While the S&P500 ($SPY) and Dow ($DIA) ended the week near unchanged, the Nasdaq 100 ($QQQ) ripped to new multi year highs. The market is easily overbought, but many individual stocks continue to setup and present good opportunities. Currently over 85% of stocks are trading over their 50-day moving averages which reveals that the rally has had broad participation, but it is also highlighting that clearly the market is extended.

I’m sharing one of my setups for this week to show what types of trades I am focusing on. While I am always thinking of risk first, the current environment actually has me a little more careful than usual. First and foremost, we are still in earnings season, so traders need to be constantly aware of when a company reports. Second, because everything has been moving, many stocks are too extended to offer a good risk versus reward. I am focusing on stocks with a narrow range, whether it be several weeks long, or just a few days. This allows me to keep a tight stop and minimize my risk in a market pullback. One key point I will make is that if you are playing with a tight stop, you should be aggressive in locking up some profits. Tight stops are more prone to be triggered on shakeouts, so it is important to match the stop at least a partial target.

Triangle Capital Corporation ''(Public, NYSE:TCAP) ($TCAP) is an example of a setup I am looking at. It has been trading very tightly just under all time highs for a few weeks. I would be interested in a move above Thursdays highs because it could lead to a test of all time highs. I would set a stop just under the past few days lows because I am attempting to catch a breakout and if the stock dropped under those lows it would signal that it may need more time. Again, because I am aiming for a breakout, I don’t want to be in the stock if it needs more time to consolidate. The target would be a test of all time highs near $21, which is easily within reach on a true breakout. I am leaving the second target open ended in case of a runaway move, but with the market’s being overbought, I would trail this with a very tight stop as well.

Good Trading,

Joey