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@jeffdecker - Thanks for posting my article. If anyone has any comments, drop me a line.
Why Stocks Are Now Poised To Move Lower
For the past five weeks, the S&P 500 and NASDAQ Composite have been stuck in choppy, sideways ranges.
This lack of direction has caused the number of low-risk trade setups to dwindle, which is why I said in my most recent blog post that SOH mode (sitting on hands) is the best plan of action until the stock market eventually makes a clear move in one direction or the other.
Are You Ready For Action?
The good news is my top leading technical indicator (explained below) is strongly hinting that stocks may finally be ready to make a significant, definitive move in the coming days…to the downside.
But if stocks are ready to move lower, you may be wondering why that would be considered “good news.”
It would be positive news because, as a technical swing trader, you have the fortunate ability to also profit in weak markets by short selling stocks and ETFs (and any trend is better than no trend).
For traditional “buy and hold” (buy and pray?) investors, on the other hand, a resumption of the selling pressure that began a few months ago would definitely not be good news.
In this blog post, I explain why stocks appear ready to move lower, then follow-up with a brief video analysis of a few stocks and ETFs that are setting up for potential short entry in my daily stock picking newsletter.
The Most Reliable Technical Indicator In Any Market
One of the best technical indicators in a swing trader’s arsenal is volume, which is arguably the most reliable indicator as well.
Yet, volume ironically seems to be one of the least discussed indicators whenever I stumble across other traders’ technical analysis of stocks around the web.
Analysis of volume patterns in the market is crucial because well over half of the stock market’s average daily volume is the result of trading among banks, mutual funds, hedge funds, and other institutions.
As such, the major indices typically follow the money flow of institutional trading.
This means volume is a leading indicator, rather than a lagging indicator (such as moving averages).
If the “big boys” are accumulating stocks (represented by higher volume gains), the market will be forced to move higher.
On the other hand, stocks will move lower when faced with enough institutional distribution (higher volume losses).
With this knowledge, take a look at the following daily chart of the NASDAQ Composite, which shows the bearish volume pattern of recent weeks (light volume up days, followed by heavier volume down days):
The combination of the bearish volume patterns in the NASDAQ and an abundance of overhead resistance (such as the 50-day moving average), leads me to believe the next move in the stock market will be lower.
To help you make money on the short side of the market if the anticipated breakdown occurs, below is a 3-minute video that highlights a few of the best ETFs and stocks on my radar screen for potential short selling entry in the near-term.
For best viewing quality, select full-screen HD mode by clicking the rectangular icon on the bottom right of video player window:
Short Selling Stock Picks - Video
One of the greatest benefits of momentum trend trading is the ability to profit in both uptrending and downtrending markets.
Although the model portfolio of my nightly swing trading letter has been mostly cash over the past month, I am fully prepared to profit from selling short stocks and ETFs that are rolling over and/or breaking down (assuming the NASDAQ and S&P 500 break down as well).
Does Account Size & Share Price Matter?
Whenever I receive a question I think will be beneficial to other traders who may be wondering the same thing, I share the question and my reply.
In this post, a trader is seeking advice on how to size positions within his portfolio, and also clarification on whether or not the share price of a stock is important.
His questions are below, followed by our actual reply…
Hi,
I signed up for a 3 month stint with your company. I think it is worth at least three months to see if it fits my lifestyle. So far I like the approach you have. It is a cautious approach, which is what I need. I think the slow and cautious approach fits me well.
I wonder if someone could share some philosophies with me and maybe answer some questions?
I have been trading off and on for years so I have a decent understanding of how things work. I am not an expert. I do feel that the more money you have to invest per trade the better return you get on the investment. What I mean is that if you buy 10 shares of a 100 dollar stock, or a $1000 investment and that stock moves to $101 that is a 1% return or $10 which is a profit, but after trading fees that is a loss. However if you can invest $100,000 that same trade give you a $1000 profit. So the size of the portfolio does matter. I simply explain this to setup my questions. I know you guys understand the above.
Honestly, my portfolio for this type of investing lingers between 25K and 30K. When I apply all your rules for the size of an investment I would typically be investing somewhere between $500 to $1000 per trade. So for stocks that trade around 10 or 11 dollars per share, I get more shares and a better opportunity to make a few hundred dollars if the swing trade is positive. Things become difficult when you suggest stocks that trade at 80, 90, or 100 dollars per share. Or even worse TSLA is above 200. Which is not a huge deal if you have a larger portfolio.
Now with all of this being said, I guess I am simply looking for advice about how I should be approaching things? Or how would you approach things if you were in my position? The more money you have the easier things get, to a degree, and I do understand this. As I try to learn it helps to just hear from experts like yourselves about where my head should be at with respect to my level.
Just thinking about it on my own I have wondered if I should make two or three investments that are worth 5K to 10K a piece and approach it like that. There is more risk, but with the stop loss approach I can minimize my risk to a degree. The larger investment give me a greater opportunity to make money, but it also has greater risk. Plus with my limited funds, I can’t always take advantage of a setup you suggest.
Hopefully my minor confusion is something you can advise me on.
Thanks,
D.S.
Hi D.S.,
Great questions.
With 25-30k, you may have to stick with fewer positions to make decent gains. Maybe 4 to 5 positions at 5k each.
Key here is that you want to take on more core trades when you can, which will enable you to hold stocks longer.
You may still be able to take on a few swing trades, especially if you are not fully invested.
So, for example, with 5 positions at 6k, you have 20% positions.
Say we grab 3 full 20% positions; that will leave you with 2 empty slots. Now, those 2 empty slots can be 2 core positions at 20%…or maybe 4 quick swing trades at 5%.
So you can grab 5 full, 10 half, or any sort of mix; it is a very fluid approach.
When you have a full portfolio, you do nothing. If we stop out and you have a 20% position open, and the next trade is a swing trade with 33% size, maybe you take a 5-7% position.
And you could even take another one until a new core position comes along and you need the money.
Regarding cheaper vs more expensive stocks, it really should not make a difference [in your overall return].
Actually, if you stick with expensive stocks, you have cheaper execution cost due to fewer shares.
With a $5 stock, you would need 1200 shares on a $6,000 position (resulting in $24 round trip at a broker like Interactive Brokers that charges 1 cent per share).
For $TSLA [just over $200 per share], you would only need 25 shares, resulting in a $2 round trip commission fee.
[Editor's note: A lot of our subscribers prefer tradeKing because they are currently offering 60 days of commission-free trading, and then just a flat fee of $4.95 per trade.]
Now, if $TSLA were to go up 20%, then your $6,000 would increase to $7,200.
Similarly, if the $5 stock rallied 20%, then your $6,000 would also become $7,200. It is the same difference [in profit].
Also, you get the added benefit of holding an “A rated” stock like $TSLA [accumulated by institutions] versus some junk stock that is cheap.
Let me know if you have further questions.
Regards,
Rick
It’s a common mistake among newer traders to shy away from expensive stocks, based on the assumption that not as many shares can be bought with a smaller account.
But as explained above, this is a mistake because it does not make a difference to your bottom line; a 20% gain on a $100 stock is the same dollar return as a 20% gain on a $10 stock (actually, slightly more due to lower “per share” commission fees).
Remember that expensive stocks are expensive for a reason — institutions are buying them (you should too).
Also, if your trading account is not yet that large, you now have some ideas on how to be flexible with regard to buying stocks.
In this case, focusing on our intermediate-term core trades may be more profitable than trying to enter all the shorter-term swing trades.
A Hot ETF To Buy (Albeit Corny)
As recently discussed in my March 26 blog post, banks, mutual funds, hedge funds, and other institutional funds have been rotating out of the NASDAQ and into the S&P 500 and Dow Jones in recent weeks.
Although this has been leading to moderately bullish price action in select blue-chip stocks such as $IBM, more explosive, high-momentum moves have been coming from various commodity-based ETFs (which have a low correlation to the direction of the overall stock market).
Today, I share with you the technical setup of one of the best looking ETF trade setups out there right now, so read on for all the details…
Corn Is Popping!
Designed to follow the price of continuous corn futures contracts, the Corn ETF ($CORN) broke out from a short-term consolidation on heavy volume yesterday (March 31), after a three-week consolidation.
Note the drop off in volume during the base of consolidation, which was bullish:
The “undercut” of the 20-day exponential moving average that occurred on the morning of March 31 was followed by a breakout above the high of the recent range (from shakeout to breakout in a few hours).
Confirming the massive intraday reversal and breakout was a huge volume spike (nearly 400% it average daily volume).
Whenever volume suddenly surges so massively as a stock/ETF breaks out above a tight range, it is the undeniable footprint of institutional buying activity, which acts as a gas pedal to propel the stock/ETF higher in the near to intermediate-term.
Corn Confirmation On Weekly
Since a key part of our technical analysis is always looking for confirmation on multiple time frames, let’s zoom out to look at the longer-term weekly chart of $CORN:
On the weekly chart above, notice the tight price action near resistance of the 40-week moving average (similar to 200-day moving average) over the preceding four weeks.
When the price of $CORN broke out yesterday, it pushed above the highs of that 4-week range. It’s also quite bullish that yesterday’s volume alone nearly equaled turnover the entire previous week.
With such strong volume confirming a clean weekly breakout and trend reversal, bullish momentum is likely to carry $CORN substantially higher over the next several weeks.
As such, we have added $CORN to today’s Wagner Daily watchlist as a potential buy entry in our ETF portfolio. Regular subscribers should note our exact buy trigger, stop, and target prices for this trade setup in the “Watchlist” section of today’s report.
Nice ETF To Buy Now, But What About Individual Stocks?
Large-cap tech stocks have had a rough go of it lately, as most completely ignored the solid gains of yesterday’s market rally.
Household tech names like $AMZN, $PCLN, $GOOG, $NFLX, $TSLA, $FB, $EBAY, $BIDU, and $GMCR either closed in negative territory, or near their lows of the session (despite a 1.0% gain in the NASDAQ Composite).
Clearly, market leadership is broken.
Since this is the basis of our intermediate-term position trades in individual stocks, the next step is to simply wait for new leadership to emerge (which eventually happens after each significant stock market correction).
Overall, there simply isn’t much to do on the stock side. We will merely continue to lay low and wait for setups to develop on either side of the market (long or short).
Although our nightly swing trading newsletter is basically a dynamic service that generates specific stock and ETF trade ideas, the main goal of our trading system is to aggressively trade the best technical trade setups when conditions are ideal, but also be ready and able to quickly and cut back market exposure by reducing position size on new trades (or simply not trading at all) when market conditions deteriorate.
It is impossible to trade every single wave in the market, and trying to do so will lead to over-trading and eventual burnout.
In challenging market conditions, simply learning how to hold on to hard-earned profits earned in the good times is a critical skill towards become a winning trader over the long-term.
As such, let’s be patient and wait for our pitch.
With our market timing model remaining in “buy” mode, our current focus primarily remains on leading individual stocks.
Tesla ($TSLA), for example, is now showing an unrealized gain of 68% since our December 31 buy entry in The Wagner Daily newsletter. SolarCity ($SCTY) is similarly up 56% since our December 19 buy entry.
