A swing trader with daily ideas...

[morpheustrading]

Well, we got our breakout in IBB today, so that's cool.

As for the charts, TradeStation states one can freely use their charts as long as the tagline is included at the bottom of each chart (which it is).

Cheers,

Deron

Nice set up on IBB, thanks. My own system definitely calls for a buy there, probably with a stop buy just over the current market (particularly since the overall market is in a significant down draft. If the market was healthy I'd just get in now). My only hesitation on the trade is that the volatility on IBB is pretty low at 1.3%. Going up to the recent highs (138) is only about a 3% gain; I prefer situations where that kind of rise is more like 5-7% (or more) ideally, and I can take a much higher probability profit at a "part way" point. But it is a great set up.

Isn't it a copyright violation to post TradeStation charts? You might want to check their terms and conditions.

 

[morpheustrading]

A deceivingly strong trading session, as small-cap stocks break out

After opening near the flat line yesterday (September 4), stocks sold off in the morning, but afternoon buying interest enabled the main stock market indexes to reverse back up. By the closing bell, major divergence in the broad market caused the major indices to finish with substantially mixed results. The blue-chip Dow Jones Industrial Average ($DJIA) posted a 0.4% loss and the S&P 500 Index ($SPX) edged 0.1% lower. However, small and mid-cap issues showed impressive relative strength yesterday. The small-cap Russell 2000 ($RUT) and S&P MidCap 400 ($MID) rallied 1.2% and 1.1% respectively. The Nasdaq Composite ($COMPQ) registered a more modest gain of 0.3%. The bulls held the upper hand into the close, as stocks closed near their intraday highs.

Although the closing prices of the main stock market indexes were rather mixed yesterday, make no mistake that it was indeed an overall bullish trading day. For starters, stocks managed to shake off significant morning selling and subsequently recover all the way back to test their intraday highs. Afternoon strength and resilience is a common trait of healthy markets. But even more important was the clear relative strength of small-cap stocks.

Long-time subscribers of my newsletter know that the performance of small and mid-cap stocks plays a significant role in our swing trading strategy for both individual stocks and ETFs. Most of the stocks we buy (only in uptrending markets) are small and mid-cap growth stocks because they have the greatest potential to exhibit sharp upward price momentum in uptrending markets. But even most industry sector ETFs tend to perform better and trend smoother when small and mid-cap stocks are leading the broad market.

The institutional money flow into small-cap stocks yesterday caused iShares Russell 2000 Index ($IWM) to break out above a key level of horizontal price resistance yesterday. Confirming the move was a surge in volume, which shot well above its 50-day average level. The IWM breakout is shown on the daily chart pattern below:

Given the high volume breakout in IWM yesterday, we are now stalking ProShares Ultra Russell 2000 ($UWM) for potential swing trade buy entry going into today’s session. For those not familiar with ProShares ETFs, UWM is simply the 2X leveraged version of IWM. Over longer-term holding periods, most leveraged ETFs usually underperform their non-leveraged siblings. However, the long-term underperformance that arises from daily rebalancing of the portfolios of leveraged ETFs is not much of an issue with the shorter-term, momentum-based trades that we focus on.

If it triggers our preset entry price, buying UWM in our model ETF trading portfolio, rather than IWM, ties up less capital. Still, we will use IWM as the proxy for getting our buy and sell signals for this trade set up, then use corresponding entry and exit prices for trading UWM instead.

All three of our current open ETF positions advanced yesterday. The biggest gainer was iShares Nasdaq Biotechnology ETF ($IBB), which broke out above its recent consolidation and cruised 1.5% higher. The ETF is now testing resistance of its all-time high, which was set on July 27, 2012. Given the increasing volume of this ETF, combined with ongoing relative strength in the healthcare sector, we expect IBB to soon break out to a new record high. Although we have already been holding our initial entry in this ETF for the past three weeks, our patience is starting to pay off. Take a look:

The iPath Grains Trust ($JJG), a commodity ETF we have been long since August 29, rose 0.5% yesterday and continues to exhibit a nice daily chart pattern. On the chart below, notice the bullish “pennant” formation JJG has been forming, while the 20-day exponential moving average (beige line) has been perfectly acting as support. This should eventually lead to a breakout to new highs in the coming days:

DB Gold Double Long ($DGP), a gold ETF we bought when it broke out on August 31, digested the previous days sharp gains, while still managing to rise 0.3%. We expect bullish momentum to carry gold ETFs substantially higher, both in the short term and intermediate-term, but we plan to sell DGP into strength before the first correction occurs, then look to re-enter after it forms a bull flag or a base of price consolidation.

 

[morpheustrading]

Hong Kong ETF Is Heating Up ($EWH)

In uptrending markets, a vast majority of our ETF trading entries are Breakouts to new highs and Pullbacks to near-term support levels of strongly trending ETFs. However, we sometimes take advantage of Trend Reversal swing trades for quick, momentum-based “pops.” An example of this is our recent winning trade of an 8.5% gain in DB Gold Double Long ($DGP), which we bought after it broke out above both its 200-day moving average and one-year downtrend line. Now, another potential Trend Reversal play is setting up in iShares Hong Kong Index ($EWH), an international ETF.

Starting with the weekly chart, you will see that $EWH is testing resistance of a downtrend line that has been in place since early 2011. It has also formed two “higher lows” since then, which are annotated on the chart below:

When buying Trend Reversals, we never try to catch the absolute bottom because it is risky and foolhardy. Rather, we prefer to see sufficient confirmation that a significant bottom has formed before attempting to buy. The two “higher lows” on the weekly chart above are positive because it indicates key bottoming action. However, it is also important to look for confirmation of intermediate-term trend reversal on the shorter-term daily chart interval. For this, we need to see that the 20-day, 50-day, and 200-day moving averages have all begun to slope higher. Finally, we need to ensure that the 20-MA is above the 50-MA, and the 50-MA is above the 200-MA. Typically, it takes at least several months from the absolute lows for these events to occur. In the case of $EWH, it also meets these requirements on the daily chart. Take a look:

Because yesterday was the first day of price correction in the broad market since last week’s breakout, we are not yet listing $EWH as an “official” ETF trade setup on our trading watchlist today. Nevertheless, it is now on our radar screen and we will report our exact entry, stop, and target prices to subscribers of our newsletter if we decide to target $EWH for new trade entry.

