I wanted to discuss a trading setup that I’ve recently added to my playbook – the IPO setup. While all IPOs aren’t created equal (FB fiasco), the setup, as I see it, is as follows:

  • Stock opens above the IPO price.
  • Spot a clear level of support on the tape.
  • Get long at or near that support level.
  • You can have a trade on where the r:r is 10:1 in some cases (sometimes even more).

 

This is really a simple setup, but requires tape reading skills since there are no charts. Below I will discuss two IPOs, both of which opened up today at premiums and offered excellent risk/reward setups.

    First one is Marketo, ticker MKTO. The stock opened at a 54% premium to it’s IPO price ($13/share) – check. Right off the open, there was a lot of buying at $19.50. You could’ve gotten long there, but if you didn’t you were afforded another opportunity. The stock then consolidated above $20 for about 90mins, which was where it had opened. Support on the tape was $20.10. So the stock was trading at a premium & was being supported on the tape above that level – check. The thing with most of these IPO setups is their simplicity, as they tend to trade pretty clean on the tape.. In this particular case, assuming you didn’t get long at $19.50, you could’ve gotten long say at $20.10 with a 20 cent stop. It never traded below $20. The stock closed at $23 & traded as high as $23.37. This represents a r/r of 15:1 – I’ll take that r/r any day of the week.

(Note: right click & select View Image to make the charts larger)

http://charts.stocktwits.net/production/original_13651239.png?1368831462
2min chart showing the 90min consolidation above $20 where you could’ve gotten long:

 

The next IPO was Tableau Software, ticker DATA. Again this stock opened at a premium to its IPO price of $31/share, with an opening print of $47. The stock wasn’t as clean off the open at MKTO, but the levels to watch were the $47 level and the $50 level (intraday resistance). Around noon, the stock pulled back to that important technical level of $47. Again, keeping it simple – get long at $47, risk 10-15 cents, and look for a move up to $50, which represents a 20:1 risk/reward! The stock traded as high as $52.15.

 

http://charts.stocktwits.net/production/original_13651236.png?1368831446
5min chart showing the pullback to $47 & the $50 resistance, which could’ve been your initial target:

 

As always, it’s prudent to book some profits along the way, but there were really never any reasons to sell in either one of these names until they were several points in-the-money. These were 2 excellent IPOs that offered excellent risk/reward opportunities. This is a setup I would consider adding to your playbook.

Let me know if you have any questions or comments (@MarketPicker on StockTwits)

The IPO Trading Setup – Something to Consider Adding to Your Playbook