Why Traders Look for Early Momentum Shifts?

Traders who analyze charts and apply technical analysis techniques are looking for optimal entry points where momentum begins to shift. In general, traders look at price charts for areas where supply and demand are changing hands.

This blog provides insight into the Launch Pad Setup which identifies when the price is contracting within a base before breaking out into new highs.

For simplicity, the most effective methods in technical analysis approaches often focus solely on price, volume, and moving averages. Price levels on charts serve as reference points showing support and resistance areas while the moving averages illustrate the trend’s direction.

When a trading opportunity becomes too obvious, it frequently tends to be susceptible to failure. To avoid getting shaken out of a trade during a traditional base breakout, entering before the crowd provides a profit cushion to withstand normal market reactions.

What is a Launch Pad Setup?

The Launch Pad setup is a powerful early entry strategy that helps traders get in on a stock’s move before it breaks out into new highs. In each bull market cycle, the strongest stocks will pause their advance, consolidate their recent gains, form a new base, and then break out to even higher levels.

When an equilibrium of supply and demand is reached, the price will slowly begin drifting sideways. Over time, a contraction in price creates a tradeable range during the basing formation, where the stock’s price will tightly consolidate, drawing the moving averages closer together.

The Launch Pad occurs when the price on a closing basis is within 1-3% of the 21-day simple, 50-day simple, and 65-day exponential moving averages.

This dampening in volatility offers an ideal trading opportunity. When the price expands out of the range, the stock’s movement will continue in the direction of the expansion. A protective stop can then be placed at the opposite end of the range.

An important note is that the moving averages should support the price action. The moving averages should be rising and aligned, with the 21-day above the 50-day and both above the 65-day.

When Supply and Demand Reach Equilibrium

When a new base is forming, the price will make a series of lower highs and lower lows. After a stock no longer experiences any selling pressure it will ultimately establish a bottom as it consolidates sideways over time.

Soon, the price will begin forming the right side of a new base by creating a series of higher highs and higher lows. A traditional base breakout occurs when the price advances above the previous high price.

The Launch Pad Setup provides a strategic entry opportunity earlier in the price cycle.

When supply and demand are in a state of equilibrium, the price will chop sideways over time, stabilize, and tighten before the next wave of buyers or sellers appear. Price tightness serves as an essential indicator for momentum traders, signaling a period of reduced volatility where a stock is accumulating “energy” in preparation for a significant price movement.

Using the Launch Pad Setup for a Buying Strategy

The Buying Strategy involves waiting for the stock to form a tight trading range within 3% of the moving averages after the stock has found support, displayed positive price action, and is trending higher.

The tight price range offers a straightforward method for deciding when to enter a trade: Long above the range or short below the range. Begin focusing on price action when the closing price is tight above the supportive moving averages.

Entering a trade early allows traders to sell partial profits into strength when the price reaches previous highs. When Swing Trading around a core position, traders can then add to their position as the price breaks out of a traditional base setup.

Launch Pad Setup Examples

The Launch Pad appears repeatedly, just like any other technical pattern. As an early entry technique, note where the Launch Pad signal is triggered.

A Green “X” is labeled under the candle when the signal for the Launch Pad occurs.

After NVDA led the market off the October 2023 lows, it consolidated for six months. Eventually, the price tightened near the moving averages formed a Launch Pad and advanced another 100%.

After the selling pressure subsides, the price will trend sideways as an equilibrium is reached between buyers and sellers. FSLR formed a Launch Pad as accumulation volume appeared near its lows and advanced just shy of 100% in 50 days.

Unlike a traditional base breakout that relies on buying new highs, the Launch Pad strategy gets you in the trade at the very beginning of the advance. Waiting for COIN to make new highs would have seen a 70% gain while trading the Launch Pad would have more than doubled the outcome with a 150% profit.

When holding positions for extended periods, look for multiple Launch Pads to form while the price consolidates and a new base is formed. Note how AVGO signaled a Launch Pad near the end of the basing periods when the price tightened near the moving averages just before the next big move.

Look for a Launch Pad towards the end of a basing period, where the price tightens and establishes a tradeable range, displaying a clear indication of supportive price action. APP signaled a Launch Pad after it made a series of higher lows and then advanced 130% in five months.

How to Add the Launch Pad Indicator to Your Charts

To incorporate the Launch Pad signal into your trading system, add the Technical Patterns indicator to your charts.

In the settings, uncheck all the other indicators, leaving only the Launch Pad.

You can customize the appearance to suit your preferences by altering the icon’s shape, color, and position. By default, the Deepvue Launch Pad Indicator will signal a green “X” under the candle when the price on a closing basis is within 1-3% of the 21-day simple, 50-day simple, and 65-day exponential moving averages.

Screening for Stocks with the Launch Pad Setup

Utilize Deepvue’s Screener Presets to quickly find any chart currently exhibiting a Launch Pad.

Duplicate the Screener Preset to make it your own, or add the Launch Pad Technical Pattern to your favorite screener to fit your trading style.

Key Takeaways for Mastering the Launch Pad Setup

The Launch Pad setup offers a high-probability strategy for entering trades early in the Cycle of Price Action after the stock has bottomed and begins working up the right side of a base.

Pay attention to when the moving averages converge around any tightness in price action.

When the price on a closing basis is within 1-3% of the 21-day simple, 50-day simple, and 65-day exponential moving averages, look for a tradable range to form.

When the price expands out of the range, the moving averages will continue to guide the price in the direction of the trend.

Mastering the Launch Pad setup provides traders with an early entry tactic that capitalizes on a contraction in price before a standard base breakout.