 

[morpheustrading]

The Best Financial ETF To Buy For Short-Term Trading ($KRE, $XLF)

The financial sector has picked up some momentum the past few weeks, with the S&P Select Financial SPDR ETF ($XLF) breaking out from a six-month base on Thursday (September 13). Today, we follow-up that analysis by examining in more detail the increasing bullish momentum in the financial sector.

In addition to scanning hundreds of daily ETF chart patterns every night, we also use percentage change charts to compare the performance of numerous industry sectors with the benchmark S&P 500 and/or Nasdaq Composite indices. Rather than showing actual price changes, percentage change charts simply compare relative price performance between two or more indexes, ETFs, or stocks (this concept is thoroughly explained in Advanced Technical Analysis of ETFs, my new ETF trading book that was just published last week). The increasing bullish momentum in the financial ETF we mentioned last Friday can be easily seen on the percentage change chart below, which compares the performance of S&P Select Financial SPDR ($XLF) against the S&P 500 SPDR ($SPY), a popular ETF proxy that tracks the performance of the broad-based S&P 500 Index:

On the chart above, notice that XLF started showing slight relative strength to SPY on September 4, but the bullish divergence started became much more clear starting on September 6. Since then, the relative strength of XLF has been increasing, which tells us institutional funds are rotating back into the financial arena. As such, the gain of XLF (7.7%) has nearly doubled the return of SPY (4.3%) over the past 10 days.

Although following the flow of institutional funds from one industry sector to another is a key aspect of our ETF sector trading strategy, it's important to realize there are typically at least several different ETFs that track the same sector. Therefore, upon identifying relative strength within a particular sector, the next step is to analyze each of the various ETF fund families to see which individual ETF is showing the most relative strength within the sector index. This is necessary because the daily and weekly chart patterns of various ETF families can vary greatly, depending on the underlying stock portfolio that comprises each ETF.

Upon analyzing the charts of quite a few financial ETFs over the weekend, we determined the most relative strength is currently within the Regional Banks sub-sector. Specifically, one of the best ETFs for trading in the financials right now may be S&P Regional Bank SPDR ($KRE). Although the more-diversified XLF closed at a new 52-high last week, it is still trading below resistance of its 2010 and 2011 highs. Conversely, KRE has already broken out above its 2010 and 2011 highs, and is trading at its highest price since late 2008. The relative strength of KRE vs. XLF is shown on the long-term monthly chart patterns of XLF and KRE below:

Although our exact entry and exit prices are typically determined from the shorter-term daily chart patterns, the longer-term weekly and monthly chart patterns are important because they show us the "big picture" of the trend. Being on the right side of that trend increases our odds of a successful trade, even if we are only buying the ETF for a short-term, momentum-based swing trade.

Due to its relative strength and lack of significant overhead price resistance (most investors who wanted out of this ETF are already out by now), we now like KRE for potential swing trading buy entry on a pullback. It has much less overhead supply than XLF, and other financial ETFs we compared as well. Along with a few other select ETFs with relative strength, we are now monitoring KRE for buy entry when it retraces to provide a positive reward-risk ratio.

Our sole open ETF position, ProShares Ultra Russell 2000 ETF ($UWM) came within just 2 cents of our original target price last Friday, before drifting a bit lower into the close. But because the ETF came within such close proximity of our price target, and since UWM is now showing an unrealized gain of 10% since our September 5 buy entry, note that we will be selling UWM at market on Monday's open to lock in a nice gain.

Given last week's substantial broad market gains, it would not be surprising for stocks to pull back from their highs, or at least enter a period of sideways consolidation in the coming week. Frankly, we would like to see that happen, as there is currently a lack of new ETF trade setups with low-risk entry points at current levels. On the other hand, we are continuing to build an increasing list of ETFs with relative strength that we are targeting for potential swing trade entry when the market eventually enters into at least a short-term correction by price or time. As always, patience to wait for proper trade entry points with favorable reward-risk ratios is important, so we are not interested in chasing ETFs just for the sake of action. Nevertheless, we will be "locked and loaded" with new ETF trading setups when stocks eventually pull back or start consolidating after their recent gains.

 

[morpheustrading]

International ETFs heating up

In yesterday's ETF trading newsletter, we pointed out the potential trade setup in iShares Emerging Markets Index ($EEM). Although listed on our watchlist, the trade did not hit our trigger price for buy entry. However, yesterday's price action in EEM now makes our reward to risk ratio even more favorable for buy entry because the ETF gapped lower on the open, then reversed to close at its intraday high. This resulted in the formation of a bullish reversal candlestick, which is shown on the daily chart below:

Looking at the weekly chart again, notice that yesterday's pullback also caused EEM to come into new support of its prior downtrend line from the 2011 high. One of the most basic tenets of technical analysis is that a prior level of resistance becomes the new level of support, after the resistance is broken. Therefore, the prior downtrend line shown on the weekly chart below should provide substantial support for EEM:

When a stock or ETF is forming a bull flag chart pattern and then gaps down sharply, it has the effect of washing out the "weak hands" who sell a position that the first hint of trouble. This is positive because it absorbs overhead supply from traders who would otherwise be selling into the next move up. The end result is that it makes it easier for the stock or ETF to move higher when the buyers step back in. Then, traders who sold at the lows feel regret, which causes them to buy at a higher level, thereby adding to the bullish momentum. The other benefit of a stock that gaps down, but closes with a bullish reversal candlestick, is that it makes it easier for us to clearly define our stop price just below the low of the reversal bar. For these reasons, we now like the EEM trade even better.