However, despite strength in leadership stocks, we have also been noticing a stealth sector rotation of institutional funds flowing into various commodity ETFs.
One such ETF we are stalking for potential buy entry in the coming days is Global X Uranium ETF ($URA), which is shown on the weekly chart below:
$URA blasted through the high of its prior trading range and 40-week moving average, on volume that was about 400% greater than average. High volume on a breakout is important because it confirms the presence of institutional accumulation.
Additionally, $URA closed near its high of the most recent week. The 10-week moving average crossed above the 40-week moving average as well, which signals a bullish reversal of trend is under way.
Since breaking out above its recent highs on heavy volume last week, the price has been consolidating for a few days on declining volume. Lighter volume during bullish consolidations is positive because it indicates the sellers are not stepping in while the bulls take a rest. This can be seen on the daily chart pattern:
From here, we now expect about five to ten days of sideways action before $URA resumes its uptrend. Zooming into the shorter-term hourly chart interval, we see the price action is holding above the 20-period exponential moving average:
As detailed in my book, Trading ETFs: Gaining An Edge With Technical Analysis, the 20-period exponential moving average on the hourly chart is usually the first legitimate support level on a pullback after a strong breakout.
The strongest breakouts will hold support at the 20-period exponential moving average and then push higher. But if that moving average fails to hold as support, then a touch of the 10-day moving average is the next logical support level.
Because of the confirmation through multiple timeframe analysis, we are now stalking $URA for potential swing trade buy entry.
Regular subscribers of our swing trading newsletter should note our exact entry, stop, and target prices in the “Watchlist” section of today’s report.
On the verge of a new sell signal
On January 27, I said it was not yet time to sell stocks, but the technical situation has deteriorated quite rapidly since then.
Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another “distribution day” (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite.
In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand.
However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner.
The 3-Part Test
There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up.
1.) Volume Pattern Of Broad Market
In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model is now flashing a clear “sell” signal.
2.) Broad Market Trend
In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case.
With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a “sell” signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back).
3.) Performance Of Leadership Stocks
The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current “neutral” mode from officially shifting to “sell” mode (click here to see the five modes). Still, even this portion is barely holding on.
NASDAQ 4000 – Coming Soon?
Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support).
If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day’s high could lead to a short-term bounce:
Although my swing trading newsletter is not yet in full “sell” mode, I have been laying low (in “neutral” mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry.
The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile.
Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence.
Trade What You See, Not What You Think!
Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go.
Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow.
If my timing model shifts into full “sell” signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness.
Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment.
Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break.
With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side. Upon doing so, you will surely see the importance of maintaining discipline and patience right now.
Thanks. Glad you found the article helpful.
Thanks! Glad you liked it...getting ready to post another one here.
How Multiple Timeframe Analysis Increases Your Trading Profits
In the formative years of my trading career (late ’90s), I frequently found myself scratching my head over an interesting problem.
Despite analyzing the hell out of stock chart patterns, ensuring the technicals looked quite favorable before buying, I still found my trades completely going in the wrong direction way too often.
Thanks to the help of a trusted trading mentor, I eventually discovered the problem; hyperfocusing primarily on the daily time frame.
Although the daily chart has always been pivotal for locating low-risk buy setups, my extreme focus on that single time frame was causing me to ignore the power of confirmation from longer time frames (such as weekly and monthly charts).
Put simply, I was missing the “big picture” and it was destroying my trading profits until I fixed the problem.
Are you…
Missing The Big Picture Too?
Every technical trader has his own specific approach to scanning chart patterns and locating potential buy setups.
Although I have my own, rule-based swing trading strategy, which has been thoroughly explained on this blog and nightly newsletter over the years, my trading system is just one of many types of successful trading methodologies out there.
Nevertheless, there is one trading technique you (and every trader) should always use, regardless of your individual trading style:
Multiple Time Frame Analysis
Multiple Time Frame Analysis (let’s call it “MTF” hereafter) is an extremely simple, yet incredibly powerful concept, that can be applied to analysis of stocks, ETFs, forex, futures, bitcoin, and any other financial instrument that can be charted.
If you too have been making the same mistake of hyperfocusing only on the daily charts, read on to find out why you’re missing the big picture of what’s really happening with the stocks and ETFs you trade.
Exploring For Oil On Multiple Time Frames
One of the ETFs currently on my watchlist for potential buy entry is SPDR S&P Oil & Gas Exploration ETF ($XOP). Using MTF analysis, I will show you how this ETF actually landed on my swing trading watchlist.
Starting with a long-term monthly chart showing at least 10 years of data or more (if possible), we see that $XOP stalled at resistance of its all-time high a few months ago.
If you were buying $XOP based strictly on a daily chart with three to five years of data at that time, you probably would not have even seen the highs from 2008:
Although $XOP pulled back after bumping into resistance of its 2008 high, the ETF firmly remains in an uptrend, above support of its rising 10-month moving average. Furthermore, the current base of consolidation is holding above the prior highs of 2011.
The next step in my MTF analysis is to zoom in to the shorter-term weekly chart interval, where each bar represents a full week of price action:
On the weekly chart, notice the 10-week moving average is trending lower, but the price is still holding above the 40-week moving average. The 10 and 40-week moving averages are similar to the popular 50 and 200-day moving averages on the daily chart.
The current base of consolidation will take some time to develop, but as it chops around the 10-week moving average, the price should eventually flatten out and begin to tick higher.
Finally, let’s use MTF analysis to drill down to the benchmark daily chart time frame:
The $XOP daily chart shows last week’s price action holding above the prior swing low. If this low holds, the price action can begin to set “higher lows” with the base and form the right side of the pattern (learn more about base building patterns here).
The next breakout in $XOP will likely be the one that launches the ETF to new highs on multiple time frames, which would be a very powerful buy signal.
Still, if you were to only glance at the daily chart of $XOP, without taking into account the weekly and monthly chart patterns, you might understandably make the mistake of assuming this ETF is not in a steady uptrend.
On the contrary, the “big picture” provided to you by MTF analysis definitely shows a dominant, long-term uptrend in place. Pullbacks and consolidations along the way, such as shown on this daily time frame, are completely normal.
Why Longer Is Better
Now that you understand the easy, yet crucial concept of MTF analysis, you may be wondering which individual time frame holds the most weighting, especially in the case of conflicting chart patterns.
Remember, in the beginning of this article, when I told you about that problem I had when I first started trading?
As I found out the hard way, a longer time frame always holds more weight over a shorter time frame.
In the best, most promising stock trading setups, all three chart time frames (daily, weekly, monthly) will confirm the patterns of one another.
But if that is not the case, just remember that a weekly trend is more powerful than a daily trend, while a monthly chart holds more sway than a weekly trend.
Of course, you must also keep in mind that longer time frames also take a longer period of time to work themselves out.
For example, daytrading based on a weekly chart pattern does not work. However, that same weekly chart is of paramount importance if you are looking to buy a stock as a core/position trade.
There’s no doubt in my mind that utilization of Multiple Time Frame Analysis will substantially increase your trading profits…but only if you make the decision right now to start applying this underrated technique to all your stock chart analysis.
Why You Shouldn't Worry About A Market Pullback
Stocks fell hard yesterday (January 13), igniting the usual fears that it’s time to sprint for the exit doors and sell all your stocks.
But just wait! Grab a seat, close your eyes, take a deep breath, and let’s objectively assess the situation on a technical level.
Although the NASDAQ and S&P 500 tumbled 1.5% and 1.3% respectively, you must ignore fear-mongering of the financial media and keep the January 13 sell-off in perspective.
If you are new to stock trading, you must know that bull markets do not trend in a straight line (the same is true of bear markets).
Rather, even the strongest uptrending market undergoes the occasional pullback along the way. Then, after catching its breath for a month or two, buyers return to the scene and once again drive stocks to new highs.
This cycle of a rally, pullback (or consolidation), then rally again is what forms the “higher highs” and “higher lows” of any healthy market uptrend.
Furthermore, the longer a market rallies without a pullback, the more severe the eventual correction off the highs will be. As such, it’s better to have a correction now, rather than after stocks have entered into a parabolic moonshot.
I personally welcomed yesterday’s pullback because it is likely the start of a healthy, short-term correction that is necessary in order for stocks to take a break before eventually marching higher again. But in the meantime, you may be wondering…
Where will the main stock market indexes find support?
Because of the intensity of the January 13 sell-off, it is unlikely that stocks will immediately snap back. Rather, short-term bearish momentum is likely to keep the bulls in check for at least the next several weeks (one to two months more likely).
To help give you an idea of where the S&P 500, NASDAQ, and other indexes may find their next levels of price support, I have annotated the daily charts of several popular, broad-based ETFs. While looking at the charts below, keep in mind:
1.) During stock market corrections, key technical support levels generally get “undercut” (quickly probe below the obvious support level, then rebound just a few days later).
2.) It is better to think of support as an area or zone, rather than just a precise “line in the sand.”
3.) We love to see bullish reversal candlesticks (such as “hammers” or “engulfing” patterns) that substantially undercut key support levels.
S&P 500 ETF ($SPY)
Let’s begin with the S&P 500 SPDR ($SPY), an ETF proxy for the benchmark S&P 500 Index.
The first zone of support for $SPY is convergence of its prior highs from November/December and 50-day moving average (around $180-$181). If that band of support (not much below the current price) is breached, expect $SPY to find support near the prior “swing low” from December (labeled as “Support zone 2?):
NASDAQ 100 ETF ($QQQ)
PowerShares QQQ Trust ($QQQ), a very popular ETF that tracks the tech-heavy NASDAQ 100 Index, is nearing support of its 50-day MA, which converges with its prior swing lows (around $85). The second zone of support is formed from the basing action in October and November (around $83):
Dow Jones Industrials ETF ($DIA)
The Dow Jones Industrial Average SPDR ($DIA) has support from a prior swing high and 50-day moving average, which are converging around the $160 area.
The second level of support is from the highs of September and October 2o13, along with a prior swing low in December (around $157):
Small-cap Russell 2000 ETF ($IWM)
The iShares Russell 2000 ETF ($IWM) is currently sitting at support from its November 2013 high, as well as its rising 20-day exponential moving average.
The next major support level is the 50-day moving average ($112 area), while the second zone of support is the prior swing lows (just below $110):
As you can see, there is a plethora of technical support below the current prices of the main stock market indexes.
As long as the major averages remain above their 50-day moving averages, and leadership stocks continue holding above pivotal support levels, our stock market timing model will remain in “buy” mode.
If you missed the most recent leg of the rally and have been waiting for a substantial pullback to start buying stocks, consider waiting for a bullish reversal pattern to form as the major indices test support.
Patience Pays Off Again
Over the past few days, we at Morpheus have been doing a bit of housekeeping in the portfolio of our swing trade newsletter by taking profits on winning swing trades, while bailing out of a few dogs.
On the January 13 open, we sold Tekmira Pharmaceutical Corp. ($TKMR) for a share price gain of +56.1% since our November 29 buy entry.
That same day, we unloaded HomeAway ($AWAY) for a 10% gain, and also locked in a gain of +15.3% in Direxion Financial Bull 3x ($FAS), a leveraged financial ETF, when it hit our tight trailing stop.
