Unusual Due Diligence: 9/26/21
Finance & Investing
Sunday; September 26th, 2021 - Good afternoon everybody! Welcome to Unusual Due Diligence, a segment that covers general investing practices & unusual options caught on Unusual Whales, a powerful tool that helps you analyze the live options flow and catch large, unusual trades that have the power to move the markets. We’ll spend some time breaking down watchlists, fundamentals, strategies - the subjects are constantly being cycled through. If you enjoy this segment, please be sure to leave a like, comment, and subscribe to stay up to date on more upcoming Newsletters, which you definitely don’t want to miss. Emails are strictly bound to Newsletters only, so you’ll never receive any form of spam or unwanted promotional content from us or any third party. Subscriptions are currently completely free, so why not give us a shot?
Remember: This is NOT financial advice and nothing I say or do should be replicated without doing proper due diligence. Please only invest whatever you are capable of and willing to lose, taking any and all trades at your own risk.
Note: I want to apologize again for taking so long to get these Newsletters up and running and back to their usual consistency. As shown in the previous letter, it’s been a very busy few weeks. I never wanted to release a Newsletter on #TheSTRAT without making sure I completely understood it, tested it, and was able to confirm that this strategy could be of actual use for everybody here if utilized properly. So far, I’ve been amazed with the performance, and I now feel comfortable bringing this to everyone and creating our own strategy behind it.
Today, we’re going to be going over a strategy I’ve been slowly absorbing called #TheSTRAT, which was developed by Rob Smith over a period of almost 30 years. TheSTRAT is a trading strategy that’s 100% objective and completely eliminates all market noise, focusing on aspects that we can define, quantify, analyze and execute in real-time. This helps us remove all personal biases when entering or exiting a trade, and we’re going to be using this strategy in combination with our usual breakout strategy for patterns or trends to help us identify proper entry & exit points.
First, I’m going to start off with a simple watchlist I’ve had my eyes on, and then we’ll move on to exactly how we can use this strategy in combination with our watchlist and any breakouts that occur.
$AMRS | 1-3 Consolidation on Weekly | Breakout of Triangle
$CLF | Possible 2-2 Reversal on Weekly | Rejection at $19.76 Support
$OCGN | Possible 2-1-2 Continuation on Weekly | Breakout of Triangle
$RDFN | Top of Falling Channel - Watch for Reversal or Continuation
$FCEL | 3-1 Consolidation on Weekly | Breakout of Triangle
$CCL | Bottom of Large Channel - Breakout of Small Channel
$AMAT | Ascending Triangle & Divergence with RSI on Weekly
Now, let’s begin with #TheSTRAT! As stated previously, TheSTRAT is a 100% objective trading strategy that focuses on aspects that we can define, quantify, analyze and execute in real-time. We’re going to keep this Newsletter very simple and just go over the basics to start everyone out. We’re going to go over the numbers and what they mean, reversals, continuations, and consolidations. Finally, we’re going to talk about what’s called “Timeframe Continuity” and explain exactly how we’re able to use this strategy in combination with our breakout strategy we all know and love.
First things first, TheSTRAT teaches us that there are only three things that can take place within any market at any given moment across all timeframes. These three things are:
Inside Bar: A period of Consolidation; The candlestick neither makes a higher-high nor a lower-low
Directional Bar: Where a candlestick breaks either the high or low of the previous candle; The candlestick moves in a single direction
Outside Bar: A Broadening Formation; Where a candlestick breaks both the high and the low of the previous candle
It’s literally that simple. You don’t need to overthink, you don’t need to dive deep, there are only three outcomes with every single movement on the chart. However, always remember that a candlestick is not finished performing until it fully closes. Threes cannot occur without being a two first, while a three can never become anything other than a three once it fully forms. When you’re able to understand that, statistically, there are only a finite amount of candlesticks that can occur from one bar to the next, you never have to guess what direction the price is moving in. From understanding and being able to identify the 1s, 2s, and 3s - we’re able to interpret exactly how the price is performing in real-time.