We also mentioned in yesterday's newsletter that several other international ETFs were starting to look good. One of those is iShares Philippines ($EPHE), which just broke out to a new all-time high and has pulled back to new support of its breakout level. In addition to EEM, we have added EPHE to our watchlist for potential buy entry today. The weekly chart pattern of EPHE is shown below:

One other international ETF we are monitoring is iShares Mexico ($EWW). It is not an "official" trade setup for entry yet, but it is definitely on our radar screen as a potential breakout candidate. The long-term monthly chart of EWW is shown below:

The other ETF that was on our watchlist yesterday, Elements Intl. Agriculture ($RJA), did not yet trigger for buy entry, but remains on our watchlist going into today. Note the slightly adjusted trigger price. If it does not trigger, or at least form a bullish reversal bar, in today's session, we will probably remove it from our watchlist on Monday.

 

[morpheustrading]

Best Stocks To Buy As The Market Pulls Back Now

The stock market’s pullback of the past two days has created plenty of doubt among traders as to whether or not the major indices will continue to trend higher throughout the rest of the year. But even though the S&P 500 and Nasdaq have suffered a few “distribution days” (higher volume selling), our market timing system remains on a “confirmed buy” signal. As such, we expect any pullback to be short-term and eventually lead to fresh buying opportunities with more positive reward-risk ratios for buy entry, at least at the present time.

Nevertheless, the key word for our style of money management is flexibility. We have no problem selling marginal winners/losers when the market begins to sell off, especially when our stock swing trades do not act as expected. We can always re-enter positions if they provide proper technical setups again, but our primary concern during market corrections is to control risk and reduce our long exposure so that we can think clearly.

Our overnight stock scans produced a handful of decent momentum swing trading setups that may trigger for buy entry within the next few days. The top stocks on our watchlist for potential buy entry in the coming days include the following tickers: $RGR, $ULTA, $BRLI, $ESRX, $PII, $MGAM, $BCOR, $ALNY, $ONXX, and $LNKD. Below are a few annotated charts of the setups that meet the technical criteria of our rule-based trading strategy:

The selling in the broad market over the past two days has pressured the individual stocks we are holding in our model trading portfolio, but the effect on the prices of our ETF trades has been more muted. For example, UNG (which we bought on September 25) has gained nearly 5% over the past two sessions, while the S&P, Nasdaq, and Dow have all moved substantially lower during the same period. This divergence is a good example and reminder of why we trade both individual stocks and ETFs.

In healthy, steadily uptrending markets, we frequently trade more stocks than ETFs because the greater volatility of leading stocks can provide us with a greater return on capital. However, when the stock market is trending lower, chopping around in a sideways range, or entering a possible correction mode, we usually shift our focus to ETFs because the plethora of commodity, currency, fixed income, and international ETFs can still provide us with profitable swing trading opportunities. This mixture of trading both stocks and ETFs in our swing trading newsletter, with the ratio dependent on market conditions, enables us to maintain a smooth equity curve and helps us to achieve consistent profits year after year, regardless of market trend.

 

[morpheustrading]

An Emerging Market ETF Setting Up To Move Sharply Higher ($GXG)

Global X FTSE Colombia 20 ($GXG), an international ETF, was initially listed in the ETF trading section of our newsletter a few weeks ago, due to the strong base of consolidation that was forming on the weekly chart. Presently, we still like the price action of $GXG, and its weekly chart continues to show bullish price action after breaking above the 10 and 40-week moving averages in early September. The current base building action is shown on the weekly chart pattern of GXG below:

$GXG may still need another week or two of basing action above its 10 and 40-week moving averages, as well as new support of its prior swing highs from July, before breaking out. As such, we do not yet have a low-risk entry point in this ETF swing trade setup, but we will continue to monitor the action closely. Here’s a closer look at recent price action on the shorter-term daily chart:

 

[morpheustrading]

Educational review of winning swing trade in US Natural Gas Fund ($UNG)

Yesterday, we sold our position in US Natural Gas Fund ($UNG) for a nice gain of 11% (nearly $1,000 based on our $50,000 model ETF trading account). In today’s ETF analysis and commentary, we will do an educational technical review of the trade setup, walking you through from the date of our buy entry to the date of our sale. Having a clear understanding of our ETF trading strategy will enable one to ultimately become a more successful swing trader by having more belief and confidence in our trading system.

The UNG trade setup was originally presented to subscribers in the September 24 issue of our newsletter. On that day, we presented exactly the following commentary and chart of UNG (presented in blue text):

Unlike our stock trading strategy, which focuses primarily on Breakouts and Pullbacks in uptrending markets, we afford ourselves a bit more diversity with our ETF trading strategy because we also seek to take advantage of ETFs reversing from downtrends. This is particularly true with ETFs that have a low correlation to the direction of the broad market, such as currency, commodity, fixed income, and international ETFs. One ETF we are stalking for potential short-term buy entry now is U.S. Natural Gas Fund ($UNG). The technical analysis of the trade setup is shown on the daily chart below:

For trend reversal plays, we typically wait several months after the ETF has formed a significant low, which enables the 20, 50, and 200-day moving averages to each be trending higher and above one another. Buying before that happens often leads to a negative result. However, in the case of UNG, a very important factor driving this setup is the close proximity of the 200-day moving average.

As a long-term indicator of trend, the 200-day moving average usually acts as a brick wall. If an ETF or stock is trying to move above that resistance level, it typically requires at least several attempts. However, when the breakout above the 200-day MA eventually happens, it is normally quite powerful, at least in the near-term.