On the downside, disappointing price action in US Silica ($SLCA) caused us to stop out with a 15.3% loss the same day (basically a wash with the 15.3% gain in $FAS).
On January 10, we sold Montage Technology ($MONT) for +21.2% gain and partial shares of Shutterstock ($SSTK) for +18.5%.
Finally, we are selling Montage Technology Group ($MONT) on today’s open, in order to lock in the better part of our 27.4% unrealized gain. Although this trade is up nearly 30% since our entry just one week ago, we are making a judgment call to take the quick profit and run because $MONT is not an “A-rated” setup.
In this blog, we like to remind you that lots of patience is necessary when holding on to winners, and several of the intermediate-term swing trades we’ve recently closed are a good example of this.
On the other hand, never forget that it’s equally important to get the hell out of Dodge when stocks go the wrong way and hit your stops.
Don’t Make Like Nostradamus
How deep will the developing correction take stocks, and how long will stocks remain in pullback mode? We don’t have a clue!
More importantly, we don’t even care because we will simply follow our rule-based trading plan, rather than becoming a hostage to emotions.
In the near-term, our simple, objective plan is to take profits on non-core positions (momentum swing trades) when we can, while holding on to core positions (A-rated stocks) as long as the market timing model remains in “buy” mode.
As always, the key to our trading system is not to predict what is going to happen, but to simply react to what is actually happening. Remember our mantra is to trade what you see, NOT what you think!
How Much Volume Is Enough For Liquidity?
Have you ever asked yourself, “What should be the minimum volume requirement for the stocks and ETFs I trade?” If so, you’re definitely not alone.
It’s an important question, yet the answer is not black and white (despite what you may have heard from other traders). Read on and I will tell you why…
What Is Average Daily Trading Volume? Why Does It Matter?
Average Daily Trading Volume (“ADTV”) is a measure of the number of shares traded per day, averaged over a specific period of time (we use 50 days).
While this is not a technical indicator that seeks to predict the future direction of an equity, it is nevertheless important because it helps traders to assess the liquidity of a stock or ETF.
When a stock is highly liquid, you can easily enter and exit positions without directly influencing the stock’s price. Conversely, you can know which securities to avoid because they are too illiquid to trade.
Knowing the ADTV of an equity is also important because it establishes a benchmark from which to spot key volume spikes that are the footprint of institutional accumulation.
If, for example, a stock has an ADTV of 500,000 shares, but suddenly trades 2,000,000 shares one day, that means volume spiked to 4 times (400%) its average daily level.
If such a volume surge was also accompanied by a substantial price gain for the day, it is a definitive sign that banks, mutual funds, hedge funds, and other institutions were supporting the stock.
4 Key Questions To Determine If A Stock Is Liquid Enough To Trade
Although ADTV by itself could be used as a concrete “line in the sand” to determine if a stock is liquid enough to trade, there are too many other factors that play a part in that role.
Following are four key questions that, when combined with ADTV, can help you to more accurately determine whether a stock can be traded or should be left alone.
1.) How Many Shares Will I Trade? (Size Matters)
If you are only planning to buy 100 shares of a stock, the ADTV of an equity basically becomes a non-issue because it will be easy to liquidate such a small position, even in a very thinly traded stock.
However, if you intend to buy 5,000 shares of that same stock, you need to more seriously consider whether or not it will be difficult to eventually exit the position with minimal slippage and volatility.
Regardless of what you may have heard, size matters (at least in this scenario).
2.) How High Is The Average Dollar Volume?
Average Dollar Volume (not to be confused with Average Daily Trading Volume) is a number that is determined by multiplying the share price of a stock times its average daily trading volume (ADTV).
For example, a $25 stock with an ADTV of 800,000 shares has exactly the same dollar volume of a $50 stock with an ADTV of just 400,000 shares. In both cases, the Average Dollar Volume is 20 million ($25 X 800,000 or $50 X 400,000).
For institutional investors and traders who rely on making big trades, Average Dollar Volume is a more important number than ADTV.
In the example above, an institutional trader would consider both of those stocks to be equal with regard to liquidity.
As a general rule of thumb, an Average Dollar Volume of 20 million or greater provides pretty good liquidity for most traders.
If you trade a very large account (and accordingly large position size), consider an average dollar volume above 80 million to be extremely liquid.
By knowing the Average Dollar Volume of a stock, you can lower your minimum ADTV requirement if the stock is trading at a higher price.
3.) How Long Will I Hold?
Are you a daytrader, swing trader, or position trader? The length of time you typically hold stocks has a direct relationship to suitable minimum volume requirements (click here for a comparison of trading timeframes).
A daytrader who scalps for tiny 10 or 20 cent gains must limit himself to trading only in thick stocks where millions of shares per day change hands (equities with tight spreads and extremely high liquidity).
On the other hand, a position trader who rides the profit in uptrending stocks for many months can trade in much thinner stocks because they can scale out of positions over the course of several days or weeks.
Although I originally started as a daytrader (in the late ’90s), I now focus exclusively on swing and position trading stocks in my managed accounts and newsletter.
4.) Am I Trading Individual Stocks Or ETFs?
In individual stocks, ADTV and/or Average Dollar Volume plays a big role in determining a stock’s liquidity.
But with ETFs (exchange traded funds), average volume levels are largely irrelevant because ETFs are open-end funds. This means new units (shares) can be created or redeemed as necessary; supply and demand therefore has little effect.
Even if an ETF has no buyers or sellers for several hours, the bid and ask prices continue to move in correlation with the market value of the ETF, which is derived from the prices of individual underlying stocks.
As such, you should be much less concerned with the average volume of an ETF than with an individual stock.
In my nightly stock and ETF pick newsletter, I generally use a minimum ADTV requirement of 100k-500k shares for individual stocks (depending on share size of the position), but may go as low as 50k shares for ETFs (in order to achieve greater asset class diversity).
While liquidity is not of concern when trading ETFs, you should still be aware that ETFs with a very low ADTV may have wider spreads between the bid and ask prices.
To remedy this, you may simply use limit orders in such situations. Since I trade for many points, not pennies, occasionally paying up a few cents does not bother me.
For further details on the subject of ETFs and liquidity, check out Why ETF Trading Volume Does Note Determine ETF Liquidity.
How To Easily Determine The Liquidity Of A Stock/ETF
Although there are free financial websites that provide you with the ADTV and/or Average Dollar Volume of stocks, the fastest and best way to gauge the liquidity of a stock is by plotting the data on a stock chart of a quality trading platform.
Below is the daily chart of SolarCity ($SCTY), which I bought in The Wagner Dailynewsletter on December 19 (still long as of January 10, with an unrealized price gain of 26%):
The chart above is pretty self-explanatory. The top section shows the price action (and a few moving averages), the middle shows daily volume bars and 50-day ADTV, and the bottom bars plot the Average Dollar Volume (in millions).
With an ADTV of nearly 5 million shares and an Average Dollar Volume of 315 volume, $SCTY is a highly liquid stock that is “institutional-friendly.”
It’s Important, But Don’t Get Hung Up
If you want to avoid surprise price reactions when it comes time to close out your trades, pay attention to the ADTV and/or Average Dollar Volume of stocks. Doing so ensures there is sufficient liquidity to prevent your trades from directly affecting the stock prices.
Nevertheless, you must realize that determining whether or not a stock has sufficient liquidity is not as clear-cut as merely picking an arbitrary number such as 500,000 minimum shares per day.
Further, you should understand that Average Dollar Volume gives a more complete and accurate picture of a stock’s liquidity than ADTV alone. Your individual trading timeframe also plays a role in determining which stocks can be traded.
Frankly, I feel many individual retail traders get too hung up about the average daily volume of a stock. Unless you’re a whale with a massive trading account, your individual transactions within a stock will usually have a minimal (if any) effect on the price.
Of much greater importance is just focusing on buying leading stocks with strong institutional support (these stocks are typically quite active anyway).
If a company has a history of outstanding earnings growth, or a revolutionary product that’s selling like suntan lotion at the beach, it’s even okay to buy thinly traded stocks.
But just be sure to reduce your share size to compensate for greater price volatility (I always list our portfolio position size for each new stock/ETF pick).
If You’re Seeking The Holy Grail Of Trading...
Many traders, particularly newbies, are on a continual quest to find the holy grail of trading.
“If I could just find that one perfect trading system, the one that works every time, I’d be rich!”
“Stock trading is too hard for me, but I know I will definitely make it big time if I start trading FOREX.”
“FOREX is not working for me either, but I am certain I’ll make the big bucks once I switch to trading futures.”
These and similar statements are signs that a trader is living in a fantasy world.
Although Indiana Jones indeed found his holy grail (and a lion’s head), remember it was pure Hollywood fiction (albeit a fantastic work of art).
I’ll talk more about the non-existent holy grail of trading later, but let’s get into the actual inspiration for this thought in the first place…
A Sudden Flip Flop In Our Stock Market Bias
After a few days of tight-ranged trading, stocks broke out to the upside on higher volume Wednesday (November 13), then built on those gains in the following session.
The S&P 500, Dow Jones Industrials, and S&P Midcap 400 indices have all once again rallied to fresh all-time highs. The NASDAQ Composite has also broken out once more, and is trading at its highest level since the year 2000 “dot com” bubble.
Although last week’s ugly selling action in leadership stocks and the main stock market indexes http://www.morpheustrading.com/blog/stock-market-defense/" rel="nofollow" target="_blank" >http://www.morpheustrading.com/blog/stock-market-defense/[tag]]forced our timing model into “Neutral” mode[/tag on the close of November 6, the November 13 price and volume action in the stock market was convincingly bullish.
While a few of the best leadership stocks were indeed hit hard last week, we have seen enough bullish price action this week to suggest that the market may still be able to push higher from here.
The Trend Is Always Our Friend
Because of the reasons above, we have placed our stock market timing model back into “Buy” mode.
This does not mean the stock market will go higher from here, as the possibility for false breakouts in the major averages still exists.
Nevertheless, with most leadership stocks still holding up well, we do not mind taking a few new shots on the long side.
If new stock and ETF swing trade setups in our momentum swing trading newsletter trigger for buy entry and extend higher, then we will look to add more long exposure as new setups develop.
If, however, our setups trigger for entry and quickly fall apart, we will simply be stopped out and forced back into cash.
MTG Market Timing Model – Simple And Effective
The core of our model for timing the stock market (a key component of our Wagner Daily newsletter) is primarily based on the three elements below:
* Accumulation/distribution patterns in the S&P 500 and NASDAQ Composite
* The trend of all major averages – Are the S&P, NASDAQ, and Dow making ‘higher highs” and “higher lows” on the daily charts? Are they trading above their 50-day moving averages?
* Price and volume action of leading stocks – This component is the heaviest weighting in determining our overall market bias
As you may have surmised, the composition of our market timing system is not fancy, but is quite effective and has a solid track record for accuracy.
Still, determining the proper bias for the timing model requires a bit of elbow grease (scanning through tons of charts every night), as well as some discretion.
Although many traders are on a quest to find the “holy grail” of trading systems, it simply does not exist. For example, absolutely no system in the world for timing the market works 100% of the time.
