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Thanks, glad you enjoyed the article.
Many active traders make the mistake of assuming that a winning system for swing trading stocks needs to be complicated. On the contrary, the best trading strategies are typically the most simple because they can be more easily and consistently followed.
Our methodology for picking stocks is simple, as 99% of the stocks we buy in our model trading portfolio come from one of the following three setups:
1. Combo Setup – The stock must have a combination of great earnings growth and strong technical price action (some type of bullish chart pattern). Typically, these stocks are growing their earnings at a rate of 30 to 40% (or more) quarter after quarter. Furthermore, these stocks will usually have an IBD relative strength rating of 80 or higher. Since we consider these stocks to be A-rated, they can usually be held for several weeks or more.
2. Price momentum - With this swing trade setup, earnings growth is not important, but the stock must have a top relative strength rating (95 or higher) and belong to an industry sector group that is outperforming the S&P 500. These stocks can be held for a few days to a few weeks.
Our recent trade in Celldex Therapuetics ($CLDX), a biotechnology stock with a relative strength rating greater than 95, is a good example of a swing trade setup based purely on momentum (bullish price action). Last month, we netted a 15% gain on our swing trade in $CLDX and will soon be posting an educational video review of that trade on our blog.
3. Blast Off - Neither earnings growth nor a top relative strength rating is necessary with this type of swing trading setup. We are simply looking for a monster spike in volume on the daily chart, combined with a 4% or more gain in that same session. This indicates huge demand. If demand is sharply greater than supply, the price has no choice but to surge higher (which is why volume is such a great technical indicator).
With this setup, the one-day volume spike should be at least 2.5 to 3 times greater than the 50-day moving average of volume. These stocks can be held for a few days to a few weeks (as long as the price action remains excellent).
A current example of the “Combo” setup (#1 above) can be found in Michael Kors Holding Limited ($KORS). So, let’s take a closer look at how this trade meets our parameters.
For starters, the expected earnings growth of $KORS in the coming quarter is 81%, so the requirement for strong earnings growth is definitely covered. Its IBD relative strength rating is only 71, but that is compensated for by the monstrous earnings growth the company has been experiencing. Next, let’s take a look at the technical chart pattern.
After several months of choppy price action, $KORS is starting to come together nicely. Upon completing a 20% pullback off its February 2013 high, $KORS found support at its 200-day moving average, then rallied to reclaim its 50-day moving average last week. Now, $KORS is working on forming a bullish chart pattern known as a “cup and handle,” which looks like this:
As shown on the chart below, $KORS formed the left side of the cup and handle pattern from March to late April, and is now working on the right side of the pattern. The right side of the pattern will need several weeks to develop and form a handle with a proper buy point. During this time, the stock needs to hold above its 50-day moving average as well. This annotated chart of $KORS shows what we are looking for:
YRC Worldwide, Inc. ($YRCW) is a great example of a “Blast Off” setup (#3 above). Notice the huge volume and sharp gap above resistance that occurred last Friday (May 3):
As of the first 30 minutes of trading in today’s session (May 6), $YRCW is trading more than 20% higher than the previous day’s close. Obviously, such a huge follow-up price gap is not common; nevertheless, it shows you just how powerful the “Blast Off” setup can be:
If not already holding this stock, the setup is definitely NOT buyable for swing trading right now (we never chase stocks). However, if/when it forms a proper base of consolidation from here, we can begin to look for a low-risk buy point (at which time we would notify Wagner Daily subscribers of our exact entry, stop, and target prices).
As previously mentioned, we will soon be posting an educational review of last month’s winning swing trade in $CLDX, which will be an example of our “Price Momentum” setup. Be sure to check back on our swing trading blog soon.
Hey Tappy. Glad you are enjoying my educational posts.
Another one coming right up...
Internet ETF Poised To Breakout Soon ($FDN)
One ETF on our radar screen for potential buy entry right now is First Trust Internet Index ($FDN). Unlike many of the strongest ETFs in the market that are near-term extended to the upside, $FDN has not yet broken out above its range. As such, one could understandably argue that the ETF has relative weakness and should be avoided. In many cases, that would be true.
Even though $FDN has not yet broken out, the difference here is that the ETF has been forming a constructive base of consolidation at its all-time highs. This is much different than buying an ETF that is trading near its lows and is only now attempting to reverse its downtrend. The weekly chart of $FDN below shows how the ETF has been consolidating for the past few months:
On the week ending March 8, notice that $FDN attempted to break out to a new high, but failed the following week. When this happens to an ETF or stock that is trading near its highs, it does not necessarily mean the setup becomes invalid. On the contrary, some of the most explosive upside moves occur when the first breakout attempt fails, but the equity subsequently breaks out and hold. Often, failed breakouts at the highs simply indicate a lengthier period of base building is required.
Zooming into the shorter-term daily chart interval, notice that a rally above yesterday’s (May 1) high would present a valid buy entry point for a partial position. Additional shares could be added to the position on confirmation of a breakout above the highs of the range:
Despite the major indices losing 0.9% yesterday, $FDN showed relative strength on the day by slipping just 0.5%. This was aided by shares of LinkedIn ($LNKD), which ignored the weakness in the broad market and climbed 1.4% to another fresh record high. $FDN is primarily comprised of mid to large-cap internet stocks like Google ($GOOG), Netflix ($NFLX), and Yahoo! ($YHOO), each of which are trading at or near their 52-week highs. Click here to see the current portfolio of stocks that comprise the portfolio of $FDN.
Speaking of internet stocks, our open position in $LNKD is now showing an unrealized gain of nearly 12% (20 points) since our April 9 buy entry. As we said in yesterday’s The Wagner Daily, “$LNKD is scheduled to report earnings after the close on May 2, so if you are uncomfortable holding through earnings you should exit the position into strength ahead of the report (in today’s session). Because we have a decent profit buffer we do not mind holding $LNKD through earnings.” To further your trading education, may also wish to check out how we traded around last quarter’s $LNKD earnings report for a total gain of 22%.
How Relative Strength In The Nasdaq Increases Profits
Until recently, the 2013 stock market rally has clearly been led by the Dow Jones Industrial Average, while the Nasdaq Composite has lagged behind considerably.
But since the recovery off the April 18 "swing lows" in the broad market, the Nasdaq has climbed 3.6%, while the Dow has gained only 1.2% during the same period.
Is this sudden display of relative strength in the Nasdaq only a short-term aberration, or is it the start of new leadership in the stock market?
It's too early to know for sure. However, if funds have indeed begun rotating into the Nasdaq, it would be a bullish signal for the overall market.
This type of sector rotation would point to an increasing appetite for risk among banks, mutual funds, hedge funds, and other market-moving institutional players. This is because the tech-heavy Nasdaq is generally considered to be more "risky" then deploying funds in the "old school" Dow. Of course, the potential rewards for investing and trading in the Nasdaq are typically much greater than the Dow as well.
Because our momentum-based strategy for swing trading stocks focuses primarily on small to midcap stocks (many of which are traded on the Nasdaq), we would obviously welcome the next phase of the market rally being driven by the Nasdaq.
Many leading stocks in our swing trading portfolio, such as LinkedIn ($LNKD), have begun rallying to new 52-week or all-time highs ahead of the Nasdaq. This is a bullish indication of relative strength in the stock market that enables astute traders to outperform the main stock market indexes through trading in these market leaders.
It's not only stocks that benefit from a strengthening Nasdaq. The right industry sector ETFs can show leadership and relative strength too.
Market Vectors Semiconductor ETF ($SMH), which is currently showing an unrealized gain of 3.8% since buy entry in our nightly ETF and stock picking report, nicely fits the bill.
Last week, the PowerShares Nasdaq 100 ETF ($QQQ) scored a solid 2.2% gain. However, $SMH jumped 3.9% last week (nearly double the advance of $QQQ). More importantly, $SMH broke out above a 3-month base of consolidation and rallied to a fresh 52-week high last week. It's a clear sign of relative strength in the semiconductor sector that $SMH has jumped to a new high ahead of the Nasdaq, which tells us we are holding on to the right positions.
The April 24 breakout to a new 52-week high in $SMH is shown on the daily chart below:
In case you missed it, we initially made a bullish call on $SMH (and the semiconductor sector) in this blog post about a month ago.
At that time, we liked that $SMH was breaking out above resistance of a nine-year downtrend line, which was only apparent by looking at the long-term monthly chart interval of the ETF.
Below is the same monthly chart of $SMH we pointed out on March 28, back when $SMH was still in consolidation mode (trading below its 52-week high):
Now that $SMH has finally broken out to a new 52-week high, the breakout above the nine-year downtrend line shown above is becoming confirmed.
Because this trend reversal is of such a long-term nature, it may provide swing traders with many stock and ETF buying opportunities in the semiconductor sector; not only in the near-term, but in the intermediate-term as well.
In case you are new to momentum swing trading, it's important to understand that stocks and ETFs breaking out to new 52-week high usually provide us with our largest gains because these equities have a complete lack of overhead price resistance (which would otherwise be created by sellers who bought a higher price).
If you are new to our overall swing trading system, including the concept of buying stocks and ETFs at new highs, click here for a basic overview of how our selection process works.
My pleasure, as always.
