Despite significant weakness in the market last week, there was one stock that was showing relative strength. While most tech stocks were getting clobbered, DWAC was in an uptrend, and that’s why I made it my Bullseye Trade of the Week.
After analyzing the market over the previous week and going through charts over the weekend, I send out my favorite trade setup to subscribers. This week DWAC ticked all the boxes and worked immediately. It had an upcoming catalyst, high short float, stuck shorts, and was showing relative strength in a weak market. Former President Donald Trump still has a cult following and can still move markets. And DWAC proved to be another Donald Pump….
DWAC – Bullseye Pick Of The Week
After a long holiday weekend, the markets were back to their antics again as sellers stepped in and pushed lower in the premarket trading session.
The gap lower showed the bulls were continuing to feel beat up and were not holding their long positions after a bounce.
Market Outlook on Tuesday:
But that didn’t mean every stock was in the trash can.
In fact, there were still stocks that making new recent highs as buyers still looked for strength somewhere in these weak markets.
What tool do I use to find strength?
I use a technique called Relative Strength.
Relative strength is a technical analysis tool used by many traders and is one of the most effective tools in finding stocks that could continue their strength regardless of the overall markets.
Digital World Acquisition Corp (DWAC)
DWAC was trading higher after a recent breakout from the upper pivot near $65. At this point, the bulls were able to breakout higher from the resistance level and push higher.
Next, the bears were able to push DWAC back towards this resistance level, and since it was held I considered it to be recent support where the bulls should trade against.
From here I saw higher prices but it all depend on what the bulls do at the next pivot high level near $74.
Zooming out on the chart to the daily timeframe, I saw a similar pattern forming.
As the bulls were able to breakout from the upper resistance level, the bears forced a retest to confirm the price was now supported.
Since there seemed to be support for the bulls made near $65 in DWAC I thought we would see continued momentum to the upside.
After this recent pivot high is broken and tested, the next step for DWAC and the bulls was the $100 price level which would be a huge psychological level to watch for.
My Trade Plan:
- Stop: Under $67
- Target 1: $77
- Target 2: $80+
- Strike: $70 calls
- Expiration: Feb 4 2022
- Price: near $7.00
Reasons for the Trade
Now there were a lot of checks in my favor besides the Technicals. The planned social media app backed by former President Donald Trump plans to launch on Feb. 21. This gave an upcoming catalyst for a trade into the hype! According to Barrons, as of the 31st of December 21, DWAC had 3.56million shares short i.e. a short float of 12.35% of 30.3 million shares. These short-sellers could add some fuel to an up move as short sellers might get forced to cover.
Finally, DWAC was showing Relative Strength and trending higher, and as a trader, it is my job to get long strong stocks. I also believed that the $100 level would be a magnet for bulls!
How the Trade Played Out
Whilst the rest of the market was gapping down after the long weekend DWAC was gapping up on no news. Clearly, it appears some short sellers were stuck, and there was a lot of demand for the stock. DWAC almost went straight up in the first hour of trade and both my targets of $77 and $80+ were hit during the first hour.
DWAC continued to hold its gains without much of a pullback and closed near the highs at $86.31. It was not until the next day that DWAC opened at $91.06 and sold off for most of the day, closing on the lows at 77.37.
Psychologically, I would explain the price action in this way. DWAC was being run up by bulls into the release event on 21 of Feb 2021. The $100 price was a psychological level. Bulls pushed DWAC above $90, squeezing shorts.
However, as the majority of retail market sentiment shifted to the $100 plus target the market usually does the most painful thing possible. That is, it was a gap and trap, with profit-taking occurring with significant weakness in the overall market. Bulls didn’t get the $100 push they were expecting, instead, profit-taking occurred after a 70%+ run in Jan as the entire market got the Kibosh!
The Bullseye trade is the best trade Idea that I send out at the beginning of the week. It combines research from the week before and my chart scanning over the weekend. Despite weakness in the overall market, DWAC was showing signs of relative strength and the possibility of a short squeeze.
The bulls stepped in on Tuesday after the long weekend with a $13 trend day move in DWAC from a $73 open to a $86 close. It wasn’t until the next day when DWAC gapped up and sold off for the entire session that shorts and sellers took over. I believe the meat of the move is done. However, given that there is a catalyst on Feb 21st launch, DWAC may still surprise to the upside with $100+ not out of the question before then.