Once a trader learns to accept that no trading strategy is perfect, and begins to understand that one only needs to slightly skew the mathematical probabilities in one’s favor to be a consistently profitable trader, only then can true progress be made.
Hi lincognito,
On October 8, AAPL did not actually form a bearish engulfing candle because it never traded above the prior day's high.
More importantly, the chart pattern at that time was much different because the stock was coming into support of both its 20 and 50-day moving averages, which also was forming a base.
If anything, the price action at that time pointed to HIGHER movement, not lower.
However, on the last big selloff day in AAPL from last week, that truly was a bearish engulfing candle (ugly one). More importantly, it corresponded to a false breakout and is well above the 20 and 50-day moving averages.
Now, over the past four days, AAPL has been forming a bear flag type pattern that gives probability of a breakdown below the 5-day lows in the near-term.
My 2 cents.
Bearish Engulfing Candlestick Forming On Daily Chart
One benefit of Apple selling off today is that it's an excellent reminder to always Trade What You See, Not What You Think!
No disrespect to the Apple fanboys, but I trade what the price and volume action tells me and keep emotions out of it. You should too...
Ok, flame away!
How To Avoid The Biggest Mistake Traders Make In A Bull Market
After the October 17 breakouts to new highs in the S&P 500 and NASDAQ Composite, I got to thinking about bull markets.
I was pondering over how much traders and investors must be loving and profiting from this powerful rally stocks have had in 2013.
But then a worrying thought popped into my head.
It occurred to me it’s quite possible that not all traders and investors have actually been raking in the trading profits, despite the major indices being at new highs.
Why? Because I fear that many traders and investors have been feeling the pain of the biggest mistake traders make in a bull market.
I’m speaking from personal experience when I say it’s a very real concern.
I’ll tell you why in just a moment, but first take a quick look at the breakouts in both the S&P and Nasdaq.
The October 17 rally in the S&P 500 Index ($SPX) put the index at a new closing high for the year, which is a great sign considering where this benchmark index was only six sessions ago:
The tech-heavy NASDAQ continues to extend above its prior swing high, and has now gained approximately 6% since our September 6 market commentary that suggested another breakout to new highs in the NASDAQ was coming soon:
With stocks on a seemingly unstoppable upward trajectory, it’s easy to get sloppy and make careless mistakes in the stock market without having majorly negative repercussions.
Yet, there is indeed one mistake that has some pretty damaging consequences (in the form of opportunity cost), even in a bull market.
Have You Ever Made The Greatest Mistake?
In a raging bull market such as the present, approximately 80% of stocks and ETFs will be dragged alongside of the main stock market indexes and move higher.
Small and mid-cap growth stocks with a strong history of solid earnings growth will typically outperform the percentage gains of the S&P 500 and Nasdaq by a wide margin.
These are, of course, the same stocks we cherry pick for subscribers of our swing trade newsletter.
But even if you fail to buy the best stocks in the market, you can basically throw a dart right now and still have a good chance that the stock you buy will move higher (note this only applies in healthy bull markets).
Nevertheless, roughly 20% of stocks and ETFs will still fail to move higher in a bull market.
Obviously, it is a frustrating experience if you make the unfortunate mistake of buying one of these dogs.
Yet, this biggest mistake is surprisingly common among traders, especially newer ones.
So, let’s talk about an easy way to avoid this problem.
Failing To Overcome Gravity
When I was a new trader many years ago, I’m not ashamed to admit that I intentionally focused on buying stocks and ETFs that were NOT rallying alongside of the broad market (showing relative weakness).
Why? Because I wrongly assumed they would “catch up” to all the other stocks in the market.
Furthermore, I mistakenly thought stocks and ETFs that had already rallied a large percentage would probably not go much higher.
Damn, I sure was proven wrong!
What was the outcome of buying these stocks and ETFs with relative weakness?
I was painfully forced to watch (what seemed like) every other stock in the market rally, while my positions failed miserably to overcome gravity.
Adding insult to injury, the leading stocks that I thought “couldn’t possibly move any higher” ended up being the same ones that once again made the biggest gains on their next waves up.
The worst part is I also discovered that when a stock is so weak that it fails to set new highs alongside of the broad market, that stock is typically the first to sell off sharply (often to new lows) when the broad market eventually enters into even the slightest pullback from its high.
Once in a blue moon, a stock or ETF with relative weakness will suddenly start to show relative strength. However, that typically only occurs with the luck of some major news event.
Betting on future news that may or may not cause a stock to rally is akin to betting on red or black in a casino (maybe worse).
It’s All Relative, And That’s All You Need To Know
As momentum trend traders, we focus on buying stocks and ETFs that are making “higher highs” and “higher lows,” along with chart patterns that indicate relative strength to the benchmark S&P 500 Index.
In a moment, I will show you about a great way to quickly and easily identify relative strength, but let’s first discuss what relative strength (don’t confuse this with the RSI indicator) actually means.
Relative strength - Any stock or ETF that has broken out over the past few weeks automatically is showing great relative strength to the S&P 500 because it has rallied to new highs ahead of the benchmark index.
One such example is Guggenheim Solar Energy ETF ($TAN), which recently netted us a 44% gain.
On the individual stock side, the model portfolio of our swing trading newsletter is currently showing an unrealized price gain of more than 55% in Silica ($SLCA) since our July 8 buy entry, so this is another great example (we will remain long until the price action gives us a valid technical reason to sell).
Neutral - Stocks or ETFs that are breaking out right now (in sync with S&P 500) are also decent buy candidates and may eventually outperform during the rally.
These stocks and ETFs may not be as good as buying equities with relative strength (on a pullback), but can still offer substantial returns.
One such example is Direxion Daily Semiconductor Bull 3X ($SOXL), which we are currently long in The Wagner Daily.
Relative weakness - While stocks and ETFs that broke out ahead of the S&P 500 are the best stocks to buy, and some equities only breaking out now may be fine, you definitely want to avoid stocks and ETFs that are lagging behind.
I’m speaking from personal experience here.
Any stock or ETF that is failing to even keep pace with the current breakouts to new highs in the S&P 500 and Nasdaq has relative weakness. However, don’t confuse this with stocks and ETFs that already broke out to new highs within the past few weeks (ahead of the broad market) and are now building another base of consolidation.
A Tool To Stop Being A Fool
The good news is there’s a simple tool that enables traders to quickly and easily spot patterns of relative strength and weakness.
This tool is a great way to know which stocks and ETFs to avoid right now (the 20% mentioned earlier).
Surprisingly, the tool is utilized by simply comparing the daily chart patterns of any stock or ETF versus the S&P 500 Index.
The chart below, comparing the price action in a Real Estate ETF ($IYR) against the S&P 500 ETF ($SPY), clearly shows how this works:
It’s as simple as that.
If you thought our tool for spotting relative strength or weakness was going to be complicated, I’m sorry to disappoint you.
However, our proven trading strategy has always been about keeping our analysis of stocks simple, and this tool is in line with that philosophy.
Putting The Wind On Your Back
Notice that we compared an industry sector ETF (real estate) to the S&P 500, rather than an individual stock.
We did this because it’s a great way to determine if a particular industry group or sector has relative strength or weakness.
This is important to know because you don’t want to buy an individual stock that has a great looking chart pattern, but belongs to an industry sector with relative weakness.
If you do, the stock will struggle to move higher, despite its bullish chart pattern.
In trading, you always want the wind to be on your back.
Making sure the individual stocks you buy are part of an industry sector with relative strength (or at least not with relative weakness) is one of the most effective ways to do so.
Now that you know this highly effective and easy way to eliminate stocks and ETFs with relative weakness from your watchlist, you have no excuse for continuing to make one of the biggest mistakes traders make in a bull market.
Good stuff. Cheers!
How Top Traders Mentally Deal With Sudden Reversals
After suffering a nasty, two-day decline on October 8 and 9, the stock market ripped higher on October 10, closing the day with massive gains of more than 2% across the board.
Feeling a bit of whiplash lately?
While the big gains with bullish closing action on October 10 were a positive sign for the market, that powerful and sudden reversal immediately put traders who just stopped out of stock trades into regret mode, one of the Four Most Dangerous Emotions For Traders.
Driving A Car While Staring In The Rear-View Mirror Is Hazardous To Your Health
Regardless of whether or not you sold your stocks at lower prices and are now feeling regret, let’s get one thing straight…
This is not the time to be worrying about what happened in the past because you must be focused on what is happening NOW!
Whenever traders mentally struggle over whether or not they made a correct trading decision, such as if they bought or sold at the right time, they will often be wrong…but that’s completely okay!
What is not okay is to STAY wrong! If you’re wrong, simply move along.
During the whipsaw action of October 8-10, you may have found yourself stopped out of a stock position that subsequently made an abrupt u-turn and once again looks to be in good shape.
If this happened to you, the correct thing to do is to calmly and objectively jump back into the trade (even if you need to reduce your share size a bit to make that happen).
The daily chart of Michael Kors ($KORS) is a good example of a stock that can be re-entered, even if the trader was recently forced to sell:
When $KORS sliced through key support of its 50-day moving average on October 8, it undoubtedly triggered many sell stops (which was the correct thing to do).
However, just two days later, $KORS jumped back above support of 20 and 50-day moving averages, and back into its prior range.
As long as $KORS holds the newly reclaimed support levels, it is valid to re-enter the stock (regardless of one’s previous outcome in the trade).
Remember that each new trade entry is completely independent of itself.
Furthermore, we have learned over the years that trade re-entries (after stopping out because we bought too early) are often the most profitable trades because the “shakeout” absorbs overhead supply that would have otherwise created additional resistance on the way back up.
Just one note of caution, though, with regard to re-entering trades: Don’t confuse re-entering a bullish stock with “revenge trading,” which occurs when a trader re-enters a stock that fell apart, but still has not shown a valid technical reason to get back in (ego, be damned).
Now What?
Yesterday’s strong gap up was certainly a bullish sign, and we could see a solid, broad-based rally develop if the recent lows in the major averages hold up.
Unfortunately, yesterday’s volume was lighter in both exchanges, meaning the rally was not led by banks, mutual funds, hedge funds, and other institutions.
Nevertheless, with so many stocks changing hands the past few days, it’s quite apparent that buyers were stepping in to accumulate leading stocks off the lows. Just check out the charts of $LNKD, $KORS, and $TSLA to see what we mean.
Although we reduced our long exposure on October 8, our remaining stock positions are still in pretty good shape.
U.S. Silica Holdings ($SLCA), for example, has shown incredible relative strength over the past few days, as the stock basically ignored the October 8 sell-off.
Below is an annotated chart of $SLCA that we recently posted on our new Google+ page:
When a stock breaks out with strong price and volume action, it is always a very bullish sign. In fact, price and volume are the two most important and powerful technical indicators at a trader’s disposal.
We all have the urge to lock in profits at times, but to make the big money in trading, one’s focus must simply be on consistently doing the right thing.
If a trader does so, the large profits will eventually follow.
Overall, we feel that $LNKD, $KORS, $YELP, and $TSLA are the top dogs in this market right now, and are “must own” stocks for institutions.
As of now, we view the recent shakeout action as a buying opportunity (with stops placed beneath that week’s lows).