FYI, just posted a new technical setup for a short-term momentum trade in SPDR Gold Trust ($GLD).
Hope you enjoy as well.
Why Short Selling Gold Now An Ideal Trade
On April 14, we wrote a blog post titled How To Profit From The Break Of 6-Year Uptrend in Gold. At that time, we said of SPDR Gold Trust ($GLD) that a bounce into new resistance of its prior support level (around the $150 area) would provide an ideal, low-risk short selling entry point.
But since the gold ETF plunged nearly 20% over just a two-day period (April 12 and 15), the odds of a quick bounce all the way back to the breakdown level became minimal. Nevertheless, two weeks after the meltdown, $GLD is now technically setting up for a secondary short selling entry point, based on momentum, that is also ideal.
Since its April 15 low, $GLD has been bouncing from near-term, oversold conditions. Last Friday, the gold ETF bumped into and “overcut” resistance of its 20-day exponential moving average on an intraday basis. However, by the closing bell, $GLD had fallen back down below its 20-day EMA and closed near its low of the day. This is shown on the daily chart below:
When looking to profit from a stock or ETF that breaks down below support, then subsequently bounces into resistance, we prefer to avoid entering a new short position while the equity is still moving higher. Rather, after the breakdown, we wait for the first day that the equity closes substantially lower following a rally into resistance (learn more about insert-text-here).
In the case of $GLD, last Friday’s probe above the 20-day EMA and formation of a bearish reversal candlestick is especially attractive because it followed a strong move higher that occurred on April 25 (bulls are forced to sell). As such, $GLD now presents us with a low-risk entry point on the short side only if the price falls below the April 26 low (all bets are off for short selling entry until that happens).
With this swing trade setup, we want to clarify that we are NOT necessarily expecting $GLD to make another leg lower within its current downtrend. Rather, we are merely anticipating at least a retest of the April 15 low (such as an “undercut”) before $GLD stabilizes and tries to make any type of significant move higher. As such, note that our projected holding period of this momentum trade setup is expected to be shorter-term than our typical ETF swing trade.
Also, note that our actual trade setup on today’s official “watchlist” is actually to buy the inversely correlated DB Gold Double Short ETN ($DZZ), rather than selling short $GLD. We do this because many Wagner Daily subscribers have non-marginable cash accounts, such as an IRA accounts, that prohibit short selling of any kind. But through buying a “short ETF” instead, these traders can still benefit from the downside movement of certain market sectors. Still, we are basing our entry and exit points on the actual chart of $GLD, rather than $DZZ, to ensure the most accurate tracking to the price of spot gold. Subscribers to our ETF and stock picker newsletter should note our preset and exact trigger, stop, and target prices for the $DZZ momentum trading setup in today’s report.
On a separate note, here is a brief update on the open stock and ETF positions presently in our model swing trading portfolio: We sold a partial position of Celldex Therapeutics ($CLDX) for an 18% gain on April 25, but remain long about half the original shares (more on our $CLDX entry here). LinkedIn ($LNKD) is currently 7.8% above our April 9 entry point and we continue to ride the profit. The other three individual stocks in our model portfolio are each slightly higher than their recent entry points, and we remain long.
On the ETF side, our existing long position in Semiconductor HOLDR ($SMH) has been following through to the upside nicely. It held last week’s breakout to a new 52-week high and its currently up about 3% from our average entry price. US Natural Gas Fund ($UNG), also showing an unrealized gain going into today, formed a bullish “hammer” candlestick after finding support at its 20-day EMA last Friday. It looks well positioned for further gains in the coming week. On today’s watchlist, subscribing members of our technical stock picking newsletter should also note the trade details for three additional swing trade setups (2 stock picks and 1 ETF pick).
Funds Rotate Into Nasdaq, Light Volume A Concern
Led by solid gains in the Nasdaq 100 and Nasdaq Composite, stocks closed higher across the board yesterday (April 22). The Nasdaq Composite easily outperformed the S&P 500 on Monday, signaling that money is beginning to rotate out of the S&P 500 (and Dow) and into the Nasdaq. This is a positive sign for the bulls, but there is one main concern about this — a lack of higher volume.
Over the past two sessions, the Nasdaq has climbed about 2.5% off last Thursday’s low. However, volume declined in each of those past two sessions, which means the move was unconfirmed by institutional buying. The Nasdaq may need a bit more time to consolidate, as there is quite a bit of overhead resistance.
Looking at the daily chart of the Nasdaq 100 ETF ($QQQ) below, we see price action running into resistance clustered around the $69 level:
The five weeks of stalling action near $69, along with the 10 and 20-day moving averages, make for quite a bit of resistance. However, if $QQQ can power through this level without further consolidation, it would be a very bullish sign.
Market Vectors Semiconductor ETF ($SMH), an ETF we have been bullish on since the initial March 28 analysis on our trading blog, continues to chop around near the pivotal, intermediate-term indicator of its 50-day moving average, with support coming in around $34.50 last week.
If $SMH can set a higher swing low and close above Monday’s high on a pick up in volume, then it may attract enough buying interest to break the short-term downtrend line and test the highs of the base:
In today’s Wagner Daily newsletter, we are stalking $SMH for potential swing trade buy entry if it meets our technical criteria (looking to add to our existing position on strength). Subscribing members should note the details for $SMH in the “watchlist” section of today’s report. Presently, all five of the open positions in our model trading portfolio (3 ETFs and 2 individual stocks) are showing unrealized gains.
Thanks again, Tappy.
My pleasure, Starduster. Glad you liked it.
Posting another new article right now. Enjoy.
Deron
Market Breaks Down, But These Stocks Breakout
Stocks continued to sell off on Thursday, with tech stocks getting hit the hardest. The Nasdaq Composite sold off 1.2%, while most averages closed lower by 0.6% to 0.7%. The Nasdaq sliced through key intermediate-term support of its 50-day moving average, joining the Russell 2000 and S&P Midcap 400.
The S&P 500 closed just below (but not a decisive break of) its 50-day moving average yesterday, after undercutting its prior “swing lows” at the 1538-1539 support level:
The 50-day moving average is a very important support level during a rally, as it is basically the line in the sand for the bulls. When the major averages all break below the 50-day MA within a few days of each other, it is usually a good time to raise cash and sit on the sidelines.
The evidence below suggests that the market is now in a corrective phase, which forces our rule-based timing model into “sell” mode:
- There are at least 5-6 distribution days in the market (strike 1).
- Most of the main stock market indexes are trading below the 50-day MA (strike 2). We do not count the Dow.
- Leading individual stocks are beginning to break down below key support levels (strike 3).
How long will a stock market correction last? No one knows, but there is one main clue to watch out for.
Can leading stocks that have recently broken down find support and stabilize? There is a big difference between leading stocks pulling back 15-20% off a swing high versus completely breaking down and selling off 40% or more from their highs. If most stocks hold above or around their 50-day MAs and fall no more than 20-25% or so off their swing highs, then we would expect any correction in the S&P 500 to be limited to around 4-6%.
US Natural Gas Fund ($UNG), a current holding in the model portfolio of The Wagner Daily, is in pretty good shape after yesterday’s (April 18) strong advance. The weekly chart below shows $UNG zooming above the breakout pivot, which is always a bullish sign:
As annotated on the chart above, $UNG is holding support of a steep uptrend line (black dotted line), while the 10-week MA (teal line) is beginning to pull away from the 40-week MA (orange line) after the bullish crossover a few weeks ago. One great thing about $UNG is that it has a low correlation to the direction of the overall stock market because it is a commodity ETF.
As you may recall, our actual swing trade buy entry into $UNG was based on the “cup and handle” chart pattern we originally pointed out in this April 2 post on our blog. Presently, $UNG is showing an unrealized gain of 6% since our April 8 buy entry, and is well positioned to continue higher in the near-term.
In addition to $UNG, we also continue to hold Market Vectors Semiconductor ETF ($SMH). Presently, this ETF is holding above its prior swing low, but is struggling to reclaim its 50-day MA. Nevertheless, based on our March 28 technical analysis of the semiconductor sector, we are still bullish on the intermediate-term bias of $SMH.
Alongside of $UNG and $SMH, our model portfolio is still long two individual stocks (bought when our timing model was in “buy” mode): Celldex Therapeutics ($CLDX) and LinkedIn ($LNKD).
Despite yesterday’s decline in the broad market, $CLDX broke out to a fresh all-time high and is currently showing an unrealized gain of 8.9% since our April 9 buy entry. The daily chart of $CLDX below shows our recent breakout entry point:
Our other individual stock holding, $LNKD, is roughly break-even since our swing trade entry point. However, we do not mind holding this A-rated stock through a corrective phase in the broad market, just as long as our stop is not triggered.
If the price action can remain above the 10-week MA, then we may be able to hold through earnings in early May and potentially catch the next big wave up. As detailed in this article that explains our strategy for trading around earnings reports, we previously netted a handsome gain of 22% trading $LNKD before and after its January 2013 earnings report.
Hey auroradude,
Thanks for the kind words. Glad you enjoy my commentary.
I am the founder and owner of the company.
Cheers,
Deron
My pleasure. Glad you enjoy my posts. I'm putting up another one right now.
Good trading to you!