In the case of UNG, notice it has already pulled back after several attempts to break the 200-day MA, but has formed a ‘higher low’ each time in the process. Odds of a breakout above the 200-day MA are increased after several ‘higher lows’ have already been formed, as is the case with UNG. If it convincingly rallies above its 200-day MA on this attempt, it will probably move sharply higher in the near-term. However, because this ETF is well off its 52-week high, it is NOT a trade setup we want to hold for the long-term. Rather, this is intended to be a very quick, momentum-based “pop” above the 200-day MA. Estimated holding time if it triggers for buy entry is only 2 to 5 days.

That day, we added UNG to our “official” ETF trading watchlist as a potential trade entry. Trading in a tight range on September 24, UNG did not trigger our buy entry. However, the trade setup remained on our watchlist the following day, and triggered our buy entry on September 25, as it rallied above its 200-day moving average. After it broke out above resistance that day, buyers immediately stepped in and bullish momentum propelled the ETF sharply higher for six consecutive days (and still counting). The current daily chart of UNG below shows the subsequent price action after our September 25 buy entry:

When we first explained the trade setup on September 24, we said our estimated holding time for the swing trade would be just 2 to 5 days because we were only looking for a “very quick, momentum-based ‘pop’ above the 200-day MA.” As you can see on the chart above, that is exactly what happened, as UNG rocketed to within just 15 cents of our original price target in 5 short days.

Because UNG came so close to hitting our target on October 1, we notified subscribers that we would be selling UNG at market on yesterday’s (October 2) open. Gapping slightly lower on the October 2 open, we sold UNG at $22.07 in our model ETF trading account, locking in a solid 11% gain with a holding period of 6 days. Although UNG reversed higher yesterday and actually went on to trade through our original price target of $22.58 later in the day, we have absolutely no regret for making the decision to sell on the open, which turned out to be 51 cents lower than the price target. Given that the ETF exploded higher for five straight days after our buy entry, we were simply not willing to take the risk of UNG nearly hitting our price target, but then immediately pulling back substantially. Remember that our original plan was to sell the quick, momentum-based pop, without holding through an eventual and inevitable pullback.

Even though we have closed this trade, UNG could still move much higher in the intermediate-term. The rally over the past week was a breakout above a valid base of consolidation, which could set into motion a new intermediate-term uptrend for this ETF. As such, UNG is now on our radar screen for potential re-entry after it either pulls back or forms a bull flag chart pattern. There is a good chance we will be able to re-enter the trade at a slightly lower price, or possibly near the current price, but with a more positive reward to risk ratio after UNG undergoes at least a near-term correction.

As you probably know, we follow a disciplined, rule-based trading system, but a bit of common sense and discretion is often required. Many traders, particularly newer ones, make the mistake of getting greedy, or letting their ego rule their decision making process, which often results in a highly profitable trade turning into a moderately profitable trade (or worse). We hope you found this review of the UNG swing trade to be informative, as well as a good reminder of a key psychological aspect of successful trading.

 

[morpheustrading]

How To Increase Your Trading Profits While Decreasing Risk

If you’re a swing trader who has been exclusively trading only ETFs or only trading individual stocks, you have been missing out on a stellar opportunity to increase your trading profits AND decrease your risk. In this post, we explain the massive benefits of trading a combination of both ETFs and individual stocks.

Although the overall stock market fell approximately 1% yesterday (October 9), our open ETF positions surged higher and we had a very profitable day. Going into the day, we were already long both First Trust Natural Gas Index ($FCG) and a partial position of iShares Colombia Index ($GXG). FCG, an ETF whose portfolio of individual stocks often move in a similar direction to the price of natural gas futures, ignored the broad market weakness and rallied to a 1.2% gain. GXG, an international ETF with a relatively low correlation to the direction of the US stock market, edged just 0.2% lower. Additionally, both ETFs on our watchlist going into yesterday triggered for buy entry as well. Cruising 2.3% higher, the US Natural Gas Fund ($UNG) followed through on its bull flag pattern that we pointed out on October 9. The other ETF that triggered for buy entry was ProShares Short QQQ ($PSQ), which inversely tracks the price of the Nasdaq 100 Index (recall our October 8 analysis of the bearish “head and shoulders” pattern that had formed on the index). As the Nasdaq 100 Index lost 1.6% and sliced below support of its 50-day moving average yesterday, PSQ conversely rallied 1.7% and broke out above resistance of its 50-day moving average. Putting the performance of all four ETF positions together, here was the individual scorecard for yesterday: +2.3%, +1.6%, +1.2%, and -0.2% (on a half-sized position). Obviously, that made for a pretty nice day considering the substantial losses in the broad market. In fact, it would have been a great day even if the main stock market indexes would have rallied yesterday.

The extreme outperformance of our ETF positions in yesterday’s weak market was a great example of the power of swing trading both ETFs and individual stocks in your portfolio. In strong, uptrending markets, such as what we had seen throughout August and the first half of September, individual stock positions will typically realize larger gains than our ETF positions due to the higher beta of small and mid-cap stocks that we commonly trade. However, when our market timing system shifts into “neutral” or “sell” mode, we immediately reduce both the number of trades and share size of individual stock positions, while increasing our focus on ETFs with a low correlation to the direction of the broad market (such as commodity, international, currency, and fixed income ETFs). Over the past 10 years that we have been writing our swing trading newsletter, we have found the combination of trading both stocks and ETFs in our newsletter enables us to avert major losses (and even profit) when the overall stock market heads lower, while still being able to participate in generating steady gains in uptrending markets. The end result is a much smoother equity curve over the long-term (click here to see our performance page which demonstrates this).

As long as the market remains in correction mode, we are not interested in buying industry sector ETFs because most of them have a close correlation to the direction of the overall broad market. However, astute traders will be building a watchlist of ETFs that were exhibiting relative strength to the broad market before the pullback began, as these will likely be the first ETFs to surge back to their prior highs when the stock market stabilizes and finds substantial support. One such ETF to put on your watchlist is iShares Nasdaq Biotech Index ($IBB).

