morpheustrading

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.

As you may recall from my August 18 blog post (How To Profit From Oil And Silver ETFs In This Stock Market Downturn), I have been bullish on both Oil and Silver ETFs (and, to a lesser degree, Gold) for the past week. Today, my patience is paying off because crude oil ($USO is the main ETF) has convincingly broken out above key resistance of an 8-week base of consolidation. Take a look: When the main stock market indexes are down sharply (as they are so far today), the benefits of ETF trading really become clear. Unlike stocks, most of which are correlated to the direction of the broad market, ETFs enables traders and investors to still profit in a down market because many types of ETFs have low to zero correlation to the overall stock market direction. Commodity ETFs such as $USO and $AGQ are two great examples of the above. Our current position in $USO is now showing an unrealized price gain of 7.7% since the swing trade buy entry in our nightly newsletter. Also, the position in our leveraged Silver ETF ($AGQ) is now up more 10% since our August 21 buy entry. If you have not yet added $USO to your portfolio, a secondary buy entry point into $USO would be a slight pullback to new support of the breakout level (consider a buy limit order around the $38.50 to $38.75 area).

One of the main reasons we trade both individual stocks and ETFs in this swing trading newsletter is that trading the right combination of the two equity types increases our odds of being able to outperform the stock market at any given time, regardless of the dominant market trend. In strongly uptrending markets, we primarily focus on buying leading individual stocks (mostly small to mid-cap) because they have the greatest chance of outperforming the gains of the main stock market indexes. However, when the overall broad market begins to weaken, or enters into an extended period of range-bound trading, we reduce our exposure in leading stocks when they begin failing their breakouts and running out of momentum. Thereafter, we have several choices: 1.) Sit primarily in cash 2.) Begin initiating short positions in the weakest stocks 3.) Seek to trade ETFs with a low correlation to the direction of the overall stock market. Most the time, we do a combination of these three things in weak or weakening markets, the proportion of which is dependent on overall market conditions. Since our rule-based market timing model shifted from “buy” to “neutral” mode last week, we have immediately begun easing up on long exposure of individual stocks. With the NASDAQ Composite just below near-term support of its 20-day exponential moving average, and the S&P 500 right at key, intermediate-term support of its 50-day moving average, it is fair to say the broad market has NOT yet entered into a new downtrend. As such, we are not yet aggressively looking to enter new short positions at this time. However, when our timing model is in “neutral” mode, one thing we find works very well is trading ETFs with a low correlation to the direction of the overall stock market (commodity, currency, fixed-income, and possibly international ETFs). One such example of profiting from an ETF with low correlation to the stock market has been the recent performance of the US Oil Fund ($USO). Even though both the S&P 500 and Dow Jones Industrial Average fell more than 2% last week, $USO actually gained more than 2% during the same period. Because $USO is a commodity ETF that tracks the price of crude oil, the ETF has a very low correlation to the direction of the overall stock market. As banks, hedge funds, mutual funds, and other institutions were rotating funds out of equities last week, it is quite apparent these funds were rotating into select commodity ETFs such as $USO: As you can see on the weekly chart of $USO above, the ETF is now poised to breakout to a fresh 52-week high (from a five-week base of consolidation). If it does, bullish momentum should carry the price substantially higher in the near to intermediate-term. We are already long $USO from our buy entry last month, and the ETF is presently showing an unrealized share price gain of 6.5% since our original entry. However, if you missed our initial buy entry because you are not a newsletter subscriber, you may still consider starting a new position in $USO if it breaks out above the range (existing subscribers should note our exact buy trigger, stop, and target prices for adding shares of $USO in the “watchlist” section of today’s report). Two other commodity ETFs that definitely saw the inflow of institutional funds last week were SPDR Gold Trust ($GLD) and iShares Silver Trust ($SLV), which track the prices of spot gold and silver respectively. Of these two precious metals, silver is showing the greater relative strength. Check out the weekly chart of $SLV below: Notice that $SLV has convincingly broken out above resistance of a downtrend line (dotted black line) that had been in place throughout all of 2013. That breakout above the downtrend line also coincided with a sharp move back above its 10-week moving average (roughly equivalent to the 50-day moving average on the daily chart). Furthermore, last week’s rally in $SLV was confirmed by a sharp increase in volume. This, of course, indicates institutional money flow into the ETF. Like $SLV, $GLD has also moved back above its 10-week moving average (and 50-day moving average), but $SLV showed substantially more momentum and relative strength than $GLD last week. Moreover, last week’s volume in $GLD was only on par with its 50-week average level ($SLV traded nearly double its average weekly volume). Between $GLD and $SLV, the latter is definitely more appealing to us on a technical level. Now that $SLV has confirmed its trend reversal on the weekly chart, and has also formed two “higher highs,” we will be stalking $SLV for a low-risk buy entry in the coming days. Ideally, we would like to see $SLV retrace back down to near the prior downtrend line (which has now become the new support level). However, even if $SLV does not pull back that much, we will be looking for either the formation of a bull flag type pattern on its daily chart, OR a pullback that forms a bullish reversal candle (at which time we would look to buy above that day’s high in the following session). To reiterate, $SLV is NOT actionable at the moment because we do not chase stocks and ETFs that have already broken out too much above resistance. Nevertheless, most breakouts are followed by a pullback shortly thereafter, or at the very least, a short-term period of consolidation (such as a bull flag). As always, will be sure to give subscribing members of our swing trading service a heads up if/when we add $SLV to our watchlist as an “official” swing trade setup. In the meantime, don’t forget we are looking to add to $USO if it breaks out above the high of its recent consolidation. We are definitely seeing the rotation of institutional funds back into the commodities markets, which we plan to take advantage of and profit from.

