With strong market conditions the past few months, traders remain focused on the long side as we enter the upcoming earnings season.  In this post, we show you two top software stocks with explosive potential that have not yet broken out from their bases.

Datadog (DDOG) – Cloud Monitoring

 Datadog (DDOG) is a recent software IPO from September of 2019, so there is no need to first consult a weekly or monthly chart as we normally do.

DDOG lacks earnings growth, but has three straight quarters of impressive sales growth: +76%, +82%, and +88%. Such impressive revenue growth puts this stock on the radar of hedge funds, mutual funds, and other institutions. 

DDOG is a “liquid mover,” meaning it is an actively traded stock with a big ATR (average true range). These types of stocks can produce extremely explosive breakouts, especially in stocks with a low float.

Datadog trades an average of 2.3 million shares per day, with a float of 27 million shares. That means DDOG trades its entire float in roughly 12 sessions, making it an extremely fast mover. 

The potential breakout setup is shown on the daily chart of DDOG below:

Please reference the following annotations on the chart above:

     1 – This point shows the false breakout to new highs in November, which was followed by a pullback and filling of the gap up in early December.

     2 – Although the price dipped below the 50-day moving average several times, DDOG clearly found solid support in December. This allowed the price to form valid basing pattern (press here for a quick primer on basing patterns). 

DDOG ripped through resistance at $39 last week, and has since formed an extremely tight trading range on lighter volume–generally a bullish signal.

From here, we expect the stock to follow one of two potential scenarios (labeled as “A” and “B” on the chart):

     A –  If the price rallies above the horizontal line this week, then scenario “A” is in play. In this case, the stock may not waste much time before setting a new high.

     B – If the price stalls at $42, then look for a test of the rising 10 or 20-day moving average to provide support a bit longer before breaking out.

Of course, these two scenarios are just a guide. We have been around long enough to know that anything can happen in trading.

If Datadog can break out from its current base and hold, then it would be trading at new highs with no overhead resistance. This means it has the potential to become a huge winner in the first half of 2020.

Snap (SNAP) – Creator of Snapchat

Snap, Inc. (SNAP) is the developer of the fun Snapchat mobile application and a fairly recent IPO from early 2017.

Most stocks we purchase in our trading system are no more than 10-15 years old. We are always looking for new and exciting companies with a ton of upside potential–both SNAP and DDOG fit the bill.

Like Datadog, Snap lacks earnings growth, but has fantastic sales growth over the past three quarters: +39%, +48%, and +50%.

The liquidity of SNAP is fantastic, as it trades nearly 20 million shares per day at $18 per share. Snap typically trades its float in just 32 sessions, which still makes it a liquid mover like DDOG. By comparision, AMZN trades its float in about 130 sessions.

SNAP previously rocketed 80% higher in just twelve weeks (May-July of 2019). Now, after a long pause, it is potentially back in play on the long side:

On the weekly chart of SNAP above, notice the stock recently cleared its downtrend line and reclaimed support of its 40-week moving average in 2019.

After stalling just below $20, the price formed a valid basing pattern above the 40-week MA, with the 10-week MA also turning up the past few weeks.

Since the base looks good on the weekly chart, we now drill down to the daily interval to determine our ideal buy entry point:

The price moved off the lows of the base without much of a pause, which is a clear sign of strength.

However, these moves can be tricky because they can tempt traders to buy a stock with an extended chart pattern, simply in fear of missing out on a big rally. Always try to buy from a position of strength by waiting for a valid entry point to put the odds in your favor.

With SNAP well above the rising 10 and 20-day moving averages, there is no low-risk entry point yet. As always, we will share details of the trade setup in our nightly stock picking report when a low-risk buy entry develops.

Profit from Patience: Operate from Strength 

We mentioned above that we always try to operate from a “position of strength” when trading–a powerful concept for both new and experienced traders alike.

If we buy at the right time, then we can size and manage the position accordingly. By doing so, we limit the potential for emotional (subjective) decision making.

But, if we deviate from our trading strategy by chasing the price action and buying too high, we will no longer be in control once the trade stalls and begins to pull back in.

This is because the stock may be in “no man’s land”–nowhere near a normal reference point for us. At that moment, the odds of making a poor trading decision increase because we are no longer operating from a position of strength.

Be patient and always follow your trading plan to ensure trading decisions are made from a position of strength. By doing so, you can dramatically increase of the odds of consistent, profitable stock trading results.