Deron
Don’t Miss The Breakouts In Hot Asian ETFs
Our nightly stock screens have produced several high quality stock and ETF swing trade setups over the past several days. Within the realm of ETFs, a majority of the most bullish chart patterns are presently found in international ETFs. More specifically, ETFs of the Asian region are showing the most relative strength. In this article, we analyze the current chart patterns of two of them, both of which may be actionable within the next several days.
iShares MSCI Singapore Index Fund ($EWS) is back on our watchlist after a failed breakout attempt last February. Since then, the price action has undercut the 50-day moving average and popped back above it. After another false breakout attempt on April 3, $EWS found support from the rising 50-day MA and prior swing high (dotted black line), around $13.75. The daily chart of $EWS is shown below:
When possible, it is important to have multiple time frames confirming a potential trade (on recent IPOs we can’t). This means that we like to see something interesting happening on the weekly or monthly charts to support our analysis on the daily chart. That also goes for intraday charts, as the majority of our buy entries are placed above all major moving averages on the 5, 15, and 60-minute time frames.
With $EWS, the monthly chart below shows a downtrend line in place with multiple touches of the anchor points. A breakout above the high of the current range should lead to a breakout above the monthly downtrend line:
One of the best looking country ETF charts we found was the Market Vectors Vietnam ETF ($VNM).
The weekly chart is quite powerful, as it shows the huge pick up in volume during the rally as the price action cleared the 40-week MA (in orange). The price action is now consolidating in a tight range around 10-week MA (teal line). Also, note the dry up in volume two weeks ago, which indicates that investors have lost interest in trading $VNM as it continues to base out (this is bullish):
The daily chart in $VNM shows the tight price range just below the 20-day EMA. We can easily see the nice drop off in volume since March 27 as well.
A break above the three-day high is our buy entry, as this would put the price action above the 20-day EMA and the short-term downtrend line of the tight range. A break above $21 would also confirm that a higher swing low is in place on the daily chart:
In addition to $EWS and $VNM, iShares Indonesia Index ($EIDO), iShares Thailand Index ($THD), and iShares Philippines ($EPHE) are also on our internal watchlist. However, all three ETFs ideally need several more weeks of consolidation in order for their basing patterns to tighten up. Conversely, $EWS and $VNM have already formed potentially buyable patterns that could trigger in the next few days.
Whenever there are 5 or more “distribution days” (losses on higher volume) in a major index within a 3 to 4 week period, and leading stocks begin selling off on heavy volume, it is always a major concern. However, if the stock market is able to fight off the distribution AND quality bullish stock setups can still be found, then we must buy.
Sometimes it is easy to forget that we are swing trading individual stocks and ETFs, not the main stock market indexes. Above all, don’t forget our trading system is designed to react to price action, rather than attempting to predict it.
Don’t Miss This Breakout In Natural Gas ETF
In this April 2 blog post on our trading blog, we explained in detail how to trade a bullish technical chart pattern known as the “cup and handle.” At the time, United States Natural Gas Fund ($UNG) was still forming the “handle” portion of the pattern. However, since the ETF broke out last Friday (April 5), $UNG is now in play as a valid swing trade entry. Here is a follow-up look at the current price action…
In our initial analysis of $UNG, we said, “While forming (the handle), price action will typically slope lower. In the case of $UNG, even an ‘undercut’ of the March 25 low and 20-day exponential moving average would be acceptable.” On April 4, an “undercut” of the March 25 low and 20-day EMA is exactly what happened. The following day, $UNG jumped 4.5% and broke out above the high of its 3-week range. The move was also confirmed by an impressive volume spike. This is all shown on the daily chart below:
Since this ETF closed only slightly above the highs of its range, it is not too far extended to buy near the current price level. As such, regular subscribers of our nightly stock trading newsletter should note we have listed this trade setup as a new potential buy entry. Our exact trigger, stop, and target prices for this ETF swing trade can be found in the “watchlist” section of today’s report.
One of the things we like about the $UNG trade setup is that it is a commodity ETF. Since our market timing model is now in “sell” mode, we are generally avoiding the long side of the market. However, one exception is ETFs with a low correlation to the direction of the stock market. Commodity, currency, fixed-income, and international ETFs are all such examples. If you are unfamiliar with our rule-based system for timing the market, click here to learn more.
My pleasure. Glad you enjoyed the article.
My pleasure. Glad you liked it.
Got another post I'll be firing up here again soon.
How To Trade The Cup And Handle Pattern
In uptrending markets, most of our swing trade setups are stocks and ETFs (with relative strength) that are breaking out above bases of consolidation. We also buy pullbacks of uptrending equities when they retrace to near-term support levels. However, another bullish chart formation many technical traders profit from is the “cup and handle” pattern.
In this article, we use current annotated charts of United States Natural Gas Fund ($UNG), a commodity ETF that roughly tracks the price of spot natural gas futures, to show you how to trade the cup and handle chart pattern. Let’s begin by looking at the weekly chart timeframe of $UNG below:
Notice that the left side of the pattern begins in November 2012, after a 60% rally off the lows. This is positive because proper cup and handle patterns should not form at or near 52-week lows; rather, there should already be an uptrend in place for at least several months in order for a correct cup and handle to develop.
The selloff in December 2012, as well as the bottoming action in January and February of this year, combine to form the left side and bottom of the “cup.” The right side of the cup was formed when $UNG broke out above major resistance of its 200-day moving average and rallied to the $22 area.
Zooming in to the shorter-term daily chart interval, note the “handle” portion of the pattern that is currently developing:
The handle typically requires at least a few weeks to properly develop (sometimes more). While forming, price action will typically slope lower. In the case of $UNG, even an “undercut” of the March 25 low and 20-day exponential moving average would be acceptable. However, the price needs to hold above the $20 level during any pullback. Otherwise, a breakdown below that important support level could signal the pattern needs a few more months to work itself out.
If buying $UNG, it is important for traders to be aware of possible contango issues that could result in an underperformance of the ETF, relative to the actual spot natural gas futures contracts. Nevertheless, contango is typically not a big deal if exclusively swing trading the momentum of $UNG over shorter-term holding periods (less than about 4 weeks). Conversely, the negative effects of contango become much more apparent over long-term “buy and hold” investing timeframes.
For our rule-based ETF and stock swing trading system, the technical chart pattern of $UNG is not yet actionable. Still, the annotated charts above clearly explain the specific technical criteria we seek when trading the “cup and handle” chart pattern.
As always, we will promptly alert Wagner Daily subscribers with our preset entry, stop, and target prices for this swing trade setup when/if it provides us with an ideal, low-risk buy entry point in the coming days.
Why MagnaChip Semiconductor Corp May Explode Higher ($MX)
After a nasty shakeout from a false breakout in mid-February, MagnaChip Semiconductor Corp. ($MX) (which IPO’d in March 2011) has tightened up nicely above intermediate-term support of its 50-day moving average, and is holding above near-term support of its 20-day exponential moving average as well.
Big breakouts are typically preceded by a tightening of price action, which $MX is now exhibiting. The recent “false breakout” absorbed overhead supply, which should make it easier for $MX to surge higher after it breaks out above the high of its recent range. The technical swing trade setup for $MX is shown on the annotated daily chart below:
Although our stock picking strategy for swing trading is based primarily on technical trend following and market timing, we also incorporate certain elements of the popular and proven CANSLIM model into our stock selection process (although we tweak the indicators to be applicable for shorter holding periods than CANSLIM is intended for).
The IBD Relative Strength Ranking for $MX is very strong at 92, along with an equally strong EPS (earnings per share) ranking of 94. The earnings and revenues of $MX have ramped up over the past three quarters, and the ROE (return on equity) is at an impressive 35%. Furthermore, there has been a strong increase in fund sponsorship over the past 7 quarters, signaling that institutions want a piece. Finally, the IBD Industry Group rank is 20 out of 197 (stocks in the top 40 groups are ideal buy candidates).
As we have mentioned several times in recent weeks, the king of technical analysis is always price action (volume is queen). Therefore, until key leadership groups and stocks in the market start clearly breaking down, our bias must remain on the long side (albeit cautiously).
With that in mind, we have added several new individual stock and ETF buy setups, including $MX, to today's "official" watchlist of swing trader newsletter. Regular subscribers should note our preset trigger, stop, and target prices for this $MX trade setup in today's report, as well as several additional new stock and ETFs we are stalking for potential momentum trade entry.
Navigating the stock market over the past few weeks has been challenging due to the mixed signals being received by our stock market timing model. However, don't forget that price action is always king. For the moment, the market is holding up and new technical trade setups are emerging, both of which are bullish signs.
Although the stock market continues to advance on light volume, it's tough to ignore the fact that chart patterns of many leading stocks still look good. Yes, we have seen a few market leaders break down, such as 3d Systems Corp ($DDD) or Ocwen Financial Group ($OCN), but the majority of leading individual stocks are still holding above their 50-day moving averages and trending higher (or forming bullish basing patterns).
How To Profit From Weakness In $QQQ
One ETF we have been watching closely for potential swing trade entry in recent weeks is PowerShares QQQ Trust ($QQQ), a popular ETF proxy for the tech-heavy Nasdaq 100 Index. Specifically, we have been monitoring a bearish head and shoulders chart pattern (here is an explanation of the pattern) that has been developing on the weekly chart interval of $QQQ.
