One of my favorite plays is to see a stock breakout on good fundamental news (usually earnings), run for a few days, and then knock out a base.
The “base” of the stock is incredibly important because it shows you key areas where buyers and sellers have been battling it out.
And if the previous move was on the back of good news, odds are the buyers will become much stronger than the sellers over time.
Visa had a massive gap higher on earnings and ran another 20 points before settling down into a very tight range. Support is right above 245, and resistance is just under 250.
Odds are, this breaks higher and you want to be positioned with long calls as volatility expansion will occur.
There are a few ways to play it.
- First, you can wait for the obvious breakout above 250 and then scale half of your position as the stock comes into 255.
- Second, you can get long here and start scaling into the initial breakout. This puts you at a better basis, but has lower odds.
- Third, you can wait for the breakdown of support, but if the breakdown fails you can get long on a move back into the range and then scale as it hits the upside of the range.
These three kinds of setups have very nuanced differences and really come down to your trading style and risk tolerance, so you can choose the one that is best for you.