With these identifiable numbers also come identifiable patterns. In reality, there are dozens of different patterns that will take years to grasp, but there’s a specific set of patterns that occur the most in all markets which define precise entry and exit points after the sight of an actionable signal.
There are only a total of six patterns we need to learn, which each have a Bullish/Bearish version depending on the momentum of the current market. Of these six patterns, there are only four general movements that occur. These are Reversals, Continuations, Consolidations, or Broadening Formations.
A reversal is simply a point where the market’s momentum reverses and moves in the opposite direction of the current trend.
2-1-2 Bearish/Bullish Reversal
3-1-2 Bearish/Bullish Reversal
3-2-2 Bearish/Bullish Reversal
2-2(-2) Bearish/Bullish Reversal (Two/Three 2s)
1-2-2 Bearish/Bullish Reversal
A continuation is a point where the market’s momentum is moving in a single direction, consolidates, and then continues in the same exact direction as it was previously.
2-1-2 Bearish/Bullish Continuation
2-2(-2) Bearish/Bullish Continuation (Two/Three 2s)
1-2-2 Bearish/Bullish Continuation
A consolidation is a point where the market’s momentum comes to a halt and moves in a sideways direction; Both buyers and sellers are present, but volume is decreasing over time. This can indicate both a continuation or a reversal.
A widening point of consolidation where the market’s momentum intensifies and moves in both directions; Buyers and sellers are present, but volume is increasing over time. This also can indicate both a continuation or reversal.
1-3 Broadening Formation
1-2-2 Broadening Formation
Each of these patterns are visible in the sheet above with a clear visual of how you enter and how you exit. With all of these patterns, there is a specific way you need to interpret what you’re seeing:
If there are zero formations that have taken place in the last 3-5 candles, you are scanning and searching for possible patterns that can just be starting to form. Based on a single candle, what possible patterns can form within the next two candles, and why?
If there is a formation, how far along is it? For all of these patterns, you want to be able to catch them after the close of the second candle but before the close of the 4th candle.
If the pattern has recently completed, it’s not too late for an entry; Zoom out and search for a formation taking place on a larger timeframe, which will help you understand how much time you may have left. This is called “Timeframe Continuity” which we’ll touch on later.
Now, these types of patterns are different than the previous types of patterns we’ve been identifying, such as the ascending triangle. With these, there are only a few bars that make up the patterns rather than a combination of many. However, this is where “Timeframe Continuity” comes into play.
Let’s start with the larger timeframes such as the monthly chart. A month makes up roughly 20 days (5 days, 4 weeks), so in one single candlestick on the monthly chart, there are 20 candlesticks on the daily chart. If you see a 1-3 formation on the monthly chart, that formation is actually made up of over 40+ candlesticks on the daily chart, which is what makes this strategy so good for swing trading.
When using TheSTRAT, you start out with a large timeframe and make your entry on a smaller one. If I notice on the monthly chart there is a possible bullish 2-1-2 continuation forming, move to the daily chart and see a breakout of an ascending triangle, and then move to the hourly and see a bounce off a minor support line (Just an example, not how it always works) then I’d probably want to take the trade! If there is disagreement between multiple timeframes, such as a bearish break of that minor support level on the hourly chart, then I know that the market is in a choppy condition and it’s most-likely not a good moment to get involved.
Again, this is only a simple rundown of TheSTRAT to help everyone get comfortable with how it performs. There are TONS of other things you’ll want to slowly learn over time, but this is the simple basics to it. Now that all of that’s out of the way, let’s talk about exactly how we can use this in combination with our breakout trading strategy!
In Combination with our Strategy
There are a variety of ways you can use scanners, such as the one on Finziv, to identify inside bars, outside bars, or different types of patterns en masse - but I’m not a fan of doing that. I like to analyze my charts, identify points of support and resistance, and of course, draw out any massive patterns I’m able to identify on the daily or weekly candlesticks. When scanning, you’re not paying much attention to all those different factors, you’re just scanning for patterns.