Either the lows of October 8 and 9 hold up, or the market will end up going much lower over the next few months.
As always, remember to trade what you see, not what you think!
Haaaa. Good one.
Anyway, the point of the article was not to brag about a 15% gain because that's not a huge gain or anything.
Rather, I just thought some people might benefit from understanding the technical analysis that prompted the trade entry.
Market Timing "Buy" Signal In Danger Of Reversing
Yesterday’s (October 8) selloff was broad-based and ugly, with just about every industry sector getting hit hard (utilities were an exception).
The NASDAQ Composite ($COMP) and small-cap Russell 2000 Index ($RUT), the leading market averages in recent months, were hit the hardest with losses of -2.0% and -1.7% respectively.
The NASDAQ is now the only index still trading above the 50-day moving average (but not by much).
Individual leadership stocks, typically small to mid-cap stocks with a strong history and outlook of earnings growth, were hit hard as well.
Whenever the major indices undergo a price correction, one of the most important factors we analyze is how well leading stocks hold up and show relative strength to the broad market.
So, where does this leave us as we enter the new week?
How To Know When The Tide Is Turning
If leading stocks show relative strength by mostly ignoring weakness in the S&P, Dow, and NASDAQ during broad-based price corrections, it’s a positive sign that tells us it’s safe to carry on entering new trades of these leading growth stocks, the best stocks to buy in a healthy market.
However, when top stocks begin succumbing to the weight of the broad market’s downward pressure, it quickly grabs our attention and tells us it’s time to lay off the gas pedal and take a more proactive stance with regard to managing existing positions for maximum profits and minimal losses.
So, Is The Tide Turning?
Yesterday, market leader LinkedIn Corporation ($LNKD) sliced through key support of its 50-day moving average on volume that surged to roughly 300% its average daily level. This volume spike tells us banks, hedge funds, mutual funds, and other institutions were driving the selling. Not a good sign for bulls.
Other leading stocks that sold off on heavy volume yesterday included: Qihoo 360 Technology ($QIHU), Vipshop Holdings ($VIPS), Soufun Holdings ($SFUN), Pandora Media ($P), Mercadolibre ($MELI), Priceline.com ($PCLN), and Amazon.com ($AMZN).
Although $PCLN and $AMZN had a rough day, both stocks are still trading above their respective 50-day moving averages (an intermediate-term “line in the sand” for many retail and institutional traders/investors).
Balancing On The Cliff
The broad market rally is just barely hanging on. If leading stocks begin cracking below their 50-day moving averages en masse, our proprietary Market Timing Model will be forced to shift from “buy” to “sell” mode.
If you’re new to the role that market timing rules play into our overall ETF and stock picking selection, please click here to learn the general concept of our system for market timing, then check out this article that explains the five, rule-based modes of our model for timing the stock market.
Keeping On Our Toes
Yesterday was a busy day for subscribers of The Wagner Daily, our nightly swing trading newsletter (which includes access to our market timing methodology).
On the individual stock side, we sold Bitauto ($BITA) and LifeLock ($LOCK) for decent share price gains of 36.7% and 13.8% respectively. LinkedIn ($LNKD) hit our stop and we sold for an average loss of just 2.7%. In case you missed it, you may want to check out How We Bought A Pullback In LifeLock ($LOCK) For A 15% Gain…So Far, a trading strategy video from a few weeks ago that explains why we bought $LOCK when we did.
As for the ETF side, we sold two existing ETF trades yesterday to minimize losses. On SPDR Biotech ($XBI) and Direxion Small-Cap Bull 3x ($TNA), we lost 3.6% and 6.3% respectively. However, these losses were much smaller than the 44% gain we secured in Guggenheim Solar ETF ($TAN) last week (check back on this blog for an educational technical review of this $TAN trade by the end of this week.
How To Be Profitable In A Reversing Market? Simple Math
Many traders, particularly newbies, are obsessed with the accuracy of win rates (percentage of winning trades vs. losing trades) when analyzing how well a trading system is likely to perform over the long-term.
However, the reality is that a trader’s long-term profitability depends largely on other factors, such as the dollar amount of the average winning trade compared to the dollar amount of the average losing trade.
If, for example, a trader has a win rate of 70%, but allows their average losing trade to be 300% larger than their average winning trade, he/she will be net negative over the long-term.
Conversely, if a trader has a win rate of just 50%, but allows the average winning trades to ride to being just double (200%) the size of an average losing trade, the trader will become net profitable over the long-term.
Lately, we’ve been closing our swing trades with about a 50% win rate (maybe even slightly lower), but our average gain has been MUCH larger than the average loser.
With the three stock trades we closed yesterday ($BITA, $LOCK, and $LNKD), our average winner was a share price gain of 25.3%, while the sole losing trade was just 2.7%.
That makes for a whopping reward-risk ratio of more than 9 to 1 (anything ratio above 3 to 1 is generally considered to be quite good).
To ensure you are alerted to when it’s time to start buying stocks again, based on our rule-based model, sign up today for your risk-free trial to The Wagner Daily.
2 Top Relative Strength Stocks To Buy
The stock market remains in pullback mode after a strong surge off the lows, but leading individual stocks continue to hold up and show clear relative strength.
Yesterday, for example, 4 of the 11 stocks in our swing trade newsletter gained at least 1.5%, even though the NASDAQ Composite was flat.
Yelp ($YELP), which is presently showing an unrealized price gain of 33% since our August 21 buy entry, jumped 2.4% yesterday. LinkedIn ($LNKD), another leading stock we are currently holding, climbed 2.6%.
As long as the broad market avoids heavy distribution and leadership stocks continue holding above key support levels, we expect the current correction to be short lived.
As such, our market timing system remains in “Buy” mode and we continue to establish new long positions in leading stocks and ETFs.
A 3-D Printing Stock And Biotech Stock – What Could They Have In Common?
Going into today, there are two new swing trade buy setups on our Wagner Daily watchlist: Ambarella ($AMBA) and Organova Holdings ($ONVO).
Although $AMBA is a biotech stock and $ONVO is in the exciting industry of 3-D printing, the common factor both stocks share is a very high IBD Relative Strength (RS) rating.
$AMBA has an RS rating of 94, while the RS rating of $ONVO is 98 (99 is the absolute best).
Since high RS is one of the top technical criteria in the individual stocks we look to trade, both stocks pass that test with flying colors.
Ambarella ($AMBA)
In addition to having high relative strength, $AMBA has a 5-year growth rate of a whopping 53%. Combined with high RS, the high EPS rate makes $AMBA an ideal buy candidate.
Let’s take a look at the daily chart of $AMBA below:
After rallying more than 300% since its IPO just over a year ago, $AMBA entered into a correction throughout July and August that caused the biotech stock to slip below intermediate-term support of its 50-day moving average.
However, notice that $AMBA reclaimed its 50-day moving average earlier this month, and did so on a big jump in volume. This is a very bullish sign that indicates $AMBA is setting up for another rally higher.
Organova Holdings ($ONVO)
In July of this year, $ONVO surged to the $8 level and volume correspondingly spiked higher as well.
After peaking near $8 this past summer, $ONVO pulled back to the $5 area, which caused a “higher low” to form (above the August low near $4.50). Since then, the stock has been in consolidation mode.
On September 19, $ONVO recaptured its 10-week moving average (similar to 50-day moving average) on heavier than average volume, then consolidated on lighter volume for two days.
Now, we are looking for the price action to tighten up around the 10-week moving average, which could soon lead to a breakout above the range:
Because of their relative strength, combined with their bullish consolidation patterns, both $AMBA and $ONVO have entered our radar screen for potential buy entry in the coming days.
Regular subscribers of our swing trading newsletter should note the “Watchlist” section of today’s report for our exact entry, stop, and target prices for each of these two new swing trade setups.
How We Made 15% Buying LOCK On Pullback
See educational trading strategy video just uploaded:
View Video - How We Made 15% Buying LOCK On A Pullback
An Easy Way To Buy Pullbacks For $$$
On August 13, we bought shares of LifeLock ($LOCK) with a $12.37 entry price. Since then, $LOCK has climbed to an unrealized price gain of approximately 15% since our buy entry (over a 4-week holding period).
In today's stock trading strategy video, we show you the exact technical signals that alerted us to buy $LOCK on a pullback, just a few days after the stock broke out from a bullish cup and handle chart pattern.
As you will learn in the video, the key point in buying the pullback of a stock that has already broken out is to look for a retracement to the 10-day moving average, then buy the first move above that that day's high.
Sometimes, especially when the broad market is taking a rest, a stock will pull back further than the 10-day moving average (to the 20-day moving average), but the swing trade setup is still valid if the stock quickly snaps back.
Click the link below to view the 3-minute video on our blog:
Video - How We Bought A Pullback In LifeLock ($LOCK) For A 15% Gain…So Far
Thanks, dude! Although it's not about the short side of the market, you may be interested a trading strategy video I just uploaded.
It's called How To Buy Top Breakout Stocks On A Pullback, and is based on my recent buy entry into $YELP (still long and with a 24.8% gain).
Here's the link for the video: Trading Strategy Video - How To Buy Top Breakout Stocks On A Pullback
Good trading to you, dude!
Deron
Why The NASDAQ Will Soon Breakout
For the past six weeks, the NASDAQ Composite Index ($COMP) has been uneventfully oscillating in a sideways trading range (a 3% range from the upper channel resistance down to lower channel support).
However, we have identified three highly reliable technical indicators that point to a strong likelihood of the NASDAQ soon breaking out to a fresh, multi-year high (despite continued weakness in the S&P 500 and Dow Jones).
1.) The Most Reliable Indicator You Probably Never Use
We prefer to keep our technical analysis of stocks pretty simple. Although there are literally hundreds of technical indicators at our disposal, we rely primarily on price, volume, support/resistance levels (such as trendlines and moving averages), and the relative strength line.
The relative strength line is a simple leading indicator that allows us to easily see how a stock or ETF is performing against the benchmark S&P 500 Index ($SPX). This is not to be confused with the RSI indicator (relative strength index).
When the relative strength line is outperforming the price action of the stock (or the Nasdaq Composite in this case), it is a reliable bullish signal that often precedes further gains in price.
On the chart below, notice how the relative strength line has already broken out to new highs twice, even though the NASDAQ has been trending sideways to slightly lower. This is a clear sign that institutional funds have been rotating out of the S&P 500 and into the NASDAQ:
2.) Salute The Bull Flag
While the relative strength line is one of the most reliable technical indicators to predict future price action, the bull flag is definitely one of our favorite bullish chart patterns to identify and profit from.
On the longer-term weekly chart, we clearly see the Nasdaq has been forming a bull flag chart pattern. This is annotated by the black lines we have drawn on the chart below:
Notice that the rally off the lows in July created the flag pole part of the bull flag pattern, while the current sideways price action forms the flag.
The tight consolidation of the past six weeks has retraced less than one-third of the last wave up. This is what we like to see, as the best-formed bull flag patterns should not pull back to more than a 38.2% Fibonacci retracement of last move up.
Finally, since the flag pole and the flag are frequently symmetrical in time, we need to compare how long it took for the pole to form with the length of the flag.
Since the pole was created over the span of six weeks, the anticipated breakout from the bull flag pattern should occur after the flag has formed for 5-7 weeks (we are currently on week 5).
