SolarWinds Inc. (SWI) may sound like an alternative energy company, but it actually makes application software. The company went public in May 2009, at $12.50, and has returned 84% since then, making in one of 2009’s hottest IPO stocks.
Trading IPOs can be an exciting way to make huge profits. SWI is a great example of that. But it’s also a great way to lose money. IPOs often trade erratically, and since the stock has no trading history, it is impossible to predict where it will trade next.
Sure, you could get lucky, like SWI investors did, but you could also be left holding the bag when the party is over if the stock heads south.
So, when trading IPOs, I like to wait until I can accurately predict their next move using technical analysis. This way I can time my entry and exit points to maximize my gains and get out before the party is over.
What is SWI’s chart telling us right now? It’s saying we are being offered a second chance to trade one of 2009’s hottest IPOs.
SolarWinds Inc. (SWI) Trade
The stock has formed a cup-and-handle, a pattern similar in appearance to a coffee cup with a right-side handle, which indicates the potential for an uptrend.
This pattern is an elongated U-shape followed by a short period of consolidation of one to two weeks in duration, which tends to be downtrending. When the stock’s price ascends outside of the trendlines, a breakout is likely to occur. If the price ascends beyond the upper right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume.
SWI is currently consolidating, and I’m looking for the pullback to extend just a few more trading days until about mid-January to the $21-$22 level before a sharp upside reversal occurs.
My target for the stock is $30-plus over the next three to four months. And if you use options, you can leverage this roughly 10-point move into fantastic gains.
This should give everyone a chance to get positioned in one of the best-performing IPOs of 2009 before it goes on a tear in 2010.
The Options Trader’s Guide to Technical Analysis
In his latest report, learn how John Lansing leverages the power of technical analysis to identify the short window when a trade is set to go straight up or down. Get your FREE copy here!