If this bearish chart pattern starts following through to the downside, it may create a low-risk entry point for short selling $QQQ (or buying a short ETF such as $PSQ or $QID). In this article, we walk you through the details of this technical trade setup for $QQQ, and present you with the most ideal scenario for actionable trade entry. For starters, check out the annotated weekly chart pattern of $QQQ below:
When determining the validity of a head and shoulders pattern, there are a few factors we look for to determine whether or not this bearish pattern is likely to follow through to the downside.
One of the biggest technical considerations is the trend of the volume that accompanied the price. The best head and shoulders patterns will be marked by higher volume on the left shoulder and lighter volume on the right shoulder. Such a pattern indicates decreasing buying interest as the pattern progresses. As you can see by the 10-week moving average of volume (the pink line on the volume bars above), volume has indeed been declining during the formation of the right shoulder.
Another element we look for is whether the neckline is perfectly horizontal, ascending, or descending. The neckline on the $QQQ chart above is ascending, which means a “higher low” was formed. This ascending neckline slightly decreases the odds of the head and shoulders following through by breaking below the neckline. Nevertheless, between the two technical elements of the volume trend and angle of the neckline, volume is considered a more significant factor in determining whether or not the price is likely to move lower after the right shoulder has formed.
Since it’s always best to assess a potential swing trade setup on multiple chart time frames, let’s zoom into the rather interesting, shorter-term daily chart interval of $QQQ:
Just as the “line in the sand” for price support of $SPY is last week’s low, the same is true of $QQQ, but even more so.
Notice how support of last week’s low in $QQQ neatly converges with both the 50-day moving average (teal line) AND the intermediate-term uptrend line from the November 2012 low (red line). The more technical indicators that converge in one area to form price support, the more substantial and pivotal that support level becomes. As such, be sure to monitor the $67.60 area very closely in the coming days, as a convincing breakdown below that level could be the impetus that sends $QQQ on its way down to testing the neckline of its head and shoulders pattern.
Despite the convincing head and shoulders pattern of $QQQ, it is important to keep the following two things in mind:
First, due in no small part to recent weakness in heavily-weighted Apple Computer ($AAPL), the Nasdaq has been a laggard throughout the multi-month rally in the broad market. Rather, the blue chip Dow Jones Industrial Average has been leading, and that index still remains very near its multi-year highs. In a fractured market with significant divergence between the major indices, clear follow-through in either direction usually does not come easily.
The second (and more important) point is that the head and shoulders pattern, like all technical chart patterns, obviously does NOT work 100% of the time. In fact, far from it. This means that blindly selling short $QQQ (or buying an inversely correlated “short ETF”) at the current price level of $QQQ is risky and not advisable.
Instead of entering this swing trade setup based purely on anticipation of the pattern working, our technical trading system mandates that we first wait for price confirmation that indicates momentum has shifted back in favor of the bears. At a minimum, we would NOT enter a short position unless/until $QQQ breaks down below last week’s low, which we now know is a key level of price support. Jumping the gun by trying to get an “early” entry point is never advisable in swing trading.
As always, we will give regular subscribers of The Wagner Daily ETF & Stock Picking Newsletter a heads-up in advance if/when $QQQ gets added to our “official” watchlist for short/inverse ETF swing trade entry.
50,000 people? Would love to know who was sending that out, as my mailing list is a fraction of that size.
If I personally have the ability to move a commodity as thick as gold, I'd sure feel honored, but sadly that is not the case.
Anyway, as the thousands of posts on my blog will show you, I simply use objective technical analysis to TRADE WHAT I SEE, NOT WHAT I THINK.
FWIW, Gold is an ETF that I trade only once or twice a year at most.
Differing opinions are good because that's what makes a market.
How To Profit From Trend Reversal in $GLD
The impressive, long-term uptrend in gold (from 2005 to 2011) appears to be reaching an end. Since forming an all-time high in September 2011, SPDR Gold Trust ($GLD) has merely been oscillating in a sideways range. However, it appears that a definitive move lower may be on the horizon in the coming weeks.
Following is my analysis of how we plan to trade a potential move lower in $GLD, but note that my ETF trading strategy is 100% technical-based because price and volume automatically reflect the fundamentals at any given tie.
On the weekly chart of $GLD below, notice that the ETF attempted to break out above key horizontal price resistance in October 2012, but was unable to do so. As such, $GLD formed a significant “lower high” on its long-term chart. Nevertheless, there’s still a major base of horizontal price support around the $150 level:
The next near-term move in $GLD could be a bounce into resistance in the $158 to $160 range. In this area, there is new resistance of the prior lows from December 2012 and January 2013, as well as resistance of the 10-week moving average (roughly the same as the 50-day moving average) and the 40-week moving average (approximately equal to the 200-day moving average).
If $GLD bounces to this level and stalls, it will form a second significant “lower high.” This would be bearish and could easily lead to a breakdown below major support at the $150 area on the next move down.
Another possible scenario for $GLD is that it fails to bounce much higher and simply breaks below its four-week base of support (below $150) without first forming another lower high.
Regardless of how $GLD plays out, we have added this precious metal ETF to our internal watchlist as a potential short sale entry in the coming weeks. Traders with non-marginable cash accounts (meaning they can’t sell short) could simply buy an inversely correlated “short ETF” (such as $DGZ) instead.
A short sale entry into $GLD would be based on whichever of the two scenarios occur first: a bounce to the $158 to $160 area that stalls OR a breakdown below the $150 support level that subsequently bounces into resistance. As always, we will give our Wagner Daily newsletter subscribers a heads up with our exact entry, stop, and target prices if we add this swing trade setup to our” official” watchlist. But for now, we are waiting to see how the next near-term move plays out.
As a reminder, we never sell short into strength. So, even if $GLD bounces into resistance of the $158 to $160 level, our trading rules are such that we must subsequently wait for the first big gap down or significant down day that follows. Entering a short position while a stock or ETF is still rallying has a very high risk of getting your stop run. The much lower-risk entry point is waiting for the price to start heading back down, thereby immediately putting the odds in your favor.
To be honest, nearly 100% of my ETF trading strategy is based on technical analysis. However, you may have a good point there because the chart of Crude Oil ETF ($OIH) is setting up for a nice breakout on the weekly chart (inverted head and shoulders pattern).
3 ETF swing trade setups to consider
In yesterday’s ETF commentary, we pointed out the developing bullish setup in SPDR Energy ETF ($XLE). However, as the ETF had not yet broken out to new highs, we said it may need another week or two of consolidation, as well as tightening of the price action near its prior high.
While $XLE remains on our internal watchlist as a potential buy entry in the near-term, further research enabled us to actually find a better ETFs swing trade setup within the same industry sector. Below, take a look at the daily chart of SPDR Oil & Gas Exploration and Production ETF ($XOP):
The primary difference between $XLE and $XOP is that the former has not yet broken out above resistance of its February 2013 high, while the latter already has. This means $XOP has been showing slightly more relative strength than $XLE. On the longer-term weekly chart below, notice that $XOP has also just broken out above key horizontal price resistance of its prior high from September of 2012, which should further spark bullish momentum from here:
Over the next few days, $XOP may form a bull flag chart pattern by drifting slightly lower from the high of this week’s breakout (as shown on the first chart above). If it does, it could lead to an ideal swing trade setup, as new support of the February 2013 breakout level is just below the current price. However, just in case the ETF immediately continues higher from here, without forming a bull flag first, we have added $XOP to today’s watchlist as an “official” trade setup going into today’s session.
Since $XOP is presently only 1% above its breakout level, it’s not too far extended to take a shot from here if it continues higher. However, if the ETF trades through our trigger price (above the two-day high), we will reduce risk by only entering with partial share size on this momentum trade setup. Conversely, we may be more inclined to enter with larger share size if a bull flag pattern first develops from here instead, as that would increase the odds of follow-through to the upside.
In addition to $XOP, there are two other “official” ETF swing trade setups, as well as two new individual stock trade setups, going into today.
One new ETF setup is a buy entry into ProShares Short 20+ Year Treasury Bond ETF ($TBF) if it rallies above last week’s high. A similar trade to buy $TBT on a breakout above last week’s high was listed on our watchlist earlier this week (Monday), but it did not trigger and we removed it.
Now, we have added the short ETF back to our watchlist, but are targeting the non-leveraged ETF ($TBF), rather than the leveraged one ($TBT), because there will be a slightly better correlation to the underlying index if $TBF triggers for buy entry. Please reference this blog post from March 11 for a review of this potential Trend Reversal setups in $TBT/$TBF (or $TLT short if you are able)
The third and final new ETF trade setup on today’s watchlist is a potential short selling entry into SPDR Metals & Mining ETF ($XME). Although our market timing model is still in “buy” mode, this sector has been absolutely dead, trading near the 52-week lows while the market trades at its highs. Therefore, because of its relative weakness, even the slightest pullback in the market should cause this ETF to fall apart to new lows. We will explain the actual technical criteria behind the $XME setup in tomorrow’s Wagner Daily newsletter.