Presently trading just shy of its all-time high, IBB closed at near-term support of its 20-day exponential moving average yesterday. Since July of this year, that moving average has firmly acted as support, which led to a subsequent new high being formed each time the ETF headed back up. This means that IBB has not even touched substantial intermediate-term support of its 50-day moving average since its current uptrend began in mid-June of this year. In the coming weeks, we would like to see IBB retrace all the way down to its 50-day moving average because the first touch of the 50-day moving average after a multi-month uptrend typically presents a low-risk pullback buying opportunity with a very positive reward to risk ratio. The target for the pullback of IBB that we are monitoring is shown on the daily chart below:

Although our current open ETF positions are now looking pretty good, we must be cognizant of the fact that the main stock market indexes are now sitting in a kind of “no man’s land.” On one hand, both the Nasdaq Composite and Nasdaq 100 indices have firmly fallen below key intermediate-term support of their 50–day moving averages. But on the other hand, the Dow Jones is still holding right at support of its 20-day exponential moving average and the S&P 500 only marginally closed below its 20-day exponential moving average. With such divergence in the broad market, we must be prepared for the fact that stocks could suddenly rip back up without notice. Therefore, our best plan of action right now is simply to focus on managing our existing open positions, rather than taking on additional risk exposure. This is simply in line with the current “neutral” mode of our market timing model, which went into effect at the close of trading on October 5.

 

[morpheustrading]

How We Gained 11% On A 6-Day Hold In $BRLI (Trading Strategy and Education)

Recently, we bought Bio-Reference Labs ($BRLI) as a stock swing trade in our newsletter. The trade followed-through as anticipated, enabling us to lock in a solid 11% gain on a 6-day holding period. Following is an educational, technical recap of the original trade setup and subsequent price action.

BRLI broke out to new all-time highs on its weekly chart this past summer (2012). On the chart below, the horizontal dotted red line marks the prior all-time high. Notice how the consolidation over the next several weeks (the yellow rectangle) held above that $26.00 support level (which was prior resistance). We also liked to see the price action holding above the 10-week moving average, which is equivalent to holding above the 50-day moving average on the daily chart. Finally, the dry up in volume during the last few weeks of the consolidation was positive as well. On the long side, we never swing trade in stocks that are trading more than a few percent below intermediate-term support of their 50-day MAs (it is our line in the sand for buy setups):

Because of the bullish consolidation on the weekly chart above, BRLI was placed on our internal watchlist around September 17. Once a stock or ETF makes it to this watchlist, we patiently wait for a low risk buy point to emerge, at which point we list it on our “official” watchlist in our trading newsletter. The setup prior to our actual buy entry is detailed on the shorter-term daily chart below:

We were finally rewarded for our patience when BRLI broke through the top of its tight trading range on September 27, thereby triggering our buy stop for trade entry:

As you can see on the final chart below, BRLI smoothly followed through to the upside immediately after our buy entry, backed by a strong accumulation day on October 3. On October 4, we sold BRLI when it hits its price target and while it was up nearly 3% on the day. This allowed us to lock in an 11% gain on a six-day hold. The goal of our swing trading system (in a strong market) is to identify low risk entry points in stocks that have explosive potential. These stocks can run 10% to 20% higher over a 1 to 3 week period:

 

[morpheustrading]

Our ETF Trading Strategy With New “Sell” Signal On Market Timing Model ($QQQ, $SPY)

After the major indices began pulling back from their highs in late September, then subsequently bounced in the beginning of October, our disciplined, rule-based market timing system shifted from “confirmed buy” mode to “neutral” mode on October 5. This change in our market bias perfectly coincided with the peak of the bounce off the lows of late September. In “neutral” mode, we can be positioned either long or short, but position size of all new trade entries will be lighter than usual, in order to reduce risk. Also, our portfolio will be primarily (or fully) in cash, with only a few positions in either direction.

As we entered into neutral mode on October 5, we exited all long positions in individual stocks and began focusing primarily on swing trading ETFs with a low correlation to the direction of the overall stock market (ie. currency, commodity, fixed income, and international ETFs). One week later, on October 12, the necessary signals were generated for a new “sell” signal. The recent changes in our sentiment, based on our market timing system, are shown on the daily chart of the PowerShares QQQ Trust ($QQQ) below. Notice how the model is designed to keep you out of trouble when the going gets rough:

If we enter any individual stocks right now, the trades will be on the short side. But with ETFs, we have the choice of being short, buying an inversely correlated “short ETF,” or simply trading ETFs that are not correlated to the direction of the broad market. The latter is what we are doing right now. In addition to our three open positions, there are two new ETFs on our trading watchlist for potential entry in the coming days ($FXE and $SIL long). The technical setups of both these potential trades were discussed in the October 19 issue of our newsletter. Both of these ETF trade setups are low-risk ways to profit from weak market conditions for traders who are unable to sell short if they have a non-marginable cash account (such as an IRA).

Presently, we have three open ETF positions in our model ETF trading portfolio, each of which is showing an unrealized gain due to its low correlation to the direction of the broad market. US Natural Gas Fund ($UNG) is presently showing a 4.2% gain since our October 9 entry, FirstTrust Natural Gas Index ($FCG) is up 2.2% since entry, and our partial position of iShares Colombia Index ($GXG) is now trading 2.6% above our entry price. Since these ETFs have exhibited solid relative strength as the market sold off sharply over the past week, we anticipate further gains in the days ahead and will soon be raising our protective stops to lock in gains along the way.

In last Friday’s commentary, we said, “We can’t expect much from the S&P 500 if the Nasdaq is not on board. Over the past few weeks, two key Nasdaq leadership stocks, GOOG and AAPL, have broken down below their 50-day moving averages. These leaders are being replaced this week by insurance and utility stocks….this is not the type of rotation that inspires confidence.” Given that AAPL declined another 3.7% in last Friday’s session, further deterioration in leading Nasdaq stocks indeed played a big role in the day’s sharp decline. We continue to expect further pressure on the broad market as long as leading tech stocks remain weak. This week, all eyes will be on the quarterly earnings report of AAPL, which is due to trumpet its latest results on Thursday after the close.