3.) Already Leading The Market Higher
When I began trading and studying technical analysis many years ago, I assumed that the main stock market indexes (such as the NASDAQ) led the way for the top-performing stocks to move higher.
I was definitely wrong.
The reality is the opposite situation; leading individual stocks set the pace for the broad market to follow.
When the strongest stocks in the market (typically small to mid-cap growth stocks) are convincingly breaking out to new highs ahead of the broad-based indexes, it is a very bullish sign and the main stock market indexes usually follow suit.
Conversely, it is a bearish signal when the major indices are trending higher, but without clear leadership among individual stocks.
Right now, there is a plethora of stocks that are breaking out to new highs ahead of the NASDAQ.
In no particular order, here are the ticker symbols of a handful of stocks breaking out right now, or have already broken out, to new highs: $QIHU, $LNKD, $TSLA, $NFLX, $KORS, $LOCK, and $YELP.
We are presently long four of the above stocks in our newsletter, and with the following unrealized gains since our original buy entries (based on Sept. 5 closing prices): YELP +16.3%, LOCK +9.1%, LNKD +7.9%, and KORS +7.3%.
In case you missed it, you may want to check out our original August 21 analysis of Yelp ($YELP) (before it broke out and zoomed higher over the past few days).
You may also be interested in our educational August 26 video analysis of Amazon ($AMZN). In that video, we suggested $AMZN was setting up for a pullback buy entry and would start rallying again after pulling back to the $280 area (it’s back up to $294 now).
Death And Taxes – The Only Sure Things
As my grandmother loved to tell me, “the only sure things in life are death and taxes.” I agree, especially when it comes to the stock market.
Obviously, the Nasdaq has not yet broken out, and there is no guarantee that it will.
Nevertheless, the combination of the three reliable technical indicators above suggest a strong likelihood that the tech-heavy index will soon break out of its range and cruise to a new, multi-year high (though the S&P and Dow are another story).
If the Nasdaq suddenly rallies to new highs as anticipated, are you prepared to take advantage of the move? Do you know which stocks will offer the best odds for high profits? Be prepared.
Find The Best Entry Points For Short Selling
Because fear is a more powerful human emotion than greed, stocks nearly always fall much faster and more violently than they rise.
As such, there are key technical differences in our trading strategy between the way we analyze and buy stocks, compared to short selling stocks.
First, it is crucial to realize that trading in the same direction as the dominant broad market trend is the most important element of our swing trading system because approximately 80% of all stocks move in the same direction as the major indices.
This is where our objective, rule-based market timing model really shines, as it prevents us from selling short when the main stock market indexes are still trending higher (or going long when the broad market is in a confirmed downtrend).
Although it may seem counter-intuitive to new traders, we do not sell short stocks as they are breaking down below obvious levels of technical price support, as they tend to rebound and rip higher after just one to two days of weakness.
Rather, our most ideal short selling candidates are stocks and ETFs that have recently set new “swing lows” (or are testing prior lows), and have subsequently bounced into resistance over a period of three to ten days.
Yet, even though we prefer to wait for a bounce before entering a new short position, we also do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce).
Instead, we first wait for subsequent confirmation that the stock is about to stall again. This typically comes in the form of either a bearish reversal bar (such as a bearish engulfing or hanging man candlestick pattern) or sharp opening gap down, which signals the short-term bounce is losing steam.
Similarly, we always take the same approach on the long side when buying pullbacks of strong stocks; we wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback).
The daily chart of O’Reilly Automotive ($ORLY) below is a good example of what frequently happens when attempting to sell short a stock as it breaks down below an obvious level of price support. Again, entering a new short position while a stock is breaking down below the low of a range is not something we are very comfortable doing:
A lower risk way of initiating a new short sale, which also provides traders with a more positive reward to risk ratio for short selling, is shown on the following chart of Check Point Software ($CHKP). This is an example of what we look for for when entering a short position (although the declines are not always as dramatic):
On October 17, $CHKP gapped down sharply, on huge volume, due to a negative reaction to its quarterly earnings report. This caused the stock to crash through a four-month level of price support at the $44 area (dashed horizontal line).
But over the week that followed, notice that $CHKP climbed its way back up to test new resistance of its breakdown level.
If $CHKP subsequently manages to probe above the intraday high of October 17, it would see some short covering, as most traders would not have expected the price action to climb back to that level.
Further, the 20-day exponential moving average is also just overhead, which lends a little more resistance.
It is at that point ($44.50 to $45 area) that we would look for the first bearish reversal candle OR opening gap down to initiate a very low-risk short selling entry with a positive reward-risk ratio.
By waiting for a significant bounce into new resistance of the breakdown before selling short, we can “be right or be right out” by keeping a relatively tight protective stop.
Finally, drill it in your head that having the patience to wait for the proper entry points is crucial when short selling stocks, as the short side of the market is less forgiving to ill-timed trade entries than the long side.
My pleasure. Good trading to you!
Oil, Silver, Gold - Good time to review
Given that stocks are down sharply today, while oil, silver, and gold are up sharply, thought this would be a good time to review a post I put on this board back on August 18, titled "How To Profit From Oil And Silver ETFs In This Stock Market Downturn."
In case you missed it, here's a link to the original blog post:
How To Profit From Oil And Silver ETFs In This Stock Market Downturn
The breakout in $USO today is what I've been waiting for, so patience finally paying off with this one:
Good trading to you all.
Deron
A Low-Risk Swing Trade Entry In $YELP
With the market in substantial pullback mode, the number of leading stocks showing relative strength and still presenting low-risk swing trade buy entries has dwindled. However, there are a few lone holdouts, each of which could quickly jump back to new highs if the market suddenly recovers (as it has been prone to do many times this year).
One such stock with relative strength that is currently set up for ideal buy entry is Yelp, Inc ($YELP).
Since printing a bullish reversal candle on August 16 (the big green candlestick three days ago), $YELP has been trading in a very tight range over the past two days. Most importantly, volume has dropped off to extremely light levels during these two days as well.
When a stock demonstrates bullish reversal action after bouncing off a level of support (the 20-day exponential moving average in this case), it will often enter into one or two days of tight price consolidation. When that sideways price action occurs on substantially decreasing volume it is usually a sign that the current pullback may be over and that the uptrend is ready to resume.
If $YELP can rally above its three-day high on increasing volume, we would then look for the price action to consolidate for another week or two, while simultaneously forming higher “swing lows” within the base.
If that scenario plays out, the August 16 low (which coincides with near-term support of the 20-day EMA) should end up being the low of the current pullback. Assuming the broad market at least holds up, we would subsequently anticipate a rally to new highs thereafter:
The next two weeks will be quite interesting for large-cap NASDAQ stocks like $AMZN, $GOOG, and $PCLN, as they attempt to hold or reclaim important support levels. With $AMZN breaking below its 50-day moving average last week, for example, we would like to see the price action hold above $280 (just below the highs of the last base).
If these key large-cap stocks begin to break down, along with leaders like $LNKD, $TSLA, and $KORS, our market timing system will signal it is time to move into cash and/or begin establishing new short positions. However, as followers of our swing trading methodology already know, we prefer to shy away from predictions and take it one day at a time instead.
Always remember to trade what you see, not what you think!
Cup and handle of $HIMX - breakout coming?
After completing our weekend stock scanning research, Himax Technologies ($HIMX) has entered our radar screen as a potential swing trade buy entry in the coming days.
This small-cap tech company, which manufactures the liquid-crystal on silicon chips that power the displays of Google Glass, is presently forming the “handle” portion of a cup and handle chart pattern.
As explained in our recent blog post, How To Find Chart Patterns That Precede The Best Breakouts, one of the best and most reliable technical chart patterns that precede the strongest stock breakouts is the cup and handle.
Looking at the daily chart of $HIMX below, notice the depth from the high of the left side of the cup (mid-May), down to the low of the cup (late June), equates to a price retracement of over 40%.
Although this is a bit wider than we like to see, bear in mind that $HIMX is only a $7 stock that is forming a base of consolidation after a gain of more than 100%. As such, a little extra volatility is to be expected.
The same could be said for the handle, which should not retrace more than 15% from the highs in a normal cup and handle pattern. With $HIMX, the pullback was 19%.
Again, this is fine because it is a volatile small-cap stock. Conversely, if the handle dipped 20% in a stock like Google ($GOOG), it would be ugly.
On the annotated daily chart below, we have highlighted the cup and handle that has developed for this swing trade setup:
With this momentum trade setup, please be aware that $HIMX is scheduled to report its quarterly earnings results on August 15. Since that is only ten days away, our initial share size will be very small if the trade triggers for buy entry because we are only seeking a quick pop ahead of earnings. If, however, the stock blasts off in the coming days and we have a large enough profit buffer, we would hold the position through the earnings report.
Our exact entry, exit, and target prices for this trade setup are provided to subscribers in the "watchlist" section of today's report. In that regard, we need to point out that our initial stop price on $HIMX is tight because this is a G.O.N.G (“go or no go”) trade setup. We want to be right or be right out, as we are not willing to hold this stock for long if it doesn’t quickly take off.
Finally, it is noteworthy to point out that $HIMX is not an “A-rated” stock for us. This means if your portfolio is full (buying power is maxed out), there is no reason to cut existing positions to move into this stock. Nevertheless, a stock is still quite capable of outperforming even if it is not “A-rated.”
For us, an “A-rated” stock is one with top earnings growth (usually small to mid-cap), solid volume, and overly positive price action. If a stock is slightly lacking in any of those areas, it is not “A-rated.” Two current examples of “A-rated” stocks are LinkedIn Corporation ($LNKD) and Michael Kors Holding Limited ($KORS).
Two Low-Risk ETF Swing Trade Setups
We have been holding Guggenheim Solar ETF ($TAN) as an intermediate-term swing trade since July 2, when we bought in anticipation of another breakout to new highs. This momentum trade has been working out well so far, as this ETF swing trade is presently showing an unrealized share price gain of 13.8% (based on our July 2 entry price of $24.20 in The Wagner Daily newsletter).
Over the past four days, $TAN has been consolidating a tight, sideways range near its all-time high. This is healthy price action and has led to the formation of a “bull flag” type pattern on its daily chart. This is shown on the chart of $TAN below:
Because of the bullish pattern that has formed, odds now favor another breakout to new highs for $TAN in the coming days. Since we presently have only 50% of our maximum share size in this trade, we will be adding an additional 25% exposure if the ETF rallies above the July 19 high.
Additionally, traders who missed our original entry point for any reason may now also consider establishing a new position in $TAN, based on our same entry and stop price criteria. However, in this case, no more than 25% to 50% of maximum position size would be recommended because the average entry price on this trade would be more than 13% above our original July 2 entry price.
Another ETF we are already holding is Market Vectors Semiconductor ETF ($SMH), which we bought one week ago when it broke out above resistance of its prior highs. Since then, the ETF has pulled back and is trading slightly below our entry price, but the current retracement from the highs now provides a low-risk buy entry point for traders who missed our initial entry point. The pullback is also an ideal level to add additional shares for traders who are looking to increase their position size:
Notice that $SMH gapped down last Friday (July 19), but found support at its 50-day moving average, which neatly coincided with the intraday low of the session. Furthermore, the ETF formed a bullish “hammer” candlestick after bouncing off key support of its 50-day MA.