In the meantime, regular subscribers should note our exact entry, stop, and target prices of the $XOP breakout, $TBF trend reversal, and $XME short selling setup in today’s report. Trade details for our two new stock swing trade setups ($ALNY and $SWFT) are also discussed in today’s stock swing trading report.
2 ETF Swing Trade Setups- $TBT $TAN
With our stock and ETF swing trading strategy, there are three main types of trade setups we take: breakouts above consolidation, pullbacks to near-term support (in uptrending stocks), and trend reversals. In healthy markets, we primarily focus on buying breakouts and pullbacks. However, we occasionally spot low-risk trend reversal setups, which often offer a very positive reward to risk ratio.
There are two new “official” ETF swing trade setups we are targeting for potential buy entry going into today’s session, both of which are trend reversal plays. The first is ProShares UltraShort 20+ Year Treasury Bond ETF ($TBT). The technical criteria for this setup is detailed on the weekly chart below:
Buying a trend reversal does NOT mean “bottom fishing,” which is akin to catching a falling knife. Rather, the stock or ETF must first indicate a high likelihood that a significant bottom has already been formed. For this, we specifically look for the stock or ETF to both trade in a sideways consolidation pattern for at least several months. More importantly, it must also form at least one “higher low” within that consolidation period (two is preferable).
Additionally, we always make sure the 10-week moving average (same as the 50-day moving average) has crossed above the 40-week moving average (same as 200-day moving average), which confirms the bearish momentum has reversed. Then, we buy the stock or ETF when it breaks out above the highs of its consolidation (horizontal price resistance).
As you can see on the chart above, $TBT meets all of these qualifications for a trend reversal play. The ETF has been consolidating in a sideways range since June 2012, and has formed two “higher lows” since then (November 2012 and February 2013). Then, after four weeks of tight consolidation near the high of its range, the ETF “undercut” support of its 10-week moving average just two weeks ago, but zoomed right back up to close at the highs of its range last week. Such price action is bullish and often precedes major breakouts.
Because $TBT is a leveraged inverse ETF, there is a degree of underperformance to the underlying index (long-term treasury bonds) as the holding period increases. Therefore, short selling iShares 20+ Year T-bond ETF ($TLT) is technically better than buying $TBT. However, since traders with a non-marginable cash account (IRA) are unable to short sell anything, $TBT or $TBF (non-leveraged version of $TBT) is a decent alternative. For this swing trade setup, members of The Wagner Daily newsletter should note our predefined and exact entry, stop, and target prices on the “watchlist” section of today’s report.
The second ETF trend reversal setup we are stalking for potential buy entry today is Guggenheim Solar ETF ($TAN). Like $TBT, this ETF meets the same trend reversal requirements on its weekly chart interval. However, it’s actually the daily chart pattern that makes this trade setup enticing. Take a look at the chart below:
In mid-February, $TAN attempted to break out above a five-week base of price consolidation (point “A”). However, the breakout failed, causing the ETF to fall back to the lows of its range (point “B”) less than two weeks later.
If you are new to trading, you may understandably assume failed breakouts are a bad thing. But the reality is that failed breakouts that hold support of the prior range often lead to some of the most explosive breakouts on the second breakout attempt. Since many traders buy the initial breakout attempt, then quickly sell when the breakout fails, it has the effect of absorbing overhead supply. In turn, this makes it easier for the stock or ETF to zoom higher on its next move up.
In the case of $TAN, we like that the ETF firmly found support at the lows of its prior range, which has conveniently converged with major support of its 200-day moving average (orange line). If this ETF triggers for buy entry, bullish momentum should cause it to surge above last month’s high shortly thereafter. Again, subscribers should note our detailed parameters for this trade setup on today’s watchlist.
Tug Of War Between The Bulls And Bears
We spent several hours extensively scanning the markets over the weekend, and came to the conclusion that the current market environment is a choppy, sloppy mess. Although large-cap stocks continue to show relative strength, which enabled the Dow Jones Industrial Average to finish at a new 52-week high (on the weekly chart), the important Nasdaq Composite remains well below its prior highs from September of 2012.
Clearly, the market has become fractured over the past two weeks. Like the Dow, the benchmark S&P 500 Index finished the week near its 52-week high. Nevertheless, it is becoming quite apparent that a tug of war between the bulls and bears are starting to take place. To illustrate that, just take a look at the following daily chart of the S&P 500 SPDR ($SPY), a popular ETF proxy for the S&P 500 Index:
When such major day-to-day volatility starts taking place after an extended rally, it is often a warning sign that a significant correction is about to take place. Furthermore, the Nasdaq remains in a rather precarious position, as the index has been struggling to hold on to key intermediate-term support of its 50-day moving average.
If the Nasdaq convincingly breaks down below its 50-day MA in the coming week (by closing below last week’s lows), it will certainly have a substantial drag on even the Dow and S&P 500. Below is the chart of the PowerShares QQQ Trust ($QQQ), an ETF which tracks the performance of the large Nasdaq 100 Index (the brother of the broader-based Nasdaq Composite):
Although the broad market has been “whiplash city” over the past week, it’s important to note the bearish volume patterns in the broad market continue to persist.
Since the February 19 peak, three of the four down days have been on higher volume (“distribution days”), while all four up days have been on lighter volume. While many technical indicators give false signals, volume is the one indicator that never lies because it is a clear footprint of institutional trading activity.
Since banks, mutual funds, hedge funds, pension funds, and other institutions control more than 50% of the market’s average daily volume, the direction of the stock market nearly always follows the institutional money flow. Right now, the volume patterns tell us that institutions remain in sell mode (so our market timing model is as well).
Although our timing model in sell mode, we continue to monitor leading stocks with the most relative strength. The top individual stock presently on our internal watchlist is LinkedIn Corp. ($LNKD), which we have already bought and sold twice for solid gains the past two months.
The first buy of $LNKD was in January, based on a “cup and handle” type chart pattern, which we sold into strength for an 11% gain ahead of earnings. The second buy was on a big gap up from its February 8 earnings report, which we also sold into strength for a nice profit. Check our blog (http://www.morpheustrading.com/blog) for an educational technical review of that second swing trade entry soon.
Not surprisingly, a majority of the ETFs in our weekend stock screening have similar chart patterns to the major indices, but we did spot one pocket of relative strength in the healthcare sector. iShares Biotech ($IBB), SPDR Health Care ETF ($XLV) and Vanguard Health Care ETF ($VHT) have either broken out to new 52-week highs or are poised to breakout within the next few days. However, given recent market conditions, a breakout in the current environment would have a higher than usual likelihood of failure. Conversely, low-risk short selling setups remain minimal as well.
Overall, we do not see any low-risk stock or ETF swing trade setups that are presently actionable. Therefore, the best plan of action is to sit on the sidelines primarily in cash until the market shows us the direction of its next move. Remember, we’re not in the business of predicting price action. Rather, we simply plan our trades according to the reaction the market is presenting us at any given time. It’s a much less stressful and more profitable way to run your trading operations over the long-term.
Market Timing Keeps You Calm In Volatile Markets
Since February 25, we have been operating on a “sell” signal that was generated by our rule-based market timing system (learn exactly what that means). We have been using that same market timing strategy internally since 2006, and it has always done a pretty good job of keeping us in line with the intermediate-term trend of the broad market, which is where we operate with our short to intermediate-term swing trading system.
Although stocks have actually moved slightly higher since our most recent sell signal was triggered, it’s important to understand the market does not always need to immediately break down in order for the timing model to have value.
Sometimes a sell signal is generated and the market immediately rolls over, but other stock market timing sell signals lead to an initial short-term bounce before the market moves substantially lower.
Obviously, we can never know in advance what will happen immediately following a new sell signal. Still, we always respect a bearish market timing signal by moving to cash and/or tightening up stops on long positions and waiting for conditions to improve before establishing new long positions. A new sell signal also allows us to selectively short sell stocks and ETFs with relative weakness.
To clearly illustrate the different ways a market can behave after receiving a sell signal from our market timing model, the charts below detail the subsequent price action of two different intermediate-term sell signals that were generated by our market timing strategy in 2012:
After a decent rally in early 2012, the distribution days began piling up in late April and early May, forcing us out of several long positions by May 3 and generating a 100% sell signal on the close of May 4 (as annotated on the chart above). In this case, the timing of the signal was perfect, as the market plunged 7% over the next 10 sessions.
Following a very short-lived rally in August/September of 2012, the number of distribution days once again began increasing within a short period of time, and leading individual stocks began falling apart as well. These are two of the main components (along with a few proprietary tweaks) that determine when our market timing model issues a new sell signal.
Given the bearish action described above, our market timing strategy generated a sell signal on the close of October 12, 2012. But although this prompted us to quickly exit our long positions, this time the stock market did not immediately come unglued.
Instead, there was a short-lived bounce that inevitably attracted some “late to the party” Charlies who were not paying attention to the bearish volume patterns in the market. Nevertheless, after one day of stalling on October 18, the market sold off sharply, erasing all of its gains from August and September:
Finally, let’s look at our most recent sell signal that was issued on February 25, 2013 (just four days ago). Much like the price action that followed the most recent sell signal from October of 2012, stocks did not sell off right away. Rather, the broad market bounced higher for a few days:
Because we are not mystical prophets, we don’t know if the market will sell off sharply over the next few weeks. Nevertheless, we have not been willing to establish new long positions over the past few days (though we entered a few new short positions) because experience has shown us exactly what can happen when the volume patterns in the market suddenly turn bearish.