 

[morpheustrading]

Two Bullish Emerging Markets ETFs In A Bearish Stock Market ($EEM, $EWH)

Over the past week, we have been noticing an interesting and notable divergence between the performance of U.S. broad-based ETFs and select emerging markets ETFs. The PowerShares QQQ Trust ($QQQ), which tracks the Nasdaq 100 Index, has convincingly broken down below key intermediate-term support of its 50-day moving average and is technically in bad shape. However, the iShares Emerging Market Index ($EEM) has been consolidating in a tight, sideways range during the same period, and also formed a “higher low” within its base of consolidation. With a little help from a bounce in the broad market, EEM will likely break out above the highs of its range and start making another leg higher. The daily chart of EEM below illustrates this:

Looking at the longer-term weekly chart of EEM, notice that the consolidation on the daily chart follows a recent breakout above resistance of an 18-month downtrend line, which should now act as the new support level:

Of the various countries that comprise this emerging markets ETF, one of the best looking country-specific ETFs is iShares Hong Kong ($EWH). As shown on the daily chart below, notice that EWH has been neatly holding near-term support of its 20-day exponential moving average, and is now poised for a breakout to a fresh 52-week high:

When an ETF has so much relative strength that it simply trades in a tight, sideways range while the rest of the broad market is trending lower, it clearly indicates a lack of selling interest. As such, it doesn’t take a lot of buying interest in the broad market to subsequently move the ETF higher. Therefore, both EEM and EWH are potential buy candidates if they rally above their respective horizontal price resistance levels. This could easily happen as soon as we see the first decent bounce in the U.S. markets.

As mentioned yesterday, we presently have the choice of being short, buying inversely correlated “short ETFs,” or trading ETFs with a low correlation to the direction of the broad market. Since these are international ETFs, there is a low correlation to the direction of our domestic markets. Accordingly, both EEM and EWH could be considered for potential buy entry IF they trade above their trigger prices, despite the recent “sell” signal on our market timing model. EWH is probably the better choice of the two because it is poised to breakout to a new 52-week high. Nevertheless, we are not yet listing either ETF as an “official” trade setup because we first prefer to see at least a bit of broad market stabilization, which would reduce the odds of a false breakout if these ETFs attempt to move to new “swing highs.”

For those who are new to trading or new to running a disciplined system, there will be a few times a year when there simply isn’t much to do. When this happens, there is no need to force the issue. If you are keeping track of your trade stats (and we know you are), you should be able to review these periods when you should have done very little and analyze each trade taken. Did you really have a good reason to put the trade on or were you simply trading because you were bored? Are you taking setups outside of your methodology just to satisfy the urge to do something? What was the overall outcome? For us, we plan to remain disciplined and patiently wait for the pitch, following the proven methodology of our swing trading system.

 

[t_rader6]

I am new here and to trading. Trying to get educated. What is swing trading?

 

[morpheustrading]

How To Find The Best Entry Points For Short Selling Stocks ($CHKP)

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 with regard to the price levels where we look to sell short stocks, compared to the ways in which we buy stocks. In this article, we summarize our basic trading strategy for determining the most ideal, low-risk entry points for short selling stocks and ETFs.

Since our rule-based system for market timing switched to a new “sell” signal on October 12, our swing trading focus is now on selling short weak stocks, rather than buying stocks with relative strength to the broad market. It is crucial to realize that trading in the same direction as the dominant broad market trend is, and has always been, the first and most important element of our swing trading system.

Presently, the majority of stocks we are monitoring for potential short sale entry have either set a new “swing low” within the past few days, or are trading too close to a prior low, to initiate a low-risk entry point at current levels. We do not sell short stocks that are breaking down below obvious levels of support, as they tend to rebound and rip higher after just one to two days of weakness.

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. But even though we prefer to wait for a bounce before entering a new short position, it is important to realize we do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce). Rather, 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 uptrending stocks; we always wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback).

Below is a chart of O’Reilly Automotive ($ORLY), which is a good example of what frequently happens when attempting to sell short a breakdown below an obvious level of price support. Again, entering a new short position as a stock is breaking down below the low of a range is something we are not very comfortable doing:

A lower risk way of initiating a new short sale, which also provides you with a more positive reward to risk ratio for the trade, is shown on the following chart of Check Point Software ($CHKP). This is an example of what we are looking 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 past week, notice that CHKP has been climbing its way back up to test new resistance of its breakdown level. If CHKP now 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 EMA is also above to lend 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.

In our swing trading newsletter, the current near-term plan with regard to individual stock and ETF trades is to remain patient and wait for proper, low-risk short setups to emerge. When the stock market eventually and inevitably bounces, we anticipate nice short selling opportunities to develop, and we will be prepared to take advantage of them. As for the long side of the market, we are not even looking for new buy entries right now because the overall stock market has simply deteriorated too much for our liking. At a minimum, even the best stocks and ETFs will now require at least six to eight weeks for new bases of support to develop.

 

[morpheustrading]

re: what is swing trading

Hello trader6,

Welcome to the world of trading. You are making a very wise decision to focus on getting educated before diving in and wildly placing trades.

As a good starting point, it is indeed good to understand the pros and cons of swing trading, and how it compares with other trading/investing strategies.

Generally speaking, swing trading is a short-term style of trading that is typically based on technical analysis. Average holding period for most swing traders is at least several days up to several weeks. This lies in the middle of daytrading and position trading. This article gives you a good overview of swing trading, specifically with regard to how it compares to other types of trading methodologies. It's a good starting point.

Just let me know if you have any other questions. You will also learn a lot by following this thread.

