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How to Avoid Gambling in the Markets Plus My Bull and Bear Stock Predictions (and More)

Mark Shawzin
February 10, 2021

I titled last week's weekly Report “The GameStop Suffocation of the Financial Markets” and made a point of discussing the fact there are basically no shortcuts to success in this business.

Now of course we've all been fascinated with the rollercoaster ride in GameStop. GME started out around $6 - $9 and rose to nearly $500 in the pre-market sessions at some point. That’s a wild ride!

But as I was saying last week, these parabolic moves always end in tears.

Look at how GME peaked with a clear double top price pattern. It subsequently dropped to $60 by the end of the week.

What if you bought near the top? Or anywhere in that highly speculative bubble? You might not ever get your money back by this point.

All those young traders on Robinhood got caught up in this thing and now they’re substantially underwater. Trading on emotions (which is what most of these traders did) and effectively taking shortcuts inevitably ends in disaster.

So how exactly do you know when to jump aboard? How do you know when to jump off?

That's really what I try and do week after week here at The Pattern Trader. Getting in and out always comes down to price, because price is the information - “the news” – you can rely on. Not rumors or emotions or anything like that.

Let’s illustrate that with a real world example I’m involved with right now.

Last week I highly recommended taking a long position in Lyft Inc (LYFT):

That was before LYFT closed at a multi-year high just above the $53 area.

I knew to get into LYFT when it was around $45 because of a key price pattern. I was looking at the very robust double bottom around the $15 -$20 area. For most of LYFT’s existence, it’s been tracing out a bottom.

As you might expect, the word “bottom” suggests this only has one way to go: higher. So when LYFT cleared the neckline of that double bottom, this confirmed the stock was ready to “lift” off (no pun intended).

After that initial breakout, the stock encountered a bit of resistance and then settled back. Typically this is what happens after a breakout: the price retreats and retests the level at or near the breakout area. Once that retest is successful, it’s a very strong indicator that we’ll see much higher prices soon.

Following that retest, I not only bought the stock but I bought call options about to expire on Friday. I bought the $46 calls and the $47 calls while the stock was around $44.50-$45. These were therefore “out of the money” calls because they had no intrinsic value at the time (the strike price was higher than the stock price).

I paid about a dollar for each of these very speculative options. (I don't do this very often unless I feel good about an impending move because not only do you need to be right about the price direction and magnitude, but also you need to be right about the timing.)

But because of the giant double bottom in LYFT acting as the governing price pattern, I was confident that price was much more likely to go up than down – and soon.

The size of that double bottom is such that we could see an uptrend in LYFT for many days, weeks, months, and possibly years going forward.

So I do believe that this is just the beginning.

Anyway, I bought out of the money calls as a short-term bet to add to my longer-term bet on the underlying shares.

LYFT went through my strike price and suddenly I was “in the money”. My options were moving dollar for dollar with the stock. This gave me incredible leverage as the call options I bought for about a dollar were suddenly worth $6 (the $47 calls) and $7 (the $46 calls). That’s where I sold them.

I still have the underlying stock and I’ll look at the next series of call options after LYFT announces their earnings on Tuesday, February 9th. There's huge volatility around earnings calls, and I anticipate that volatility will inevitably be favorable even if LYFT initially falls back.

To my mind, I would any pullback in LYFT is a buying opportunity because I feel the inevitable trajectory of the stock will be higher.

Another stock that’s caught my imagination recently is Kratos Defense & Security Solutions (KTOS):

This company sells drones to the US military and certain other cybersecurity products. But I’m primarily interested in the price action as this stock has moved swiftly from $5 to its present level around $29.

So it's had a huge move already. However, based on the underlying price patterns, it looks like there's a huge move still to come.

The patterns I’m looking at include an asymmetric double bottom acting as the head of an inverted head and shoulders pattern. (An asymmetric double bottom is when one bottom is higher or lower than the other.)

Again, with the word bottom in this pattern, the implication is that KTOS will keep going higher – especially since the stock has broken out over the neckline.

What’s more, last week KTOS traced out a very healthy bullish key reversal. (That’s one where price dropped to a new low early in the week before reversing to close at the high of the week.)

The combination of a very bullish looking double bottom / inverted head and shoulders price pattern combined with the very bullish key reversal price action suggests KTOS is going higher.

Now I need to disclose that I’m long KTOS call options expiring in March with a $32.50 strike price. Again, these are out of the money calls for which I paid about a dollar. That means KTOS has to go to $33.50 or better just for me to break even on them.

But I've got about six weeks before those options expire, and I think it's a good bet to take because the underlying chart patterns and price action in KTOS look so promising.

That’s not to say that all stocks look like they’re going up. In fact, I don’t feel we have a stock market right now. Instead it's a market of stocks. T

here are some shares like LYFT and KTOS which look like they're going higher. But some stocks look like they're going lower.

There've been a recent spate of the IPOs that are starting to trace out bearish price patterns.

For example, the stock of Lemonade Inc (LMND) shows a prominent double top around the $175 price level.

Right now LMND is hanging at or near the neckline around $140. If the price drops below that level, there looks to be some room on the downside for LMND.

I'm also looking at Snowflake (SNOW) which is showing an unconventional double top price pattern. Just like the asymmetrical double bottom we saw in KTOS, I believe we have an asymmetrical double top in SNOW:

SNOW is sitting on prices right around the neckline of that double top. Any penetration below the $300 price level should take the stock lower.

Now I'm looking at the weekly chart of DoorDash (DASH):

This was also a recent initial public offering (IPO) and appears to be tracing out a bearish head and shoulders price pattern. The price is sitting right on the neckline at $180 and any penetration below this should take prices lower -- perhaps much lower.

I feel particularly bearish here because the head of the head and shoulders is a very long and ominous key reversal. The price spiked to an all-time high and then closed almost at the low.

So once again, instead of getting caught on wild rides like GameStop and not knowing what you're getting into, instead sit back and review patterns. Let the market tell you where it wants to go.

That's how I'm able to hop aboard and capture monster moves and companies like LYFT, KTOS and others.

Incidentally, the same Reddit crew that tried to push up GameStop also tried the same trick with the silver market. They thought they could create a short squeeze in silver.

It wasn’t very successful.

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