Deron WagnerFounder, Morpheus Trading Group

How To Find The Best Stocks To BuyBEFORE They Breakout

Overview of core beliefs Swing trading in the near to intermediate-term timeframe Trading with the intermediate-term trend Momentum-based strategies work!

An object in motion tends to stay in motionStocks trading near 52-week highs have the least amount of

overhead resistanceCheap stocks are cheap for a reasonWe buy high and sell higher, not buy low and sell highHuman nature is to underestimate how long a trend can last

Main structure of every uptrending stock is: base, breakout, pullback (rinse and repeat)

Momentum-based strategies work!

Momentum-based strategies work!

Momentum-based strategies work!

Buy stocks at or near 52-week highs

Buy stocks at or near 52-week highs

Primer To Buy Setups

Before a stock makes our breakout “watchlist,” it must satisfy two key criteria:

1.) Stock must be in a clear and distinct uptrend

2.) Stock must have a valid basing pattern

Base Building – The Key To Successful Breakouts!

Base building is like the foundation of a house Base is crucial to an uptrend, as the stock builds a strong

foundation to launch the next advance Before a stock can launch a big price run up, it must first

have a solid base pattern to build upon Bases typically form after a stock/ETF has already

experienced a substantial price increase of at least 30%

Basing Pattern #1 – Cup and Handle

Spotting A Valid Cup And Handle Must form within an existing uptrend, AND stock must be at least 30-40%

off the lows The best cup and handle patterns form near 52-week highs 50-day moving average should be above 200-day moving average, and

200-day moving average should have already been trending higher for at least a few months

The base typically forms on a pullback of 20-35% off the highs (deep correction), and is at least seven weeks in length

As the base rounds out and price returns back above the 50-day moving average and holds, look for the “handle” to form (usually 5-10% below the highs of the left side of the pattern)

Handle should drift lower, and is typically 5-10% or so in width. Handles that retrace more than 15% are too volatile and prone to failure.

Handles should be at least 5 days in length and NOT form below the 50-day moving average.

Basing Pattern #2 – Flat Base

Spotting A Valid Flat Base As with the cup and handle type pattern, a flat base consolidation

must form within an existing uptrend. Typically, it will form after a breakout from a deeper correction (such as a cup and handle).

The best way to identify a flat base is by using the weekly chart timeframe. The majority of the base should form above the rising 10-week moving average (or 50-day moving average on daily chart).

The 10-week moving average should be trading well above the 40-week moving average.

A flat base should be at least 5 weeks in length. Flat bases usually correct no more than 15% off the highs

Main characteristics of a valid base

Main characteristics of a valid base

The breakout entry

The breakout entry and follow-through

The breakout entry (example #2)

The breakout entry (example #2)

The breakout entry and follow-through (example #2)

Secrets Of A Valid Basing Pattern A base (or zone of congestion) is anywhere from 1 month to 1

year in length. For our style of trading, we prefer bases that form in a 1 - 3 month period that find and hold support of the 50-day MA.

We want to see “tight” price action in the base, especially during the last two weeks before the breakout.

A valid base should pullback anywhere from 10 - 30% off the swing high. Once a stock retraces 40 - 50% or more, we begin to question the strength of the uptrend.

We must see a “higher low” form within the base. This is crucial to the pattern. Without a higher low forming, we have no way to set a stop and therefore can not define the risk.

Volume should be declining during a base, or at the very least, not heavier than average. If there are too many days of heavy volume selling in a base, the base could be faulty.

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