Although the market pushed higher on February 26 and 27, it did so on lighter volume. This followed three out of four big declines on higher volume. Yesterday (February 28), the market stalled, which reinforced the sell signal generated by our stock market timing model on February 25.
Quite a few supposed “gurus” claim that market timing doesn’t work, but those who believe this are clearly not following the right indicators. Broad market volume patterns, combined with poor performance by leading individual stocks, always play a crucial role in identifying significant market tops and bottoms.
Many investors make the mistake of focusing purely on price patterns or percentage gains of a broad-based index, while paying little or no attention to the market’s volume patterns. To learn more about why volume is such an important indicator, check out 5 Technical Reasons Stocks May Soon Move Lower, an article we wrote on October 8, 2012 (just four days before our October 12 “sell” signal highlighted above).
When volatility increases, trading can become quite emotional, which can easily lead to bad decisions and a ton of regret. The best way to remove (or at least minimize) emotions from trading is to follow a well-defined and disciplined trading strategy at all times.
Our proven system for market timing allows us to operate with confidence during stressful periods in the market. Are we wrong sometimes? Of course! But successful trading isn’t about being right or wrong (ego); rather, it’s about doing the right thing. When traders consistently do the right thing in trading, the money eventually follows.
New Short Selling Setup in $QQQ
In this February 22 post here on another board, which was published immediately following two days of heavy selling on February 20 and 21, we said, “If and when the S&P attempts to bounce from its current level, the subsequent price and volume action that immediately follows any recovery attempt will be extremely important at determining whether stocks are merely take a breather, or if the rally is dead…If the S&P 500 generates another distribution day that follows just a feeble, light volume bounce off the current lows, that could be the nail in the coffin for the current rally.
The scenario highlighted in bold text above is exactly what has happened over the past two days. After just a one-day lighter volume bounce last Friday, stocks again got slammed on higher volume yesterday (February 25). Since the S&P 500 Index has now logged three distribution days within the past four sessions, and individual leadership stocks have begun to falter, we are now selectively targeting new stocks and ETFs for potential short sale entry.
Even though we have been trading exclusively on the long side of the market since the new buy signal was received at the start of 2013, we are objective, emotionless trend traders who simply follow and trade in the same direction as the dominant market trend (which now favors the downside, at least in the near-term).
The PowerShares Nasdaq 100 ETF ($QQQ) closed below support of its 50-day MA yesterday, with an ugly, wide-ranged reversal candle (all the major indices formed bearish engulfing candlestick patterns yesterday). Although support of the 200-day moving average of $QQQ is not far below its current price, prices can slice through important moving averages like a hot knife through butter whenever the market is in distribution mode. Moving averages work really well in a bull market, but not so much when conditions turn sour. The ugly pattern in $QQQ is shown on the daily chart below:
The recent relative weakness of $QQQ really becomes clear when comparing its price action throughout last rally with the S&P 500 SPDR ($SPY): On the chart below, notice that the S&P easily cleared its prior highs, but $QQQ struggled with its initial swing high from December 19 (attributed in no small part to the sharp correction in Apple ($AAPL) recently):
Operating with the idea that the 200-day moving average of $QQQ will not provide significant support, we now expect $QQQ to fall to test its prior swing low (around the $63 to $64 area) over the next two weeks. As such, we are now targeting this trade as an “official” momentum swing trade setup on today’s watchlist.
Rather than short selling $QQQ, we plan to buy the inversely correlated and leveraged ProShares UltraShort QQQ ($QID) instead. This enables our subscribers with non-marginable cash accounts (such as IRAs) to still take advantage of newfound bearish momentum in the market, without technically selling short (inverse ETFs move in opposite direction of the underlying index). As always, our exact entry, stop, and target prices for the $QID trade setup should be noted in the ETF Watchlist section of today’s report above.
In closing, the daily chart of the benchmark S&P 500 Index below shows that it’s always a negative technical signal when distribution days cluster over a very short period of time:
Numerous times in the past, a cluster of distribution days after an extended rally, combined with the suddenly poor performance of individual leadership stocks, has been enough to prompt us to exit long positions within just a few percent of a market top (check out this actual such instance from mid-2012). This has once again been the case, as we have exited all long stock positions (mostly substantial winners), and nearly all of our ETF positions (a handful of small losers) over the past few days.
Overall, we had a positive, profitable run from the rally of the past two months (exact statistics to be reported soon), and now are focused on preserving those gains through the combination of sitting patiently in cash, combined with selective short selling of stocks and ETFs with relative weakness.
Top 2 Trading Tips For The Current Market
For the second day in a row, the broad market sold off across the board on higher volume. Although the percent losses were not as bad as Wednesday, the S&P 500 followed through to the downside for the first time in 2013. With turnover increasing on the both the Nasdaq and NYSE, the S&P 500 and Nasdaq have posted back to back distribution days.
Whenever distribution begins to cluster, we take notice. Although we never care whether or not stocks are “overbought,” the increasing presence of institutional selling is indeed one of the most important factors we use when assessing the health of a rally.
Given the sudden reversal in market sentiment over the past two days, this is the perfect time to share with momentum swing traders our top 2 tips for managing your trading account in a stock market that may be forming a top:
1.) Be sure you know and are on aggressive mental defense against these 4 most dangerous psychological emotions for stock traders (greed, fear, hope, and regret). In particular, given the sharp losses of the past two days, traders absolutely must be on alert for the natural human emotion of paralyzing fear that may prevent you from simply cutting your losses on any losing trades that have already hit your stop prices. To ignore your predetermined stop losses is always tantamount to playing Russian roulette with your trading account. But this is even more so the case right now, as the recent rally is beginning to show valid technical signals of a potential top.
2.) In case you missed most or all of the rally of the past two months, perhaps because you didn’t believe in it for whatever reason, you are now probably feeling the pain of regret. If this is the case, you must be very careful to avoid being a “late to the party Charlie” (LTPC) right now. To learn what this means, check out this article we ironically wrote nearly exactly a year ago. While the stock market’s current pullback may indeed turn out to be a low-risk buying opportunity, it is dangerous and way too early to make that determination right now. Continue reading to learn why…
As far as the charts of the major averages go, the S&P 500, small-cap Russell 2000, and S&P Midcap 400 appear to be in decent shape. The same can not be said of the Nasdaq Composite, which has taken a beating the past two sessions, and is already closing in on intermediate-term support of its 50-day moving average. The Nasdaq 100 Index, which basically did not budge during the entire rally in the rest of the broad market, is already trading below key support of its 50-day MA.
Looking at the daily chart of the S&P 500 below, it appears the price may be headed for an “undercut” of the prior swing low, around the 1,494 area:
If and when the S&P attempts to bounce from its current level, the subsequent price and volume action that immediately follows any recovery attempt will be extremely important at determining whether stocks are merely take a breather, or if the rally is dead.
Next week’s price action in the S&P is important because there is a cluster of technical price resistance around the 1,515 to 1,520 area (annotated by the black rectangle on the chart above). Four sessions of stalling action last week created overhead supply around 1,520, while the 1,515 level represents resistance of a 50% Fibonacci retracement (based on the range from the February 20 high down to the February 21 low).
If the S&P 500 generates another distribution day that follows just a feeble, light volume bounce off the current lows, that could be the nail in the coffin for the current rally. Still, unless leadership stocks suddenly begin breaking down en masse, a pullback to the 50-day moving average of the S&P 500 would be considered normal within the context of the strong rally of the past two months.
As we closely monitor price and volume action of the broad market over the next week, we will gain a much better idea as to the likely direction of the stock market’s next major move, which will automatically cause our rule-based stock market timing system (learn more about the system here) to be adjusted accordingly. But in the meantime, be sure to read the two articles mentioned above so that you will be on guard against the most dangerous emotions that could seriously harm your trading account right now, while also avoiding becoming a member of the “late to the party Charlie” club.
Thanks much. Glad you liked the post and hope you found it educational. I'm actually just about ready to post another educational article in this thread. Hope you like it too.
Cheers,
Deron
Trading Education - Walkthough Of Swing Trade Strategy
Last month, we netted an 11% gain on a swing trade in LinkedIn Corp ($LNKD), which we held for approximately two weeks (15 trading days). In this trading education article, we explain exactly how we did it by reviewing the annotated technical chart pattern that prompted us to enter the trade, then concluding by explaining the technical criteria that told us it was time to sell and lock in the profit on this stock pick.
For all our stock and ETF trade entries on the long side (other than trend reversal plays), we must first verify there is already a well defined uptrend in place before buying. This ensures that bullish intermediate-term momentum is in our favor, which dramatically increases the odds of a profitable trade.
Although the stock pulled back from a high of $125 in September of 2012 to a low of $95 in November, $LNKD had already rallied more than 100% during a preceding ten-month advance. As such, the $30 price retracement off the September high equated to just a 24% pullback (which is about the maximum percentage pullback we like to see).
Once we establish that the stock is already in a strong uptrend (here is how we specifically do that), we then look for a bullish base of consolidation to form over at least the next five to seven weeks. $LNKD did exactly that, as it formed a 15-week base from September through December of last year.
