Did you wish you should have bought TESLA Inc (TSLA) shares when it was trading around $20 back in 2010? Or, rather Facebook Inc (FB) when it went public on May 2012 and traded around $30 for about a year after the IPO?
3 years after their IPOs, FB and TSLA were trading between 500% and 1000% above the IPO valuation.
There were some important markers many traders had failed to notice then before these stocks started making the big move.
Here is what actually happened.
Just after the IPO debut, these stocks went off the radar or out of favor because they had suffered sell-off immediately after the IPO sizzle but then, value buyers started to buy them up quietly.
I remember that vividly because I was in these trades and held them for few years with a small capital investment of less than $1000 on each.
We could likely to see the same event to repeat again in 2018.
This time, it will be Snapchat Inc (SNAP).
Yes, SNAP is on the news once again (after nearly 1 year hiatus) when it jumped 40% on a good news recently and this event is a significant turning point for long term growth potential.
I will be in the SNAP stock trade with a 3 year outlook and expect to reap the maximum return on a relatively tiny investment.
Here is a simple 1-2-3 trade setup I look out for on every high profile IPOs that made an immediate short-term pullback and trades below the IPO price to qualify for the trade.
Trade Setup Explained:
Stock should make a new high at the start of an IPO
Wait for a pullback to fall below IPO valuation, and determine the low
Draw Fibonacci retracement from high to low point and determine the 50% level
(Condition 1) Stock must be trading below the IPO valuation for a while
(Condition 2) Then, the price must break up above IPO value
(Condition 3) And then, the price must finish above 50% Fib level
Buy when the price pulls back slightly to the Buy Zone (see chart below).
Stop loss is set below the lowest price.
Hold stock for 3 years while moving up your stop level or use a trailing stop.
Look at the SNAP chart below for the formation of the trade setup (Condition 1 through 3 is now fulfilled).
Current price has moved into the Buy zone for the entry.
Current price is below $20.19 (50% retracement) is now at Buy Zone.
Example of trade entry with stop-loss and exits.
Here in another example on TSLA, I had used the same approach for entry, exit and take profit. This 1-2-3 setup also worked pretty well on other high profile IPOs like Facebook (FB) and Alibaba (BABA).
Snapchat (SNAP) is presenting a rare opportunity for long-term investment trade with high returns on small risk taking.
About the Author
Ramesh is the author of 3 trade strategy development books sold on Amazon. He is the creator the 10/20/30 Rule™ that could transform a mediocre trading system to become a top performer by following a systematic and thoughtful approach on strategy development.
Books By Ramesh Selvarajoo