(See Frank Cappelleri's trade ideas on CNBC PRO here .) Anyone who has had the pleasure and benefit of reading any of Jack Schwager's "Market Wizards" books understands these points: Active traders can, in fact, beat the market. Sometimes by a lot. Every successful trader has a process or a set of rules. The process can vastly differ per trader. The key to a long track record of successful trading is to always adhere to one's process. This is important to understand. Below I discuss the process that I use to find technical analysis-based trades. This will make all the sense in the world to some readers, but not to others. This is completely normal. Healthy markets literally are created by millions of participants expressing different viewpoints via trading every single day. For example, two of the smartest and most successful traders I know have completely different approaches. One buys breakouts, while the other one looks for breakouts in order to sell or short . Yes, you heard that right. They often find themselves trading the same instrument, and sometimes, they both end up making money. How is this possible? They have different processes, which can mean managing risk differently, caring about different time frames, using different strategies like options, etc. The point is that anyone interested in becoming an active trader should work to find a process that makes sense to them and keep working at it. It's a never-ending journey. Let's get into the meat of the piece now. We'll keep this very straightforward and focus only on long trade ideas, i.e., technical buy set-ups. For those readers who prefer trade ideas on the short side, the same logic applies, just in reverse. My process has six steps: Step 1: Determine the market's dominant trend Step 2: Choose trading strategies based on the dominant trend Step 3: Look for trade ideas Step 4: Determine the best entry point Step 5: Set a price target and stop loss Step 6: Pay attention to step #5 Step 1: Determine the market's dominant trend There are three kinds of trends: up, down or sideways. The S & P 500 has encountered all three from 2020-2024: 2020-2021: uptrend 2022: sideways 2023-24: uptrend The S & P 500, alone, has formed eight different bullish patterns since last October'23 and has achieved eight upside targets. As is clear to see, in aggregate, that produced a strong uptrend . Another key trait that we see in uptrends is low two-way volatility. We track this by paying attention to the number of +/-1% moves every month. From April'23 through June'24, the number of big daily moves remained subdued, and breakouts worked. When volatility is low, we often see "clean" breakouts. That means when a stock breaks out, it doesn't revisit (or negate) the breakout zone. In downtrending markets , breakouts are difficult to find. When the market is declining on a continuous basis, it's characterized by frequent large moves – both on a daily basis and over weeks and months. In 2022, for example, the S & P 500 logged 128 absolute 1% moves: 65 declines and 63 gains. Two-way volatility was fierce. When that happens, tight consolidation phases simply don't take shape often. And when they do, the breakouts that stem from them are negated because the whipsaws are so severe. We can see how many sharp rallies failed just as potential breakouts were about to occur in 2022. From my point of view, the sideways phase encompassed the price action from Q4 2022 through Q1 2023. Indeed, the bear market was still in play through the first part of that phase, and the new bull market had already begun toward the end of that period. But the number of big moves continued, which made for a treacherous trading environment. However, in April'23, the number of 1% gains and losses fell off a cliff, giving way to the calmer trading environment that supported breakouts more often than not through early July '24. Step 2: Choose trading strategies based on the dominant trend So, after establishing what the dominant trend is, we then need to choose the best suited trading strategies. In uptrending markets, two types of buy set ups work: buying bullish pattern breakouts and buying dips in long-term uptrends. In downtrends and sideways trading environments, the best kind of long trades are buying oversold stocks near support. Those have been difficult to find over the last year, but given the big declines we've seen in technology lately, these kind of trades have been popping up again. Step 3: Look for trade ideas This is where it gets interesting since the question is always "Where do I even begin?" I look for trades in various ways. One method is to use a stock screen service (which CNBC Pro Subscribers have access to here ). There are countless scenarios one can choose from, but a good starting point is screening for stocks trading above key moving averages like the 200- and 50-day moving averages. Regardless of the parameters chosen, that's only part of the process. In my recent Pro Talks interview, I talked about how technical analysis is both a science and an art. The science part is using technology to help narrow the amount of potential trades down from the thousands of publicly traded stocks to a more manageable amount. From there, it becomes an art. The set-ups that I choose to trade have to pass the old-fashioned eye-test. For instance, when the market experiences a big decline, I often look at the stocks that bucked the trend and actually advanced that day. Sometimes this reveals certain stocks in the same group showing relative strength and/or displaying bullish characteristics. Steps 4 through 6: We'll review steps 4-6 together and go over real trade ideas that we provided to CappThesis clients over the last few months. Given that the dominant trend has been higher for most of 2024, the trades discussed below were bullish pattern breakouts and buying dips in long-term uptrends. For bullish patterns, this is pretty straight forward. We buy the breakout. On most trading applications, the buy-stop order type allows you to buy a stock as it crosses above a certain price level. Notice that step four says "best" entry point, not "lowest" price level. I have no interest in buying a potential breakout while the stock still is below a key supply zone. We'll see why in a second. Recent Trade Ideas Here are two bullish pattern breakout trades that worked well. We recommended SPGI on the morning of 6/21 with a target of $468 and a suggested stop of $426. Why 426? Breaking below that level would have negated the structure of the cited bullish pattern. The italicized entries below are excerpts from our premium reports: "SPGI was one of the leading financial stocks from October'23 through early February'24, gaining 35%. But since gapping down on earnings on February 8th, it's traded in a very tight range. In fact, each rally attempt has failed to challenge that gap so far. The silver lining is that the range has taken the shape of this bullish inverse H & S pattern , which the stock is close to challenging now. A breakout would target $468 , which would be a new high. Here's the chart as it appeared in the report: …and how it looks now: On July 16 th , WELL – a REIT name – was a long idea: " WELL has come back after the June decline, bouncing near its 50-day moving average. It's now constructed this potential two-month upward sloping inverse head and shoulders formation. A sustained breakout would target 112." …and here is how it looks now: Of course, some bullish patterns don't work that well even when the market is in an uptrend. We showed this potential breakout in SNPS on 7/16/24, too, a day before Tech stocks, as a whole, began to falter: "SNPS continues to fight back from the spring downturn and now is close to making another new all-time high. While it has been making higher highs and higher lows since then, the breakouts have been marginal up to this point. It has another chance now after having built this four-week cup and handle pattern . A breakout would target 660." SNPS never even got to the breakout zone, so being patient would have prevented us from buying it. But even if we did, we would have (hopefully) been stopped out early in the aggressive decline. Buy the Dip in a Long-term Uptrend Here's an example of buying a stock (AZO) that got hit hard but remained in a long-term uptrend. Here's what we said about it on 5/24. " AZO now is down 16% from its March 2024 high, and this week it responded poorly to its latest earnings report. The recent downturn also filled the gap from its prior earnings report from late February. It's now oversold for the first time since last June, as well. In other words, there's been nothing to like recently. However, the stock now is back to a confluence of support. In particular, the following reside between current levels (2,775) and its February & March lows (2,650): Key uptrend line 200-day moving average 61.8% retracement of the October-March advance Support from February/March The initial target would be near $3k, which is a former resistance zone from April and early May. Its 50-day moving average is close to that spot, too, along with the 50% retracement of the recent decline." Here's how AZO has done since then. At CappThesis, we provide a handful of chart-based ideas like these every week. With so many potential trades to choose from, we're okay with the following outcomes: Big gain, small gain or a small loss . Aside from an unpredictable micro or macro event, we aim to avoid big losses . No matter how experienced a trader is, we all can use technical analysis to manage risk in this way. Taking it a step further, coming up with your own process – using technicals or anything else - could very well help you become a more profitable trader, as well.