The next step before attempting to establish a low-risk buy entry in a stock that is basing out is to ensure the price action has begun to show signs that bullish momentum has moved back in our favor. This is accomplished by looking for the formation of at least one “higher low” to form within the base.
As annotated on the first chart below, notice that $LNKD formed a higher low in late November of last year, as it held above the $105 level. Once that higher low is in place, we then start to look for an ideal buy entry point (if one develops).
On January 8, after four weeks of consolidation above near-term support of its 20-day exponential moving average, $LNKD closed well off its low of the day, after “undercutting” its prior low from January 2. This presented us with a a low-risk entry buy entry point above the $113 level (which was simply a rally above the intraday high of January 8).
That night, we provided our exact and predefined entry, stop, and target prices to subscribers of our Wagner Daily end-of-day trading newsletter. The following morning, $LNKD triggered our buy entry by rallying above $113. Below is a snapshot of the daily chart pattern as it looked the day before our swing trade buy entry:
Our preset buy stop triggered on the morning of January 9, and we were long at an entry price of $113.30. Our initial goal with this short-term stock pick was to hold $LNKD for a quick pop, and then sell into strength ahead of its upcoming quarterly earnings report. The momentum of the swing trade immediately began working in our favor, as $LNKD gapped sharply higher on January 10, just one day after our buy entry point, and held firm.
The strong breakout of January 10 was accompanied by a burst of volume, which attracted plenty of additional buying interest. As such, $LNKD continued pushing higher over the next two weeks. After two strong up days that came two weeks after our entry point, we decided to raise our protective stop after the close of January 28 to just below the $126 level.
The tight trailing stop we set allowed us to still participate in further upside gains if $LNKD continued moving higher, but also protected nearly all our profit in case the stock took a breather and its price reversed. The next morning (January 29), $LNKD triggered our stop just below the $126 level, enabling us to lock in a solid 11% gain on a 15-day momentum trade hold ahead of earnings. The price action subsequent to our entry point, as well as our eventual exit, is detailed on the chart below:
Obviously, not all trades are winners that work as smoothly as this $LNKD trade. However, that’s why we always set predetermined protective stops immediately at the time of entry. This ensures that our losses are limited if the trade does not move as anticipated. To be a consistently profitable trader, one only needs to make sure the winning trades are larger than the losing trades.
Over the course of the 11 years we have been publishing our stock newsletter, we have always aimed for a reward to risk ratio of at least 2 to 1 for each trade setup (meaning the average winning trade is twice the size of the average losing trade). When using strict money management rules such as this, one can still generate ]consistently profitable long-term returns, even if the winning percentage of overall stock picking is not very high.
We hope you learned a few new things from this article, as we really enjoy sharing our proven, rule-based stock trading strategy with individuals who are serious about learning trading. Be sure to check back on our trading blog frequently, as we will soon be reviewing more actual swing trades we have recently provided to our subscribers. We will even be reviewing a “breakaway gap” momentum trade setup in which we recently re-entered $LNKD on the morning of its recent earnings report, but we first need to wait until that winning trade is “officially” closed.
Solar ETF Swing Trade Setup ($TAN)
Solar energy stocks have made a comeback over the past few months, with First Solar ($FSLR) leading the way. SolarCity ($SCTY), MEMC Electronic Materials ($WFR), and JinkoSolar Holding ($JKS) have been exploding higher as well. The Guggenheim Solar ETF ($TAN), which is heavily weighted in leading solar stocks from the United States and China, has also been shaping up nicely and may provide us with an ideal technical buy entry point within the next few days.
$TAN recently reversed a long-term (multi-year) downtrend, and the ETF is now beginning to show classic signs of a bullish trend reversal. On the weekly chart of $TAN below, notice the 10-week moving average crossed above the 40-week moving average two weeks ago. This moving average crossover is a bullish technical signal that signals a reversal of the dominant trend:
Zooming in to the shorter-term daily chart interval below, we see that $TAN broke out above a month-long base of consolidation yesterday (February 13), but closed near its intraday low. If $TAN now turns into a false breakout by pulling back over the next three to five days, we may be able to grab a low-risk swing trade buy entry as the ETF retraces to near-term support of its rising 20-day exponential moving average, around the $18.40 – $18.50 level:
The false breakout entry is low-risk because traders who buy the breakout are quickly forced to sell, which absorbs overhead supply. Accordingly, the next breakout attempt has higher odds of succeeding and following through to the upside. Furthermore, false breakout entries enable short-term swing traders to have a clearly defined stop price below the low of the pullback, which creates a very positive reward-risk ratio for the setup.
If the next move of $TAN is to drift back down into its previous range (false breakout), we will add it to our "official" watchlist as an actionable momentum trade buy setup. As always, regular subscribers of our swing trading newsletter will be notified in advance of our predetermined entry, stop, and target prices for the $TAN swing trade if it meets our strict, rule-based criteria for buy entry.
$SEA Shipping ETF Setup For Pullback Entry
After breaking out from a tight, seven-month long base of consolidation, the Guggenheim Shipping ETF ($SEA) has pulled back over the past few weeks to near-term support of its 20-day exponential moving average. The longer-term weekly chart below details the prior base of consolidation from which $SEA broke out above (around $16):
Drilling down to the daily chart interval below, we see the 50-day moving average (teal line) now trading above the 200-day moving average (orange line), and both indicators are moving higher. This is a bullish trend reversal signal. Furthermore, notice how the orderly pullback from the recent highs has enabled the price to find support at its 20-day exponential moving average (beige line):
The breakout above resistance on the weekly chart, combined with the pullback on the daily chart, provides for a positive reward-risk ratio for this ETF trade setup. As such, we are stalking $SEA for potential swing trade entry going into today’s session. Regular subscribers of our swing trading newsletter should note our exact trigger, stop, and target prices for this trade in the ETF Watchlist section.
We have seen some institutional sector rotation lately, with a few strong stocks and ETFs pulling back sharply over the past few days ($EWI, $EWP, and $FXI are a few such ETFs). But overall, leadership stocks have held up well and the market has been quite resilient in fighting off distribution (higher volume selling). Although we continue to see the number of new, low-risk buy setups drying up, that is be expected at some point because many stocks and ETFs were rather extended from the January rally.
Top 2 Reasons We Don’t Fight Market Trend
In this January 30 article on our swing trading blog, we touched on a key psychological element of how to make consistent trading profits. Specifically, the article addressed the importance of trend trading in the same direction as the overall market trend, and continuing trading on that side of the trend as long as the trend continues.
Then, in this technical trading commentary published one day later, we stressed why the most profitable swing traders are those who learn to merely react to the market’s price action that is presented to them at any give time, rather than those who attempt to predict the direction of the next move. The substantial broad market rally that came last Friday, which closed out the week on a high note, perfectly confirmed the trader psychology lessons of our previous two posts.
When stocks sold off on higher volume (“distribution”) last Thursday, January 31, the weak price action was sure to attract some short sellers who keep trying to catch a top, despite the fact the uptrend remains intact. Traders who went ahead and sold short that day quickly got caught with their hands in the cookie jar the following day, as the main stock market indexes gapped about 1% higher on the open and held up throughout the entire day.
If you are new to our short to intermediate-term momentum trading system, please be assured we have no problems selling short when our proprietary system for market timing indicates the dominant trend has reversed. There were several months just last year when we profited on the short side. However, we simply do not sell short against the prevailing trend when there is a clear and objective “buy” signal in place.
Top 2 Reasons We Don’t Fight The Trend
1.) We’ll be really honest with you here. Trying to call a top by entering new short positions when the market is still in a firm technical uptrend is something we have tried to do in the past. Upon doing so, we learned that it hardly ever works. Even in the times when we eventually got it right, it was always after several initial failed attempts, which usually led to a net wash (breakeven result) at best.
2.) Perhaps more important than the actual losses sustained from those failed countertrend short selling attempts was the psychological damage done, as it was (and always is) emotionally draining to fight a clearly established trend. It’s a bit like trying to swim directly back to shore while stuck in a rip current, rather than swim parallel to the beach until the rip dissipates. Overall, you must realize there is nothing more important to your long-term trading success than protecting capital and preserving confidence. Weakness or lack of discipline in either of these two areas will eventually prevent you from living to trade another day.
All these powerful tidbits of knowledge, and many other psychological trading lessons we’ve learned over the past 11 years, are regularly shared with subscribers of The Wagner Daily end-of-day trading newsletter, and we we proudly display the cumulative trading performance results of our long-term efforts to prove it (Q4 of 2012 will be updated this week).
Moving on from the area of trading psychology lessons, let’s look at the current technical situation of the benchmark SPDR S&P 500 Index ETF ($SPY), as we ask ourselves, “Can a market continue to rally while in overbought territory?” Since pictures are always more powerful than words, just take a look at the following daily chart of $SPY from the year 2007. Specifically, notice how the ETF held very short-term support of its 10-day moving average for several months before eventually entering into a correction.
