Are you trading Yelp (YELP) correctly? Here’s your plan!

Discussed in this article: Yelp ( $YELP )

I want to look at Yelp ( NYSE:YELP ) here; this is actually a pretty easy chart to interpret. Obviously we see that the stock is in the winner’s circle, this is what we like to see. We’re not really too fond of stocks in the penalty box down here unless, they’ve osculated for a while, formed a base, and then ultimately start to break out to the upside, we like that. We form a different kind of base when a stock is in an uptrend. First we’ve got to establish the uptrend, that’s here, and then this forms what’s called a high base. The difference should be pretty obvious, but sometimes it’s not until it’s pointed out to you. A regular base occurs down here, after a downtrend, the halting of a downtrend. A high base comes basically in consolidation after an uptrend is firmly established. So then we see that happening here, this forms a high base, we think it’s a high base all the way up until the time that the stock breaks out, then we know it’s a high base. While it’s still in this basing process here this could very well be a top, and the stock could trickle down; that’s the thing about technical analysis, it is not predictive, it is informative.

So we’re looking at this, wondering where are we going to buy, where are we going to sell, what the heck are we going to do? Tops tend to be processes, bottoms are more events, they’re like Boom! Right back up where you can see. This could very easily have been a top and have the stock trickle-down. So there’s not frankly, much money to be made, and this is really important for you to realize. There’s not a whole lot of money to be made while the stock is in the box. One of the things that happens with traders, it’s a pretty common occurrence, it’s happened to me, it still happens to me every once in a while, but not that often, and that is, you get used to trading the stock when it’s in an uptrend and what you do is, you focus on the stock. You say, “Well this is how I trade Yelp ( NYSE:YELP ), love it, it just keeps moving up and so I’ll buy the dips, I’ll hold on to it, this and that and the other thing.” Then when the stock turns to a different phase in its price action, that is consolidation, you’re still acting like your trading it here.

Has it happened to you? Yes, it happens all the time. I’ve seen this in our members with Apple ( NASDAQ:AAPL ), I’ve seen it in Tesla ( NASDAQ:TSLA ), where the dynamics of the price action change and you haven’t changed. Do you know why, because they didn’t change the ticker. So don’t focus on the ticker, focus on the chart. By the way, if you do that, you’re going to start making money. If you ignore that, you will still make money, as long as the stocks doing this, but as soon as it stops doing that, you’re going to wind up giving back all of the money that you made, and probably then some; because the stocks chopping you up, you’re buying when it’s here, and then you’re selling when it’s down here. You’re doing it again and again, until finally you have no money when the stock ultimately breaks out and then you’re done, you’re out of the game. So don’t do that, instead recognize this breakout, and then the stock fell back, it didn’t resume this series of lows here, it was a higher low.

In other words there was more demand at higher prices, there was enough demand to stop the stocks dissent here, as opposed to here, and after a breakout, that’s called a higher low. Now what do we have? Well we’ve got the 50-day moving average defining this pullback. The bottom of the pull back, the stock didn’t even tag the 50-day moving average, but close enough for, they say, “government work”. So this pulls back here, now where are we here? After Friday’s action we’re testing this for two days in a row. So here’s a trade that I think you’re going to make money with, or at least not lose a lot of money. First of all, where’s support? The 50-day moving average, you can look on the left side of the screen here in the box, $85.00 is where the 50-day moving average is. The low for the day 85.30, the prior day, 85.08, we’ll call it 85.00. So essentially $85.00 is where this stock is finding support right now, certainly at the 50-day moving average.

So what you do is, wait for the stock to show you that it’s bouncing, we’re not predicting that it’s bouncing here, this puppy could just keep going down, we don’t know, I don’t think so. Why do I not think so? Because that’s not what it’s done before, and I’m a pattern trader; I don’t look to outsmart the stock, I want to just flow along with the stock. So if we look at this as support, once the stock moves up above Friday’s intraday high of 88.14, that’s less than $2.00 from where it is right now, once it moves up above Friday’s intraday high of 88.14, that is your buy point. Immediately after buying this stock, you’re buying it because you think this is a bounce, you can institute a pretty tight stop just below where the 50-day moving average is.

So what are you doing? You’re getting in right, you’re buying the stock right, you’re buying an uptrending stock that’s just broken out of a high base, on the dip, close to where you think support is and you’ve got evidence that the stock is already bouncing; you don’t need a lot of evidence all you need is some, you just need enough to know that you’re buying a stock after it showed signs are bouncing and then you put in a tight capital protective stop, you don’t want to be losing a lot of money if you’re wrong, because once you’re in the trade you get more emotional about it. So you put in the stop, hopefully this stock keeps going up, you’re going to make about $15.00 over the next couple of weeks, if this stock does indeed bounce. If it doesn’t, okay you’re going to lose a couple of dollars. Do you know what that’s called? That’s called trading.

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