Source: Julie Bang © Investopedia 2019
When trading hot IPO growth stocks like Snowflake ($SNOW), the bullish reversal candle can provide an excellent, early buy entry point with lower risk. Here’s how that reliable candlestick pattern gave us an ideal buy setup that led to a +33% gain in just 8 days.
Many of our top growth stock trade setups are based on breakouts from a tight trading range, within 10-15% of the highs of base.
However, we also pay attention to bullish reversal candlesticks that can provide us with ideal buy entries in high-momentum stocks moving off the lows of a support base.
Such bullish reversal patterns often provide us with early entry points in stocks that may otherwise be hard to find low-risk entries with.
Specifically, we often use bullish reversal candlesticks to help find low-risk entry points in hot new IPOs–which can run 20% or more without a pause when momentum builds.
The IPO trade setup in Snowflake ($SNOW)
Our recent buy of Snowflake ($SNOW) in the Wagner Daily model portfolio (disclosure: currently long with a +33% unrealized gain) is a great example of how to achieve an early, lower risk buy entry in a hot stock with explosive potential.
Snowflake began trading as an IPO back in September 2020, launching with outstanding liquidity of more than 3 million shares per day at over $200 per share.
Unlike the majority of growth stock swing trades we buy in our model portfolio, $SNOW lacks a history of solidearnings growth.
Nevertheless, Snowflake has impressively scored six consecutive quarters of triple-digit sales growth!
Forward-looking profitability, driven by massive revenue growth, is typically a key trait in the next market-leading stock that will rise to the top.
High-momentum growth stocks like this also frequently become the favorites of mutual funds, hedge funds, and other institutional funds.
Owning a stock with institutional interest matters because institutional investors account for roughly 80% of all share ownership in the market.
The combination of excellent liquidity and huge sales growth placed $SNOW at the top of our swing trade report watchlist after just a weeks of post-IPO trading.
From that point, it simply became a matter of patiently waiting for a bullish reversal candlestick to provide us with an ideal buy setup off the base of support.
Bullish Reversal Candlestick triggers low-risk buy entry
With IPO swing trade setups, we generally wait two to three weeks for the price action to settle down and show its hand before we start looking for potential entry points.
$SNOW attempted to breakout to new highs after the first few weeks of trading, but stalled at the $300 level in October.
The failed breakout attempt sparked further price correction that eventually led to a key test of the prior “swing low” from October 15.
Annotated with a horizontal line on the chart below, notice how the price “undercut” support of the prior low on November 10, then snapped right back above it the next day:
It got our attention when Snowflake “undercut” its prior low because leading growth stocks and IPOs often find major support after successfully testing and holding above a significant low.
$SNOW was already on our main watchlist, and the “undercut” provided another signal that it may soon be time to buy.
Next, we just needed to wait for a clear buy signal to form–which occurred when a bullish reversal candlestick formed on November 16:
We liked that the bullish reversal pattern occurred only a few days after the shakeout caused by the successful test of the October 15 low.
The bullish reversal candlestick that formed on November 16 shook out the weak hands when it dipped below the lows of several days, thereby absorbing overhead supply.
Most importantly, $SNOW closed the day just above the prior day’s high on increasing volume–this was the clear buy signal we were waiting for.
When $SNOW gapped higher and held up the following day, we sent an Intraday Trade Alert to notify Wagner Dailysubscribers of a buy entry at $247.70 (with a protective stop at $238.95).
We expected the price to hold above the rising 8-day EMA (exponential moving average) and follow through to the upside within the next few days.
Snowflake did not waste time after triggering our buy entry, as it promptly broke out above its downtrend line and reclaimed support of its 20-day EMA the following day (November 18).
Blasting +16% higher over the past two days alone, $SNOW is now showing an unrealized gain of +33% since our buy entry less than two weeks ago.
As long as a decent profit buffer remains, we plan to hold our position through Snowflake’s December 2 earnings report–in anticipation of continued bullish momentum and further gains.