Because of the hammer candlestick that coincided with a pullback to the 50-day MA, the actual entry point to establish a new position in $SMH (or to add to existing shares) is just above the July 19 high of $38.58. A protective stop could be placed just below major support of the June 24 swing low of $36.08. Alternatively, momentum traders with a shorter-term trading timeframe could place a tight stop just below the July 19 low, which would put $SMH back below its 50-day MA if the stop is triggered.
We are already at 75% maximum position size with $SMH, so we are NOT looking to add additional shares at this time. Nevertheless, we wanted to give you a heads-up to this low-risk buying opportunity in case you missed our original entry or are too light in share size.
How To Find Best Charts That Precede Breakouts
Stock breakouts are about more than simply buying stocks that are trading at new highs. In order for a breakout to be valid and without a high risk of failure, a stock must first possess a valid base of consolidation on its chart pattern.
In this educational article, we clearly show you how to spot two “basing” chart patterns that precede the best breakouts: Deep Correction (Cup and Handle) and Shallow Correction (Flat Base).
We suggest studying these chart patterns closely, as it will enable you to develop your eye and eventually read stock charts like a pro.
Deep Correction – “Cup And Handle” Type Pattern
Following are the technical characteristics of a deep correction, along with an actual visual example.
*The pattern must form within an existing uptrend, and stock must be at least 30-40% off the lows. This rule is very important. Do not go looking for cup and handle patterns with stocks trading at or near 52-week lows! The best cup and handle patterns form near 52-week highs. Stocks that are breaking out to new all time highs are ideal because they lack overhead resistance.
*The 50-day moving average should be above the 200-day moving average, and the 200-day moving average should have already been trending higher for at least a few months.
*The base typically forms on a pullback of 20-35% off the highs, and is at least seven weeks in length.
*As the base rounds out and the price returns back above the 50-day moving average and holds, be on the lookout for the “handle” to form. The handle usually forms 5-10% below the highs of the left side of the pattern.
*The handle itself should drift lower, and is typically 5-10% or so in width. Handles that retrace more than 15% are too volatile and prone to failure.
*Handles should be at least 5 days in length and not form below the 50-day moving average.
Putting it all together, this chart of LinkedIn ($LNKD) shows a valid cup and handle type pattern, based on the technical criteria above:
On the chart above, notice the 200-day moving average (orange line) is in a clear uptrend. The 50-day moving average (teal line) is above the 200-day moving average, and the 20-day exponential moving average has crossed above the 50-day moving average.
When the 20-day exponential moving average is above the 50-day moving average, and the price action is above both averages, it is the ideal time for a handle to form.
The key to the handle is that price action should drift lower to shake out the “weak hands.”
The buy point for this type of swing trade setup is a breakout above the high of the handle. However, over the years, we have learned to establish partial position size at or near the lows of a handle, and add to the position on the breakout above the high of the handle. This enables us to lower our average cost and provides a better reward to risk ratio.
Shallow Correction – Flat Base
A shallow correction is also known as a flat base, and the pattern should possess the following characteristics:
*As with the cup and handle type pattern, a flat base must form within an existing uptrend. Typically, it will form after a breakout from a deeper correction (like a cup and handle base).
*The best way to identify a flat base is by using the weekly chart timeframe. The majority of the base should form above the rising 10-week moving average (or 50-day moving average on daily chart).
*The 10-week moving average should be trading well above the 40-week moving average
*A flat base should be at least 5 weeks in length.
*Flat bases usually correct no more than 15% off the highs
The following chart of Pharmacyclics ($PCYC) illustrates what a flat base should look like:
Although the weekly chart above is a great example of a flat base, the pullback was just a bit over 15% at 17%. A flat base should form around 10-15% off the highs, but 16-18% is okay, especially if the stock is volatile. If the pattern is 25% wide, it is probably not a flat base. Please just use common sense with these rules.
Also on the chart of $PCYC, notice the entire base finds support at the rising 10-week moving average, which is a very bullish sign. Further, the 10-week moving average is well above the 40-week moving average, and both indicators are in a clear uptrend.
The buy point of a flat base is on a breakout above the highs of the pattern. As with cup and handle patterns, we usually try to establish partial size before the breakout if possible.
Keep It Tight!
When finding bullish stocks patterns, it is crucial to look for a tightening of the price action on the right hand side of the base.
The left hand side is the initial drop off the highs, where the price action cracks and becomes wide and loose. For the first few weeks, the price action is volatile and there can be quite a bit of selling. But after a few weeks of bottoming action, the stock begins to settle down and push higher.
When the majority of price action is above the 50-day moving average, and the 20-day exponential moving average is above the 50-day moving average, this is when the stock should begin to tighten up.
The following daily chart of Tesaro ($TSRO) clearly shows a tightening of the right hand side of the basing pattern:
On the chart above, the initial decline off the highs (around $20) produced volatile price action for several weeks. However, notice the price action never really broke below the 50-day moving average for more than a few days.
In early January 2013, the price action tightened up. By later in the same month, an extremely tight range develops above the 20-day exponential moving average. This is a classic snapshot of tightening price action, which is something we always look for.
The rules above may be rather precise, but the details are worth studying and memorizing because they have been developed through years and years of experience. Since the most profitable stock picks in our swing trading newsletter nearly always possess the above qualities, the proverbial proof is in the pudding.
Buy Or Sell Stocks Now? Neither. Here's Why...
Although stocks managed their third straight round of gains yesterday (June 27), it is risky and probably a bit too early to establish new long positions right now. This is because several of the major indices are now running into new overhead resistance of their 20 and 50-day moving averages (remember that a prior level of support technically becomes the new level of resistance after the support is broken).
One such example of this moving average resistance can easily be seen in the ETF proxy for the benchmark S&P 500 Index ($SPY):
Notice that yesterday’s (June 27) intraday high in $SPY perfectly coincided with near-term resistance of the 20-day exponential moving average (beige line). After testing that resistance level, $SPY subsequently closed at its intraday low. Furthermore, the 20-day EMA has recently crossed below the 50-day MA (teal line), which can be a signal that an intermediate-term uptrend may be reversing.
Because of the overhead supply and technical resistance levels currently confronting stocks, the market may be subject to a pullback over the next few days. At the least, it would be reasonable to expect stocks to chop around and consolidate a bit before moving higher.
In many cases, the first bounce into resistance that follows a sharp selloff (like we saw last week) provides low-risk entry points for new short positions, in anticipation of another leg down in the market. However, this time we are NOT convinced that selling short right now is the right thing to do. Why? Simply because leading stocks have been holding up pretty well throughout the market correction.
When leading stocks are not breaking down en masse, stock market corrections are typically short-lived. Paying attention only to the price action of the main stock market indexes, while ignoring the price action of leading stocks, is a big mistake that new traders frequently make. They fail to realize that the major indices usually lag behind leading stocks, and not the other way around (major indices setting the pace of leading stocks).
So, if it’s too early to start buying stocks right now, but conditions are also not ideal for initiating new short positions, what is the best plan of action right now? Having a bit of patience and sitting mostly or fully in cash for at least the next few days is probably the best bet. Dipping a toe in the water through buying one or two positions showing relative strength AND with reduced share size would not be too risky; however, this is definitely NOT the time to be aggressive on the long side.
Why 50-Day Moving Average Is So Great
Since mid-April, one of the strongest industry sector ETFs in the market has been Market Vectors Semiconductor ($SMH). We initially bought this ETF when it broke out back in April, sold into strength for a 9% gain several weeks later, then re-entered with partial share size after it began pulling back (May 23).
As the broad market has been consolidating and digesting its recent gains over the past month, $SMH has been holding up well and we remain long our partial position from the May 23 entry. However, now that the 50-day moving average has finally risen to meet the price of $SMH, we are also prepared to add to the swing trade position, in anticipation of a pending resumption of its new uptrend and a breakout to a new 52-week high.
Below is the daily chart pattern of $SMH:
As you can see, the June 13 intraday low in $SMH nearly coincided with a kiss of its rising 50-day MA (teal line). When an ETF or stock with relative strength breaks out of a base, the first subsequent pullback to the 50-day MA typically presents a low-risk buying opportunity because it is this level where institutions often step back in to buy.
Rarely will the first retracement to a 50-day MA that follows a substantial breakout fail to hold up on the first test (although “undercuts” of one or two days are common). As such, subscribing members of our swing trader newsletter should note we have listed $SMH as a potential buy entry. Please see the “Watchlist” section of today’s report for our exact trigger, stop, and target prices for this setup.
In this June 6 blog post, we pointed out the “triple convergence of support” that was forming in the S&P 500. Specifically, we highlighted how key intermediate-term support of the 50-day moving average, dominant uptrend line, and horizontal price support from the prior highs were all merging together. In case you missed it, here is the exact chart of the S&P 500 SPDR ($SPY) we showed that day:
The very next day, the S&P 500 “undercut” that area of support on an intraday basis, but formed a bullish reversal candle to close above it. Such a bounce was not surprising, as the more technical indicators that converge to form support, the more significant that support becomes.
After the formation of that triple convergence of support on the S&P 500, we indeed expected a bounce, but also still expected the broad market to consolidate a bit longer before resuming its uptrend. Now that stocks have been trading in a range for the past few weeks, the 50-day moving average has again risen up to provide support for $SPY (just like the $SMH chart). Here is the current snapshot of $SPY:
The charts of both $SMH and $SPY above are great examples of the significance of the 50-day moving average as an intermediate-term indicator of support. However, it’s important to realize that stocks and ETFs are more likely to bounce off the 50-day MA if it is only the first touch of the 50-day MA that follows a convincing breakout from a valid base of support.
Each subsequent test of the 50-day MA that occurs before the index or stock breaks out to another high technically weakens support of the 50-day MA and thereby increases the odds of a breakdown below it. As such, it would be a negative sign for the market if $SPY and/or $SMH break down below the June 13 lows (which would correspond to a break of the 50-day MAs).
As long as the major indices and leading sectors hold their 50-day MAs while continuing to consolidate, stocks still technically look good for another move higher, which would pick up where the April to May rally left off.
Top 3 ETFs To Buy As Market Corrects
On the morning of May 23, one day after the first significant broad market decline in more than a month, we targeted both Guggenheim Solar ETF ($TAN) and Market Vectors Semiconductor ($SMH) for potential pullback buy entry in our trading newsletter (these two ETFs were actually pointed out as potential pullback entries in this May 22 blog post one day earlier).
Because bearish follow-through momentum from the May 22 sell-off carried through into the May 23 open (as anticipated), both ETF swing trade setups triggered for “official” pullback buy entry, and have been acting well since then.
As of this moment, the rather volatile $TAN is already showing an unrealized gain of 8.9% since our May 23 buy entry of $23.45 (where we grabbed some shares on a pullback to the 10-day MA). From here, we would ideally like to see the ETF build a base of consolidation near the highs, then breakout to a new high within the next several weeks.
The other trade we entered on the May 23 open was $SMH, which we swiped at $37.68 as it pulled back to test substantial near-term support of its 20-day exponential moving average (for the first time since its breakout).