A few Newsletters ago, I filmed and posted a complete tutorial of how I find good tickers on UnusualWhales and analyze the charts to identify favorable scenarios. You can watch the entire hour-and-a-half-long video below:
Basically, we follow this exact strategy with only a few minor tweaks and adjustments that have to do with identifying our entry and exit points. Previously, we entered at the confirmation of a breakout after a consolidation takes place, and our targets are the highs/lows of the recent market or our areas of support/resistance.
This time, we want to identify a high-timeframe pattern (daily or higher) such as an ascending triangle or a consolidated channel and then implement timeframe continuity. Remember what we went over previously: A month makes up roughly 20 days, a week makes up 5 days, and a day will make roughly 6-8 candlesticks on the hourly chart. When you see a formation, such as an ascending triangle on the daily, we want to zoom out and look for a candlestick pattern from TheSTRAT on the weekly and/or monthly. For an example, let’s take a look at one of the tickers on our watchlist.
Here, we can perfectly see there is a massive triangle pattern on the $OCGN daily candlesticks, and it’s been taking form since the beginning of 2021. We have all of our lines of support and resistance mapped out, everything is precisely the same as we would previously analyze this pattern. However, this time, we’re going to zoom out to the weekly and take a look at what we’re now able to see.
Well, would you look at that? When looking at the previous few candles, we’re able to see there was a two, then a one, and it has yet to make a third candle. Hmmmm, a two and a one… Are there any patterns we know of that could be Bullish and involve a 2-1-X? Yes! There is either a 2-1-2 continuation or a 2-1-2 reversal! This week, when this third candle forms, it will tell us exactly if we’ll see a push towards the upside or a reversal to the downside based on what happens to that third candle. What are our entry and exit points? If it’s Bullish, the entry point will always be the high of the second candle. If it’s Bearish, the entry point will always be the low of the second candle.
So, how do we play this? Well, we want to mark the high and low of the second candle within that 2-1-X pattern we’re seeing on the weekly. Once we mark the highs and lows, we want to zoom back into the daily chart, where we can see those markings clearly. This is where you set your alerts! We’re looking for a close above or below those two levels to make an entry. The price can easily go above the lines we have marked, but we’re looking for a close as confirmation.
Don’t worry about “being late” on an entry. Remember, we based this trade on the weekly, and for other tickers, we might even base it off the monthly. We already know how long we have until we see a change in momentum. If it’s based on the monthly chart, well, we have 20 full days of movement before that final candle is formed. If it’s the weekly, we have 5 days of movement. We’re already set up for the long-term, we can now be fully confident in our decision once we see that break above those lines we have set. You can even pinpoint your entry even more by going down to the 4H chart and looking for a break. However, be careful about going too far away from your targeted timeframe. If you’re analyzing on the monthly but enter on the hourly, there’s a very high chance what you saw on the hourly will have little to no effect on what takes place on the monthly, so just be cautious.
And it’s simple as that! To summarize, with $OCGN, we’ll be looking for a close above $8.08 or below $7.31 before making an entry, and we’ll be doing this on either the daily timeframe or the 4H timeframe due to us identifying this trade on the weekly chart. Where are our target points? Simple, the next pivot point of a candle. The pivot points are basically just the previous highest highs or the previous lowest lows. So, for $OCGN, that would be the previous candle’s high/low of $8.79 or $7.11. After that, the next highest-high or lowest-low: $9.35 and $6.96. Where’s your stop-less? Your previous target. It’s literally that simple.
Alright, Apes! That is all for today! I hope you enjoyed this segment of Unusual Due Diligence, please be sure to stick around for more coming soon! Remember, set your stop-losses and take profit when profit is visible! If you do play these tickers, play them as safe as possible and enter at the best possible moment you’re given. Patience is key, don’t rush into a trade if you miss it. The market has thousands of plays every single day, these are only a few of them.
I’m constantly looking for ways to improve my segments and make sure I’m giving out the most beneficial information possible. Please leave a comment and let me know how I can improve! I’d love to hear of different types of Analytics you’d like to see on a daily basis, things I’m missing, or even things that I should take out. Thank you, please let me know!
Filtered Media welcomes contributions from outside writers and experts. If you have an idea for a piece, please send us an email summarizing the topic and some specific angles you would like to cover. We will try and get back to you when possible, thank you for the support!