not breached in the past year. b. MINL52>MINL104 AND MINL52>MINL156. This will find stocks that made a low 2-3 years ago that was not breached in the past year. 4. Create a new easy scan titled A Livermore IPO Anticipation Scan. Apply this scan to the A Livermore IPO Watchlist with the conditions shown below. The conditions are explained below the picture unless noted above.
a. Price below 2-3 year highs: MAXH52<MAXH104 OR MAXH52<MAXH156 = True b. Price above 2-3 year lows: MINL52>MINL104 AND MINL52>MINL156 = True c. Percent distance from 52-week high is < 7%. I chose 7% because this is a good normal reaction for a Livermore type stock after an advance and before the next. This finds stocks closest to breaking to new 52-week highs. d. Liquidity pcf to filter low liquidity issues: MINV3 >100000 = True e. Price History > $10 to filter out low price stocks with normal wide % swings. f. Stockbee Trend Intensity formula to find highest momentum stocks over last 3 months: (avgc7/avgc65) > 104.50 g. Low Range Day pcf to find stocks ready to move after sideways action rather than stocks already moving up: ABS((C - C1) / C1 * 100) < 1.5 h. NOT up 2-days in a row pcf to filter out stocks that would be up 3 days in a row if they broke out tomorrow: C<C1 or C1<C2 = true
Trading Process Flow: The process consists of nightly analysis and then daily execution based on price alerts. I work outside the home so I have both daily and nightly procedures that complement each other. 1. Nightly Process a. Nightly, run the Livermore IPO Anticipation scan above on A Livermore IPO Watchlist. b. Sort the output by STI highest to lowest. c. Go through the list of stocks. Look for the following characteristics, in this order: i. Linearity rallies followed by orderly pullbacks lasting a few days, along same lines as prior rally(ies) ii. Normal reaction phase stock should be in consolidation / range phase near highs. iii. Volume - during the normal reaction phase should be low/decreasing, will be higher on the breakout if it occurs. d. Flag each stock that looks like a potential breakout coming. Move the stock to a watch list titled Livermore Anticipation Watch list. e. Go through each stock and set a price alert in Telechart at the 52-week high. Make sure alerts are set to email. 2. Day time process a. The next morning, head to the office. Connect to the internet and open the following: i. IB Broker page ii. Stockcharts.com iii. FINVIZ iv. Stockbee ;) b. As alerts come into email: i. Go to stockcharts.com page and pull up the daily chart in a 1-year view. ii. Look for the same characteristics as the night before on the chart, except now you are looking for the breakout on high increasing volume. 1. New 52-week high that day. 2. High volume, higher the better. Needs to be much higher than normal reaction phase. 3. Stock is not more than 5% beyond breakout level. iii. If the stock meets the criteria for entry, it is time to execute the trade. 3. Executing the trade a. Determine Risk and Opening Stop on each stock. i. Risk Calculate amount of $$ to risk (R) 1. Risk no more than 2% of capital on any trade. 2. Hold no more than 50% of the account in a single position. 3. Hold no more than 4 positions at a time (max total R = 8%) ii. Opening Stop Place opening stop 3% below the breakout price.
b. Entry Enter the first quality breakout that meets the risk criteria above. i. Determine # of shares to buy: $R / (Entry Price Opening Stop) = shares to buy c. Open IB broker page. Go to orders screen. i. Select Buy order, stock symbol ii. Enter the # of shares calculated iii. Select Market Order iv. Review order for buy/sell and # of shares, and select submit. d. Exits i. Opening Stop hit. ii. Danger signals exit entire position 1. Key reversal days on volume (i.e. bearish engulfing candle, doji) 2. High volume without much upward movement. 3. Close below 4 day ema on increasing volume. iii. Time exit if stock has not broken entry day highs within 5 days, exit. iv. Profit exits 1. Sell half of the original position on unusual strength. a. stock up 7-10% or more in a single day b. stock up 20% or more within a 5-day period 2. Move stop up to 5-day low on remaining position. 3. Sell any remaining position on the next danger signal or on unusual strength as defined above. v. Opportunity exit If a higher reward/risk trade comes along at any time, capital can be reassigned to the trade with the highest reward/risk. Example on next page of stock in anticipation mode
Example of stock in watch list currently: An alert would be set at the 52-week high on the daily chart below. This is good nice momentum up to last year s highs and then an orderly pullback (so far) near the highs. Want to see it tighten / coil and break out on high increasing volume.