Cheers,

Deron

I am new here and to trading. Trying to get educated. What is swing trading?

 

[morpheustrading]

Trend Reversal In The Long-Term Treasury Bond ETFs ($TLT, $TMF)

The Direxion 30-year Treasury Bull 3X ETF ($TMF), an index that tracks the performance of long-term US government T-bonds, has been in a long-term uptrend since February of 2011, but has been in an intermediate-term downtrend (correction) off its highs since July of 2012. Now, it appears as though TMF is setting up to break out above resistance of its 3-month downtrend line and resume the long-term uptrend that has been in place for nearly 2 years. The weekly chart below shows the long-term uptrend in TMF, while the daily chart that follows shows the potential breakout above the intermediate-term downtrend line.

In technical analysis, a longer-term trendline holds more weight and bearing over future price direction than a shorter-term trendline. Therefore, if TMF manages to breakout above its 50-day MA, it will have broken out above the downtrend line shown on the second chart, which should enable it to resume its dominant uptrend shown on the first chart.

As an aside, iShares 20+ year Treasury Bond ETF ($TLT) is the regular, non-leveraged version of TMF (which ties up a lot more buying power in one’s account). Normally, we are cautious about entering leveraged ETFs because they frequently underperform the underlying index, but we’ve observed that TMF has been tracking very closely to the price of TLT. Therefore, we are stalking TMF for potential buy entry, rather than TLT, but the latter is basically the same setup.

Over the past few days, we have spent quite a few hours scanning the technical chart patterns of hundreds of ETFs, looking for any ideal opportunities for the coming days. But we were generally not impressed with what we saw. We are listing TMF as a potential “trend reversal” setup (“breakouts” and “pullbacks” are the other two technical setups we trade) only because it is a fixed-income ETF, which has a low direct correlation to the direction of the overall stock market. Otherwise, we remain focused on selling short (or buying inversely correlated “short ETFs”). On the short side, we continue to monitor an internal watchlist of potential short selling candidates. Tickers include PowerShares QQQ Trust ($QQQ) and iShares Nasdaq Biotech ($IBB), both of which we are waiting for a substantial bounce before selling short (or buying the inverse ETF).

On the long side, select emerging markets ETFs are still looking pretty good, and are holding near their recent highs ($EWH, $GREK, $EPHE, and a few others). However, since our market timing model has been on a “sell” signal since October 12, we are presently not interested in buying stock-based international ETFs because they will eventually succumb to weakness if US stocks continue lower from here. Nevertheless, when the broad market eventually bounces, very short-term active traders may independently look to these ETFs as potential quick, momentum-based trades (just be aware they are countertrend to the broad market, which we do not advocate for our swing trading system).

 

[morpheustrading]

Re: what is swing trading

Well, you're definitely right that trading is not easy. But then again, nothing worth doing in life is ever really easy. If you get yourself a good mentor, work hard, and stay disciplined, you will increase your odds for success by ten fold.

When you are asking "which type do I use," are you referring to which trading strategy (from my previous post to you)? If so, I use the swing trading timeframe, as I find it to be the best balance between risk and reward.

Thanks for sharing my blog with your colleagues.

Cheers,

Deron

Thank you for sharing! I am still on the demo account with forex-metal as my broker and I've realized that trading isn't easy, but it is very exciting! I will definitely share your blog to 2 of my colleagues (whom I opened up a demo account with- we're sharing the fun of losing millions! but it's a great practice!) It's an unconventional way of making money.
By the way, which type do you use? Which do you think is the most effective?

 

[morpheustrading]

Why Patience Is Crucial For Short Selling Stocks & ETFs (Trading Strategy)

With the market finally bouncing off its recent lows (as of this moment anyway), it may be tempting to start initiating new short positions in the weakest stocks and ETFs during the recent decline. But I have learned the hard way over the years that patience is crucial when trading on the short side of the market. This 3-minute trading strategy video on YouTube explains and illustrates why.

Hope you find it to be helpful.

 

[morpheustrading]

Coal ETF Heating Up For Swing Trade Buy Entry ($KOL)

Going into today, we’re stalking a new potential ETF buy entry in Market Vectors Coal ETF ($KOL). After being in downtrend from April 2011 until September 2012, KOL is now setting up as a short-term, momentum-based bullish trend reversal play. On the daily chart below, notice that the 20 day moving averages recently crossed above the 50 day moving average, which is a bullish signal, although the 200-day moving average (orange line above the current price) has not yet started sloping higher. Nevertheless, there is a clearly defined area of horizontal price support and daily chart, and the ETF is also formed a pattern that is similar to an inverse head and shoulders.

The head and shoulders chart pattern is bearish when it forms near the highs after an extended rally, and usually leads to new near-term lows. Conversely, an inverse head and shoulders is bullish when it forms around the near-term lows of a protracted downtrend, and will frequently lead to new “swing highs.” On the chart below, we have annotated the components of the inverse head and shoulders pattern. As such, we are adding KOL as an “official” trade setup today (subscribers should note our exact entry, stop, and target prices in the ETF Trading Watchlist section of today's newsletter):

In addition to being an inverse head and shoulders pattern, notice that the right shoulder is higher than the left shoulder. This tells us there were less sellers on the pullback after the formation of the head. A higher right shoulder than the left shoulder with this type of pattern is a bullish indicator. Although this is a trade setup for a long position, the fact it is a commodity ETF means the play has relatively low correlation to the direction of the broad market. Otherwise, we would not be looking at bullish trade setups because our market timing model remains in “sell” mode at the present moment.

Yesterday, our existing long position in Global X Silver Miners ETF ($SIL) got off to a rough start in the morning, but reversed to close near its intraday high, this resulted in the formation of a bullish hammer candlestick pattern that also “undercut” key intermediate-term support of its 50-day moving average. This is the exactly type of price action we actually like to see during periods of consolidation, as it serves to shake out the “weak hands” who typically sell when stocks and ETFs break obvious technical levels of price support. If you happened to miss our initial buy entry, SIL presents a low-risk buy entry on a rally above yesterday’s high (around the $24.45 level).

