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Showing results for tags 'trend trading'.
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Always hold your winners until price action gives you a reason not to (but dump the losers quickly when they hit your stops). -
On January 27, I said it was not yet time to sell stocks, but the technical situation has deteriorated quite rapidly since then. Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another “distribution day” (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite. In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand. However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner. The 3-Part Test There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up. 1.) Volume Pattern Of Broad Market In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model is now flashing a clear “sell” signal. 2.) Broad Market Trend In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case. With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a “sell” signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back). 3.) Performance Of Leadership Stocks The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current “neutral” mode from officially shifting to “sell” mode. Still, even this portion is barely holding on. NASDAQ 4000 – Coming Soon? Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support). If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day’s high could lead to a short-term bounce: Although my newsletter is not yet in full “sell” mode, I have been laying low (in “neutral” mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry. The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile. Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence. Trade What You See, Not What You Think! Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go. Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow. If my timing model shifts into full “sell” signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness. Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment. Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break. With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side. Upon doing so, you will surely see the importance of maintaining discipline and patience right now.
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For the past six weeks, the NASDAQ Composite Index ($COMP) has been uneventfully oscillating in a sideways trading range (a 3% range from the upper channel resistance down to lower channel support). However, we have identified three highly reliable technical indicators that point to a strong likelihood of the NASDAQ soon breaking out to a fresh, multi-year high (despite continued weakness in the S&P 500 and Dow Jones). 1.) The Most Reliable Indicator You Probably Never Use We prefer to keep our technical analysis of stocks pretty simple. Although there are literally hundreds of technical indicators at our disposal, we rely primarily on price, volume, support/resistance levels (such as trendlines and moving averages), and the relative strength line. The relative strength line is a simple leading indicator that allows us to easily see how a stock or ETF is performing against the benchmark S&P 500 Index ($SPX). This is not to be confused with the RSI indicator (relative strength index). When the relative strength line is outperforming the price action of the stock (or the Nasdaq Composite in this case), it is a reliable bullish signal that often precedes further gains in price. On the chart below, notice how the relative strength line has already broken out to new highs twice, even though the NASDAQ has been trending sideways to slightly lower. This is a clear sign that institutional funds have been rotating out of the S&P 500 and into the NASDAQ: 2.) Salute The Bull Flag While the relative strength line is one of the most reliable technical indicators to predict future price action, the bull flag is definitely one of our favorite bullish chart patterns to identify and profit from. On the longer-term weekly chart, we clearly see the Nasdaq has been forming a bull flag chart pattern. This is annotated by the black lines we have drawn on the chart below: Notice that the rally off the lows in July created the flag pole part of the bull flag pattern, while the current sideways price action forms the flag. The tight consolidation of the past six weeks has retraced less than one-third of the last wave up. This is what we like to see, as the best-formed bull flag patterns should not pull back to more than a 38.2% Fibonacci retracement of last move up. Finally, since the flag pole and the flag are frequently symmetrical in time, we need to compare how long it took for the pole to form with the length of the flag. Since the pole was created over the span of six weeks, the anticipated breakout from the bull flag pattern should occur after the flag has formed for 5-7 weeks (we are currently on week 5). 3.) Already Leading The Market Higher When I began trading and studying technical analysis many years ago, I assumed that the main stock market indexes (such as the NASDAQ) led the way for the top-performing stocks to move higher. I was definitely wrong. The reality is the opposite situation; leading individual stocks set the pace for the broad market to follow. When the strongest stocks in the market (typically small to mid-cap growth stocks) are convincingly breaking out to new highs ahead of the broad-based indexes, it is a very bullish sign and the main stock market indexes usually follow suit. Conversely, it is a bearish signal when the major indices are trending higher, but without clear leadership among individual stocks. Right now, there is a plethora of stocks that are breaking out to new highs ahead of the NASDAQ. In no particular order, here are the ticker symbols of a handful of stocks breaking out right now, or have already broken out, to new highs: $QIHU, $LNKD, $TSLA, $NFLX, $KORS, $LOCK, and $YELP. We are presently long four of the above stocks in our Wagner Daily newsletter, and with the following unrealized gains since our original buy entries (based on Sept. 6 closing prices): YELP +23.2%, LNKD +10.0%, LOCK +9.1%, and KORS +7.1%. In case you missed it, you may want to check out our original August 21 analysis of Yelp ($YELP) (before it broke out and zoomed higher over the past few days). Death And Taxes – The Only Sure Things As my grandmother loved to tell me, “the only sure things in life are death and taxes.” I agree, especially when it comes to the stock market. Obviously, the Nasdaq has not yet broken out, and there is no guarantee that it will. Nevertheless, the combination of the three reliable technical indicators above suggest a strong likelihood that the tech-heavy index will soon break out of its range and cruise to a new, multi-year high (though the S&P and Dow are another story). If the Nasdaq suddenly rallies to new highs as anticipated, are you prepared to take advantage of the move? Do you know which stocks will offer the best odds for high profits? Be prepared.
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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.