Note the tight price range throughout the rally, which kept finding support at the rising 10-day moving average on the way up, after pulling back slightly for just 2 to 3 days. There are hundreds of other charts over the years in which we could show the same thing. Therefore, the answer is clearly “yes”…an overbought market can continue to run even higher without a deep pullback. Nevertheless, we are not implying the current market rally will match the chart above, in terms of the percentage gain or length of time, as every market rally is unique. Still, this chart simply serves as a guide and reminder for what could and frequently happens in “overbought” (we use the term quite loosely) markets.
Although Friday’s action was bullish, and we now have solid unrealized gains in the open ETF and stock swing trade positions in our model portfolio, we continue to trail tight stops in order to reduce risk and lock in gains whenever possible. As regular subscribers should note on the “Open Positions” section of today’s report, many protective stops have now placed below their respective 20-day exponential moving average, which should provide near-term support during any pullback in the market.
Great, just let me know if you have any questions.
I would browse through The Wagner Daily archives, as you will learn a lot about our trading strategy by reading up to 11 years of daily newsletters.
Also, the trading blog has educational articles, stock picks, etc. and is updated several times per week.
Cheers,
Deron
Why I Don’t Care If Stocks Are “Overbought”
When a stock market is in runaway uptrend mode and refuses to pull back substantially, most investors and traders think, “I am not buying stocks at this level; I’ll just wait for a pullback.” Eventually that pullback will come, but often only after a multi-month advance has passed. This is why, in strongly uptrending markets, we find it much easier and more profitable to focus on the price action and technical patterns of individual leadership stocks and ETFs, rather than paying much attention to whether or not the charts of the S&P, Nasdaq, and Dow are “overbought” (we hate that useless term).
As long as there remains institutional rotation among leading stocks, with new breakouts continually emerging, the broad market will continue to push higher (although the major averages must also avoid significant distribution). That’s why “overbought” markets often become even more “overbought” than traders would expect before eventually entering into a substantial correction.
We are trend traders, so we simply follow the dominant trend as long as it remains intact. When the trend eventually reverses, our rule-based stock market timing system will prompt us to exit long positions and/or start selling short…and that’s just fine by us. We are equally content trading on either side of the market because being objective and as emotionless as possible is a key element of successful swing trading.
The majority of ETF positions presently in the Model ETF Portfolio of our end-of-day trading newsletter are international ETFs because they continue to show the most relative strength (compared to other ETFs in the domestic market). One of our open positions, Global X FTSE Colombia 20 ($GXG), has not yet moved much from our original buy entry point, but we like the current price action:
Since undergoing a false breakout on January 15, $GXG has pulled back to and held support of the 20-day exponential moving average (beige line on the chart above). In the process, it also formed a higher “swing low,” which is bullish. Notice that the price has also tightened up nicely since mid-December of 2012.
All of this means $GXG could finally be ready to break out above the $22.60 area. If it does, we plan to add to our existing position in The Wagner Daily swing trade newsletter. Regular subscribers should note our exact buy trigger and adjusted stop price for the additional shares of $GXG in the ETF Watchlist section of today’s report.
While on the theme of international ETFs, let’s take an updated look at the technical chart pattern of the diversified iShares MSCI Emerging Markets Index ($EEM), which we initially mentioned last week as a potential buy setup if it made a higher “swing low” and held support of its 20-day exponential moving average:
Although the price of $EEM did not hold above the 20-day EMA, a quick dip (“undercut”) below that moving average, followed by a quick recovery back above it, would keep this bullish setup intact. Therefore, if $EEM can rally above the short-term downtrend line annotated on the chart above, and subsequently put in a “higher low,” we might be able to grab a low-risk buy entry point as early as next week. As always, we will keep subscribers updated if any action is taken on $EEM, or any other ETF with a buyable chart pattern that crosses our radar screen while doing our extensive nightly stock scanning.
Hey there,
Sorry about the late reply. I am unfortunately unable to visit this board every day.
Anyway, I am just about to make a new post discussing two ETFs on my radar screen in the near-term ($GXG and $EEM). Additionally, I am also monitoring $EWS, which was analyzed in detail two days ago on my trading blog.
If you ever have any questions on anything I post, just let me know. Glad you enjoy my posts.
Cheers,
Deron
Educational technical analysis of $QQQ and $SPY
Yesterday’s price and volume action in the broad market produced the first true distribution day (higher volume decline) in the Nasdaq since the big gap up of January 2. While we have seen a few weak, unconvincing instances of distribution since then (ie. price action closed well off the intraday lows), yesterday’s (January 24) price action closed near the low of the day, as shown on the daily chart of the Nasdaq Composite Index below:
Although higher volume declines within an uptrend are not positive, it’s important to realize that a single distribution day does not kill a rally. Although yesterday’s action in the Nasdaq could easily lead to a near-term pullback from the recent highs, we can not rule out the possibility of a strong recovery today, as bull markets tend to close out the week in bullish fashion.
Because of its heavy weighting in Apple ($AAPL), which has been undergoing the healthy price correction we predicted back on November 5 of last year, the Nasdaq 100 Index (large-cap sibling of the Nasdaq Composite) has been a complete laggard in 2013. Yesterday’s decline caused the PowerShares QQQ Trust ($QQQ), a popular ETF proxy that tracks the Nasdaq 100, to close right at short-term support of its 20-day exponential moving average (20-day EMA). This is shown on the daily chart of $QQQ below:
It would be a positive technical signal if $QQQ holds support of its 20-day EMA (beige line on the chart above), or just “undercuts” it and promptly recovers. But if it doesn’t hold near yesterday’s low, the next stop could be a test of the $66 area (support of the lows of its recent trading range). Ideally, we would like to see all the main stock market indexes moving in sync with one another. The Nasdaq 100 doesn’t have to lead the broad market higher, but we certainly do not want the price to break down below the 50 and 200-day moving averages (teal and orange lines, respectively, on the chart above).
The SPDR S&P 500 ($SPY), an ETF that follows the price of the benchmark S&P 500 Index, probed above the prior day’s high yesterday morning, but sold off throughout the afternoon. This caused the ETF to give back most of its morning advance and form a bearish reversal candlestick on its daily chart. Although $SPY closed in positive territory, the retreat off its intraday high that occurred on heavier volume is known as “churning,” which is stealth selling into strength by banks, mutual funds, hedge funds, and other institutions:
shallow, two to five-day selloff that causes the major indices to find initial, minor technical support near their 10-day moving averages (not shown on the charts above). Such price action would be an absolutely normal and healthy correction in a healthy bull market. A deeper retracement down to the 20-day EMAs would be a less bullish scenario that could indicate the market may need more time (at least two to five weeks) to form a healthy base of price consolidation.
What do my fellow traders think? Are you anticipating a near-term correction from current levels?
Original Source
Two ETFs Ready To Breakout Soon $KOL $RWO
In our January 10 commentary here on this board, we said Market Vectors Coal ETF ($KOL) could pull back to find near-term support in the area of both its rising 20-day exponential moving average and 200-day moving average (around $25.50). Specifically, we said, “we would ideally like to see the price action retrace down to its 200-day moving average and form some sort of bullish reversal candlestick pattern. If this occurs, it would subsequently provide us with a very low-risk swing trade buy entry.” In the days that followed, that’s exactly what happened. This is shown on the annotated daily chart of $KOL below:
The support level at convergence of the moving averages (last week’s lows) looks as though it will hold. If it does, it will create another higher “swing low” on the right side of the base of consolidation. As we have pointed out several times in recent weeks, a valid base of consolidation should consist of both “higher lows” within the base, as well as tightening of the price action. $KOL presently meets this technical criteria.
Because the price action of $KOL has been playing out exactly as anticipated, we are now stalking this ETF for potential swing trade buy entry going into today’s session. Although this is a “trend reversal” setup, rather than a potential breakout to new highs, we like the reward-risk ratio for trade entry near its current price. Regular subscribers to our swing trading newsletter should note our exact trigger, stop, and target prices for the $KOL setup in the ETF Watchlist section of today’s newsletter above.
Another ETF poised to rally in the coming days is SPDR Dow Jones Global Real Estate ETF ($RWO), which continues to consolidate in a tight range beneath the highs of its current base. Starting from the beginning of the basing pattern in September, the price action in $RWO is a good example of what we look for when identifying bullish price action within a base:
When looking at a base of consolidation, we typically see more volatility on the left hand side of the pattern, as the stock/ETF initially pulls back from its highs, enters distribution mode, and sells off for several weeks. At one point during the decline, the price action will either “undercut” a previous low and reverse higher or simply explode higher and hold. This usually occurs after the stock/ETF breaks out above the downtrend line from the high of its base, which subsequently leads to the “right side” of the pattern developing with the formation of “higher swing highs” and “higher swing lows.”
With $RWO, notice that the price action bottomed out by undercutting its prior swing low and then reversing sharply off major support of its 200-day moving average (orange line). Since then, the ETF has formed a series of higher highs and lows, with the price action tightening up just below the highs of the base. Note that this tightening of the price does not always have to form just below the highs of the base, as it could form anywhere from 5-10% off the highs and still be technically valid. Regardless, we like the recent price action in $RWO and expect the ETF to soon break out above the highs of the range.
Thanks much, I appreciate that. Glad to know it's a group of fellow traders who are serious about learning. This is definitely NOT the case on quite a few other boards around here, ha ha.
FYI, just posted a link to a new video I uploaded. Hope you like it.
Deron