The following day, $SMH formed a bullish “hammer” candlestick and closed above its 20-day EMA for the second straight day. The daily chart below illustrates this (based on most recent closing price of May 24):
Based on the healthy pullback of $SMH that is holding the 20-day EMA, the ETF should be well positioned to climb back to the highs as long as the broad market holds steady.
If we get a little bit of help from the market, in the form of a bounce this week, $SMH should be among the first industry sector ETFs to outperform due to the relative strength $SMH was exhibiting on the way up. An added bonus is that we are now back into this ETF at a much lower price than our most recent exit at $38.44, when we sold $SMH for a 9% gain on May 13.
On May 6, iShares Malaysia Index Fund ($EWM) gapped up 6% to a fresh all-time high. Since this was a confirmed breakaway gap, we have been stalking this ETF for the past several weeks, waiting for a base of consolidation to form and the moving averages to rise up and provide support.
Last Friday (May 24), $EWM gapped down to “undercut” support of its 20-day exponential moving average:
From here, we will be watching to see if $EWM forms some sort of bullish reversal bar and closes back above the 20-day EMA. If it does, it could present a possible buying opportunity the following day (above the prior day’s high). For now, it is not actionable on today’s watchlist, but we will be sure to notify subscribers of our nightly swing trade newsletter if/when we decide to buy as an “official” swing trade on our watchlist.
Top 5 Qualities Of The Best Stock Breakouts
When buying breakouts of growth stocks, one of the three main techniques of our momentum swing trading system, there are certain technical criteria we look for because all the best stock breakouts share the same traits.
Last week (May 17), we sold a breakout swing trade in Pandora Media ($P) for a net gain of 14% with a holding period of less than three weeks. Prior to buy entry on May 1, the stock possessed the top 5 technical traits for breakout buying, which we have listed below (see the first chart below for a visual reference):
High volume gap - On March 8, the stock gapped sharply higher to close the day with an 18% gain. Most importantly, volume spiked to approximately 700% its 50-day average level. When stocks score such a massive one-day gain that is accompanied by a monster surge in volume, it is undeniably the footprint of institutional buying (which we always want to see on the long side).
20-day MA > 50-day MA - During the formation of the base of consolidation that followed the March 8 gap, the 20-day exponential moving average remained above the 50-day moving average the entire team. This is a sign that the uptrend technically remains solid.
Tight base above 50-day MA - As $P was forming its base, the 50-day moving average was rising up to meet the price. When that occurred, the stock touched and held key support of its 50-day MA several times. Simultaneously, the base began tightening up, which is typically a precursor to a breakout.
First base after reversal off lows - This was the first real base that $P formed since its big reversal off the late 2012 lows (around $8). The first stage bases often have the highest odds of a successful breakout because the momentum of the new uptrend is just ramping up.
IPO - Although not a requirement of breakout setups, one bonus is that $P recently launched as an IPO in 2011. If strong earnings growth and momentum exists, IPOs have a tendency to make explosive moves because of the lack of overhead supply (resistance).
Below is the daily chart of $P, as it looked at the time of our breakout buy entry:
After we determined that a valid base of consolidation had formed, we then focused on determining exactly when to buy. The technical factors that helped us drill down to a precision entry point were:
- A “higher low” formed within the base (second touch of the 50-day MA)
- Price broke out above the 6-week downtrend line started by the May 8 high
- A tight range formed immediately upon breaking out above the downtrend line
The technical signals above told us it was the proper time to stalk $P for potential swing trade buy entry. In the May 1 issue of The Wagner Daily, we told subscribing members we would be buying $P if it traded above $14.18 (just above the April 30 high).
As anticipated, the stock triggered our buy entry that day, and we were long at an entry price of $14.20. The chart below shows our entry point, the subsequent price action, and our eventual exit point a few weeks later:
As $P began climbing higher, our plan was to hold the swing trade as long as the price held above the steep uptrend line that formed on the hourly chart (similar to the way we recently trailed a stop to maximize gains on our swing trade of $SMH).
On the close of May 16, we raised the stop to just below that day’s low because we observed “stalling” action over the preceding two days and wanted to protect our profits. An analyst downgrade caused $P to gap down and hit our tightened stop on the open of May 17, but our sale at $16.17 still allowed us to lock in a nice 14% gain on the trade. This was just a bit less than the usual 20 to 25% gains we typically seek to achieve with breakout momentum trades.
How We Gained 9% Selling Short Gold
Yesterday, we sold our swing trade in DB Gold Double Short ($DZZ), a “short ETF” that inversely tracks the price of spot gold, for a solid gain of 9% over a two-week holding period. Since the trade followed through as anticipated, we thought it would be helpful to share an educational technical review of why we originally entered the trade and subsequently sold when we did.
For several months prior to entering this trade, we had been closely monitoring the price action of SPDR Gold Trust ($GLD), an ETF proxy for the price of spot gold. Specifically, we were expecting $GLD to eventually break down below major horizontal price support around the $150 level. The trade idea was originally mentioned in this March 18 blog post, and then again on April 29.
The breakdown we were planning for finally occurred on April 12, which led to a massive drop of 13% over the course of just two days. But since the April 12 decline was so large, and because we run an end-of-day swing trading service, we were unable to immediately take advantage of selling short the breakdown in $GLD (or buying the breakout in $DZZ). However, we were not really concerned because we knew we would probably get a second chance.
Whenever a stock or ETF experiences a massive drop within a very short period of time, it will typically make a substantial counter-trend bounce shortly thereafter. When that bounce occurs, traders and investors who got stuck and did not sell for one reason or another sell into strength of the bounce, hoping to minimize their losses. It is this “overhead supply” that prevents the equity from moving higher in the near-term, which subsequently attracts the bears who start selling short.
The end result of all the selling into strength of the bounce is that the recovery attempt is usually short-lived. What happens next is that the price will typically head back down to at least re-test the prior low before stabilizing. There are exceptions, of course, but it is highly unusual for a stock or ETF to experience a huge plunge, bounce off the lows, and not subsequently fall back down to test the prior lows at least once. It is this knowledge that prompted our short sale of gold as it bounced into resistance of its 20-day exponential moving average, then started heading back down.
On the chart of $DZZ below, we have annotated our entry and exit points, which will make it easy to understand the concept above. Since our entry was into an inverse ETF, the price action is opposite of $GLD. Therefore, our entry was on a pullback from the highs, rather than a bounce off the lows:
As you can see, we bought $DZZ on May 1, after it gapped above the previous day’s high. When buying a pullback to support (or selling short a bounce into resistance), we always wait for price confirmation that the dominant trend is likely to resume. The confirmation we are looking for is either a big, ugly reversal bar or a substantial opening gap in the direction of the dominant trend.
The fact that we always patiently wait for such price confirmation is the reason we did not immediately buy $DZZ on its first touch of support of its 20-day exponential moving average (beige line) three days prior. Entering before the price confirmation occurs is always riskier because there is no confirmation that the counter-trend move is finished. Therefore, we happily give up a bit of the trade’s profit potential in return for a lower-risk entry point.
The initial protective stop was set at $5.49. We set the stop at this price because it was below convergence of the low of the pullback (intraday low of April 26) and support of the 20-day EMA. After the gap up of May 1, we did not want to see the price action break below that convergence of support, so we set the stop below that level, including some “wiggle room” below the exact price of the low.
Finally, as for the exit point, our target on this type of momentum trade is simply a retest of the prior swing high (or prior swing low if selling short). As such, we set a target price of $6.40 going into yesterday’s session (just one cent shy of the April 15 high). Gapping higher on the open, $DZZ neatly hit that target and we sold.
Although $DZZ could go on to set a new high from here, that was not the intention of the trade at the time of entry. Rather, we were simply looking to catch a substantial piece of the first move back in the direction of the dominant trend. Furthermore, the odds of $DZZ going to a new high are much lower than the odds of it simply going back to retest its prior highs because now there is resistance of a major swing high (support of a key swing low in $GLD).
Thanks again. Appreciate it.
Thanks, as always, for your kind words too.
Another post coming right up.
Being a consistently profitable swing trader is a juggling act that requires one to constantly be focused on a variety of key elements of success: picking the right stocks, managing risk, determining when to sell, and even mastering the psychology of trading.
In this educational trading strategy article, we will dive into the topic of knowing how and when to sell winning ETF and stock swing trades for maximum profit, using the example of an actual swing trade we are currently positioned in. As for when to sell losing trades, there’s frankly not much to say other than always have a predetermined stop before entering every trade and simply honor it.
Since April 12, the model trading portfolio of our swing trading newsletter (The Wagner Daily) has been long Market Vectors Semiconductor ETF ($SMH). We initially alerted traders of the technical reasons we were bullish on the semiconductor sector (and $SMH) in this March 28 blog post. Since then, we have also reminded regular readers of our trading blog several more times about the increasing relative strength in semis.
In the “open positions” section of today’s (May 13) Wagner Daily, subscribing members will notice we have trailed our $SMH protective stop higher for the fourth consecutive day. Because the ETF is already nearing our original target area of $40, while remaining on a very steep angled climb, we have been continually squeezing the stop tighter in order to protect gains, while still allowing for maximum profit.
On the daily chart of $SMH below, we have labeled the increasingly higher stop prices we have used in each of the past four sessions:
As you can see, our stop in each of the past four trading sessions has been raised to just below the low of the prior day’s session. Whenever an ETF or stock is nearing your target area and you wish to maximize profits while still protecting gains, setting a stop just below the previous day’s low (allowing for a tiny bit of “wiggle room”) is a great strategy. This is because basic technical analysis states the prior day’s lows and highs act as very near-term support and resistance (respectively).
By using this method for trailing stops, you will be out of a winning position before the start of a significant pullback, while still allowing the gains to build as long as buying momentum remains. This system also provides an objective way for knowing when to close a winning swing trade, rather than guessing and potentially leaving significant profits on the table.
Of course, there are many different ways to manage exits on winning momentum trades, and some of those methods are equally as effective as what is explained above. The reality is that any trading system can be a great one if the trader proves to be profitable with it over the long-term (even if the system involves trading by the cycles of the moon).
As such, we would never imply that our system is absolutely the best way to manage stops on winning swing trades. But what we truly love about our exit strategy is its utter simplicity; simple trading strategies are the easiest to follow and thereby profit from. Why complicate a technique that has already been proven to work so well? Become a member of our swing trading service to learn more.
New Momentum Trading Strategy Video Uploaded
On May 6, I shared with you my Top 3 Most Simple & Profitable Buy Setups For Swing Trading Stocks.
In that trading strategy article, I showed you an example of a “Combo Setup,” as well as a “Blast Off” setup. For the third type of swing trade setup, the “Price Momentum” trade, I promised we would show you an example of that as well, and here it is.
Recently, subscribers who follow my Wagner Daily newsletter netted an average 15% gain on a momentum stock trade that was held just over 3 weeks.
In this educational, 4-minute swing trading strategy video, I walk you through the technical criteria that prompted the initial buy entry, show you the placement of my protective stop, and explain my rationale for exiting the momentum trade for a solid profit.
Here is the link to the new video.