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). 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.

No problem. Glad you enjoyed the article. Deron

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.

Hey Steve, Not familiar with either of these systems, but will definitely check it out. Thanks for sharing. Deron

This will obviously happen sometimes, and it doesn't bother me at all. First of all, my goal is never to buy at the absolute bottom and sell at the absolute top. Rather, I focus on taking the "meat out of the middle" of the move. Second, I am never afraid to re-enter a trade if it turns out I exited prematurely. In this case, I simply wait for the first short-term pullback to support.

Hey Tim, This sounds like a very solid strategy and is similar to what I do, depending on market conditions. I trail tighter than that in shaky markets. Thanks for sharing your strategy. Deron

My pleasure. Glad you enjoyed the article.

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 post on our trading blog. 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?

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 on our stock trading blog an educational review of last month’s winning swing trade in $CLDX, which will be an example of our “Price Momentum” setup.

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 trading 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.

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 newsletter 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.

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 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 our ETF and stock technical trading newsletter a heads-up in advance if/when $QQQ gets added to our “official” watchlist for short/inverse ETF swing trade entry.

For the second day in a row, the American 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: 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. 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 (explanation of that term here). 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 (details 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.

In the January 30 article we published here on this thread (see above), 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 our trading blog 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 market timing system 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 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. 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.

Hi Larry, Glad you liked the post. Yes, the main point is that it really doesn't matter whether we think the market "should" be pulling back or if it is "overbought." All that matters is you need to be long the market as long as it keeps going up. Only when we get the signs of distribution and breakouts failing do we pull back on the reigns. You are absolutely correct that "value" is not relevant to technical traders. Actually, we like to "buy high and sell higher" because expensive stocks are the ones are expensive for a reason. :-)

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.

Just wanted to give my 2 cents to say the book below is definitely worthwhile reading. I read it back in my formative years. If you follow the strategy detailed in that book, you can definitely do it while working another full-time job. Also, has been mentioned several times on this forum, the key is to make sure you have a mechanical end-of-day trading strategy that you follow. If you do, you simply need to set GTC (good til canceled) orders with your broker for both entries and protective stop prices, then adjust them each night, based on price action of the day. I also suggest making sure you know your preferred time frame for trading (position trading vs. swing trading vs. daytrading). There are pros and cons to each strategy, but it's a crucial starting point to determine which will work best for you. The following article gives an objective comparison of the pros and cons of each strategy: How does swing trading compare to daytrading or longer-term investing? Finally, you may want to check out this swing trading newsletter that gives detailed technical stock and ETF trade setups, but is actually designed for people who have full-time jobs and cannot watch the markets, rather than daytraders. Hope that helps. Deron