At the time of this writing, all eyes are focused on the results of the US presidential election. However, we encourage you not to get too wrapped up in the results and its perceived impact on the market. Other than perhaps a short-term, knee-jerk reaction, the winner of each presidential election typically has much less to do with the future direction of the stock market than one may wish to believe. Rather, it is technical analysis and time cycles that really determines the direction of the market’s next move.

 

[morpheustrading]

Why Disciplined & Patient Stock Traders Are Consistently The Biggest Winners

Despite yesterday’s sharp losses in the broad market, our model ETF trading portfolio had a great day. We are currently holding four open ETF positions, three of which we were already holding going into yesterday, while the fourth ETF triggered for buy entry on yesterday’s open. Because we have been focused on both ETFs with a low correlation to the direction of the stock market (commodity and fixed-income ETFs), as well as inversely correlated “short ETFs,” all four of our open ETF positions moved higher and in our favor yesterday.

Direxion 20 Year Treasury Bull 3x ($TMF) was our biggest gainer, as the ETF convincingly gapped above its 50-day moving average and printed a 5.4% gain. ProShares UltraShort Real Estate ETF ($SRS) gained 1.0% and Global X Silver Miners ($SIL) rose 0.8%. The ProShares UltraShort Basic Materials ETF ($SMN), which was first pointed out for potential trade entry in our November 5 commentary and subsequently triggered for buy entry on yesterday’s open, cruised 4.0% higher on the day. However, because our buy trigger for entry was above the November 5 high, well above the November 6 close, the ETF closed near the price level where we bought it. Nevertheless, SMN is now technically poised for further gains because it broke out above resistance of its five-month downtrend line.

It’s pretty nice when all four of our open ETF positions move higher on a day when the main stock market indexes all swooned more than 2%. However, please realize was not by accident. As you may recall from previous postings in this thread, our market timing model shifted from “buy” mode into “neutral” mode on October 5, as stocks bounced off their swing lows and peaked near resistance of the prior highs. Then, on October 12, our objective, rule-based market timing system shifted from “neutral” into “sell” mode. This meant we were then required to become focused on any combination of the following: sitting in cash, selling short (including buying “short ETFs”), or only buying ETFs whose underlying portfolios had a low correlation to the direction of the US stock market (international, currency, commodity, or fixed income ETFs).

We initially got knocked out of our swing trades in CurrencyShares Euro Trust ETF ($FXE) and US Natural Gas Fund ($UNG), both of which failed to follow through to the upside with their consolidation patterns. However, the unrealized gains in our open ETF positions are now making up for that. Herein lies the benefit of having a disciplined system for timing the stock market that is objective and rule-based, rather than one that is based on emotion or pure speculation. When our model for market timing gives us the necessary signals to buy, sell short, or be neutral, we simply follow it because it is has been proven to work over the past 10 years.

Until yesterday, nearly every industry sector in the broad market was exhibiting a bearish chart pattern. The one exception was the financial sector, which was showing relative strength and forming a bullish pennant pattern near its highs. However, the financial sector finally broke down below support yesterday as well, causing the bulls to give up what was possibly the last bastion of hope for sector leadership in the US markets. On the chart below, notice that the Select Sector Financial SPDR ETF ($XLF), a highly traded ETF proxy for the overall financial sector, fell 3.3% yesterday, while convincingly breaking below its prior swing low, 50-day moving average, and lower channel support of its bullish “pennant” in the process:

The chart of XLF above is a good example of what we mean when we recently stated in our daily broad market and ETF analysis that it doesn’t pay to buy any stocks or stock-based ETFs when our market timing model is in “sell” mode. In such conditions, even the individual stocks and ETFs showing relative strength to the broad market will eventually collapse with enough pressure from the broad market, thereby enabling oneself to quickly dig a hole. Simply put, it never makes sense to fight against the direction of the dominant market trend because there is much lower risk and greater profitability to be had by trading in the same direction of the stock market’s current trend. Rather than being opinionated and letting subjective bias determine which side of the market to be on, we always try to maintain objectivity based on technical analysis. This keeps us out of trouble and puts the odds of success in our favor by always trading in the direction of the dominant market trend.

Yesterday, a subscriber e-mailed to ask why we were targeting Market Vectors Coal ($KOL) for potential swing trade buy entry. Specifically, this individual asked why we were looking at buying KOL when “Obama hates coal.” Our reply was two-fold. First, we reminded him that our swing trading system is based on technical analysis of price action, rather than news events. Although it is a common conception that stocks are driven by news, this is rarely the case; rather, the price action typically occurs first, while the financial media subsequently comes up with whatever reason they can think of to justify the reason the stock went up or down for the day. But more importantly than this, the second part of our reply to the subscriber was a friendly reminder that KOL did not even hit our trigger price for swing trade buy entry (above the intraday high of November 6). This was a great reminder of the danger of jumping the gun in trading by buying a stock or ETF before it actually hits its trigger price. Since our trigger prices for buy entry of swing trades are based on technical levels of near to intermediate-term support or resistance, trying to save a few pennies by entering a trade before it actually trades through our trigger price is a foolhardy mistake that can easily be avoided by checking your greed at the door.

Given that KOL tumbled sharply yesterday, it has simply been removed from our watchlist as a potential buy candidate. No harm, no foul. Always staying grounded in reality, rather than “hope” mode, is the key to being a consistently profitable trader over the long-term. Although active traders who are patient, disciplined, and grounded in reality will NOT make profits every single month, they will consistently end up with a better performance than the overall stock market over the long-term because they will miss the substantial losses of the big down years. A good example of this is when we actually made a small profit on our ETF and stock trade picks during 2008, at a time when the major indices fell more than 30%.