In the previous post on this thread (from December 14), I pointed out the bearish "shooting star" candlestick pattern that formed on S&P 500 SPDR ($SPY), as it ran into resistance of its multi-month downtrend line. Now, I would like to point out the bearish pattern in PowerShares QQQ Trust ($QQQ), whose rally appears to have run its course after bouncing off its mid-November lows for the past four weeks. On the updated daily chart below, notice that $QQQ is now trading below its 20, 50, and 200-day moving averages, each of which should now act as resistance on any bounce attempt. The blue horizontal line marks horizontal price support of the recent “swing lows” set earlier this month: As marked by the brown, downward facing arrows, we anticipate that a break of horizontal price support in $QQQ will swiftly lead to a retest of the prior low from mid-November. Why? The reason is simply that the stock market rally off the mid-November lows has technically been nothing more than a countertrend bounce from near-term “oversold” conditions. Now, it looks as though the rally may have already run its course, as QQQ has run into major resistance of its downtrend line from the September 2012 high. Below is a second daily chart of $QQQ, which clearly illustrates how the ETF reversed after bumping into its multi-month downtrend last week (the red descending line): We recently profited in a few ETF and stock swing trades on the long side after our system for timing the stock market shifted to “buy” mode. Yet, we were still fully aware at the time that the rally off the lows had not yet proven itself to be anything more than a countertrend bounce within the dominant downtrend. This is one of several reasons our market timing system shifted from “buy” to “neutral” mode on December 13, after several major indices formed “shooting stars” on their weekly charts while running into the downtrend lines from their September 2012 highs. Furthermore, if selling pressure in the broad market persists and we receive the necessary signals, the timing model may soon revert back to “sell” mode. We locked in solid profits on the short side of the market (and through inversely correlated “short ETFs”) when our stock market timing system was formerly in “sell” mode throughout most of October and part of November. Going into today, we have “officially” added ProShares UltraShort QQQ ($QID) to our watchlist as a potential ETF to buy for swing trade entry. This inversely correlated ETF that tracks the price action of $QQQ, but moves in the opposite direction. We are looking to buy $QID, rather than sell short $QQQ, because subscribers with non-marginable cash accounts are unable to initiate short positions, but are not restricted from buying “short ETFs” such as $QID. Also, even though it is leveraged, $QID has shown only fractional underperformance to its underlying index for short-term trading. Our short setup in iShares Nasdaq Biotechnology Index ($IBB) remains on our watchlist as a candidate for potential swing trade short sale entry going into today (December 17). Regular subscribers of our trading newsletter should note our clear, predefined trigger, stop, and target prices for the $QQQ and $IBB trade setups in the ETF Trading Watchlist section of today’s report. As for the long side of the market, many international ETFs continue to show clear relative strength and bullish price divergence to the US markets. A handful of these ETFs even closed at fresh 52-week highs last Friday. We recently profited from the sale of two ETF swing trades on the long side of the market, $FXI (China) and $EPOL (Poland), and we continue to monitor select international ETFs for potential buy entry on a pullback. When emerging markets ETFs start forming price retracements that present positive reward to risk ratios for buy entry, we will highlight and bring to your attention some of the better-looking charts for possible buy entry. But other than international ETFs, there are practically no industry sector or other domestic ETFs on the long side of the market to get excited about.

On the close of December 13, our stock market timing system shifted from “buy” to “neutral” mode. This means we now have no firm bias with regard to near to intermediate-term market trend for swing trading. The lack of substantial bullish follow-through in leading individual stocks in recent weeks, the absence of leadership in most ETFs (other than international ETFs), and the bearish pattern on the weekly chart of the S&P 500 Index (below) are all valid reasons to avoid the long side of the market now. Nevertheless, recent price action in the stock market has not yet convincingly confirmed the balance of power has shifted back to the bears, so we are a bit cautious about aggressively jumping in the short side of the market just yet. Below is a longer-term weekly chart pattern of S&P 500 SPDR ($SPY), a popular ETF proxy for trading the benchmark S&P 500 Index. Notice that $SPY will likely print a bearish “shooting star” candlestick pattern for the week. This is a topping pattern that often indicates near-term bullish momentum is running out. Since a weekly chart is a longer-term interval than a daily chart, the formation of this shooting star pattern on the weekly chart is more important than if the the same pattern occurred on a daily chart: Notice that the formation of the shooting star candlestick also occurred as $SPY “overcut” resistance of its downtrend line from the September high. This overcut of the downtrend line is significant because it sucks in new buyers, just as institutions are starting to sell into strength. This creates additional overhead supply that subsequently increases the odds of a resumption of the dominant downtrend. This would be confirmed if $SPY breaks below the horizontal price support shown above, which is merely a move below the low of its current weekly candlestick. Although the weekly pattern of $SPY looks a bit ominous, at least in still trading above technical support of its 20, 50, and 200-day moving averages on the shorter-term daily chart. That’s more than one can say about the Nasdaq 100 Index, which sliced back below its 50 and 200 day moving averages yesterday. As you can see on the daily chart of $QQQ (an ETF proxy that tracks the Nasdaq 100), a break below yesterday’s low would coincide to the Nasdaq sliding back below its 20-day exponential moving average as well: We concluded yesterday’s technical commentary by saying, “Given the lack of explosive price action in leadership stocks and the late day selling in the averages the past two days, the market could be vulnerable to a sell off in the short term…We are not calling the current rally dead, but we do not mind stepping aside for a few days and monitoring the price action.” To coincide with this statement, we made a judgment call to take profits on all long positions in our model trading portfolio by selling at market on yesterday’s open. Given that the broad market subsequently trended lower throughout the entire session, this worked out pretty well. Now, we are back to “flat and happy,” sitting on the sidelines 100% in cash. One big challenge for swing traders right now is that volume levels in the broad market will likely begin heavily receding next week, as we approach the Christmas holiday. As we have warned several times in recent weeks, swing trading in low-volume environments is challenging because day-to-day price action tends to be more erratic and indecisive. Therefore, we’re not in a hurry to enter multiple new positions (either long or short) ahead of the holidays, but will still consider new stock and/or ETF trade entries (possibly on the short side and/or inverse ETFs) with reduced share size if an ideal trade setup with a firmly positive reward-risk ratio presents itself.

I know this thread is a bit old, but I came across it while browsing and just wanted to share my general swing trading strategy with you. I put together a 7-minute video that does a good job of summarizing it, and have uploaded it to the Videos section of TL. Here is the direct link to the video. Hope that is helpful. Regards, Deron