A swing trader with daily ideas...

[morpheustrading]

Why We Are Stalking This Shiny Solar ETF ($TAN)

Solar energy stocks have made a comeback over the past few months, with First Solar ($FSLR) leading the way. SolarCity ($SCTY), MEMC Electronic Materials ($WFR), and JinkoSolar Holding ($JKS) have been exploding higher as well. The Guggenheim Solar ETF ($TAN), which is heavily weighted in leading solar stocks from the United States and China, has also been shaping up nicely and may provide us with an ideal technical buy entry point within the next few days.

$TAN recently reversed a long-term (multi-year) downtrend, and the ETF is now beginning to show classic signs of a bullish trend reversal. On the weekly chart of $TAN below, notice the 10-week moving average crossed above the 40-week moving average two weeks ago. This moving average crossover is a bullish technical signal that signals a reversal of the dominant trend:

Zooming in to the shorter-term daily chart interval below, we see that $TAN broke out above a month-long base of consolidation yesterday (February 13), but closed near its intraday low. If $TAN now turns into a false breakout by pulling back over the next three to five days, we may be able to grab a low-risk swing trade buy entry as the ETF retraces to near-term support of its rising 20-day exponential moving average, around the $18.40 – $18.50 level:

The false breakout entry is low-risk because traders who buy the breakout are quickly forced to sell, which absorbs overhead supply. Accordingly, the next breakout attempt has higher odds of succeeding and following through to the upside. Furthermore, false breakout entries enable short-term swing traders to have a clearly defined stop price below the low of the pullback, which creates a very positive reward-risk ratio for the setup.

If the next move of $TAN is to drift back down into its previous range (false breakout), we will add it to our “official” watchlist as an actionable momentum trade buy setup. As always, regular subscribers of our swing trading newsletter will be notified in advance of our predetermined entry, stop, and target prices for the $TAN swing trade if it meets our strict, rule-based criteria for buy entry.

 

[morpheustrading]

How We Gained 11% Over 2 Weeks With $LNKD (Trading Education)

Last month, we netted an 11% gain on a swing trade in LinkedIn Corp ($LNKD), which we held for approximately two weeks (15 trading days). In this trading education article, we explain exactly how we did it by reviewing the annotated technical chart pattern that prompted us to enter the trade, then concluding by explaining the technical criteria that told us it was time to sell and lock in the profit on this stock pick.

For all our stock and ETF trade entries on the long side (other than trend reversal plays), we must first verify there is already a well defined uptrend in place before buying. This ensures that bullish intermediate-term momentum is in our favor, which dramatically increases the odds of a profitable trade.

Although the stock pulled back from a high of $125 in September of 2012 to a low of $95 in November, $LNKD had already rallied more than 100% during a preceding ten-month advance. As such, the $30 price retracement off the September high equated to just a 24% pullback (which is about the maximum percentage pullback we like to see).

Once we establish that the stock is already in a strong uptrend (here is how we specifically do that), we then look for a bullish base of consolidation to form over at least the next five to seven weeks. $LNKD did exactly that, as it formed a 15-week base from September through December of last year.

The next step before attempting to establish a low-risk buy entry in a stock that is basing out is to ensure the price action has begun to show signs that bullish momentum has moved back in our favor. This is accomplished by looking for the formation of at least one “higher low” to form within the base.

As annotated on the first chart below, notice that $LNKD formed a higher low in late November of last year, as it held above the $105 level. Once that higher low is in place, we then start to look for an ideal buy entry point (if one develops).

On January 8, after four weeks of consolidation above near-term support of its 20-day exponential moving average, $LNKD closed well off its low of the day, after “undercutting” its prior low from January 2. This presented us with a a low-risk entry buy entry point above the $113 level (which was simply a rally above the intraday high of January 8).

That night, we provided our exact and predefined entry, stop, and target prices to subscribers of our end-of-day trading newsletter. The following morning, $LNKD triggered our buy entry by rallying above $113. Below is a snapshot of the daily chart pattern as it looked the day before our swing trade buy entry:

Our preset buy stop triggered on the morning of January 9, and we were long at an entry price of $113.30. Our initial goal with this short-term stock pick was to hold $LNKD for a quick pop, and then sell into strength ahead of its upcoming quarterly earnings report. The momentum of the swing trade immediately began working in our favor, as $LNKD gapped sharply higher on January 10, just one day after our buy entry point, and held firm.

The strong breakout of January 10 was accompanied by a burst of volume, which attracted plenty of additional buying interest. As such, $LNKD continued pushing higher over the next two weeks. After two strong up days that came two weeks after our entry point, we decided to raise our protective stop after the close of January 28 to just below the $126 level.

The tight trailing stop we set allowed us to still participate in further upside gains if $LNKD continued moving higher, but also protected nearly all our profit in case the stock took a breather and its price reversed. The next morning (January 29), $LNKD triggered our stop just below the $126 level, enabling us to lock in a solid 11% gain on a 15-day momentum trade hold ahead of earnings. The price action subsequent to our entry point, as well as our eventual exit, is detailed on the chart below:

Obviously, not all trades are winners that work as smoothly as this $LNKD trade. However, that’s why we always set predetermined protective stops immediately at the time of entry. This ensures that our losses are limited if the trade does not move as anticipated. To be a consistently profitable trader, one only needs to make sure the winning trades are larger than the losing trades.

Over the course of the 11 years we have been publishing our stock newsletter, we have always aimed for a reward to risk ratio of at least 2 to 1 for each trade setup (meaning the average winning trade is twice the size of the average losing trade). When using strict money management rules such as this, one can still generate consistently profitable long-term returns, even if the winning percentage of overall stock picking is not very high.

We hope you learned a few new things from this article, as we really enjoy sharing our proven, rule-based stock trading strategy with individuals who are serious about learning trading.

 

[morpheustrading]

Top 2 Trading Tips For A Stock Market That May Be Topping

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:

1. Be sure you know and are on aggressive mental defense against these 4 most dangerous psychological emotions for stock traders (greed, fear, hope, and regret). In particular, given the sharp losses of the past two days, traders absolutely must be on alert for the natural human emotion of paralyzing fear that may prevent you from simply cutting your losses on any losing trades that have already hit your stop prices. To ignore your predetermined stop losses is always tantamount to playing Russian roulette with your trading account. But this is even more so the case right now, as the recent rally is beginning to show valid technical signals of a potential top.
2. In case you missed most or all of the rally of the past two months, perhaps because you didn’t believe in it for whatever reason, you are now probably feeling the pain of regret. If this is the case, you must be very careful to avoid being a “late to the party Charlie” (LTPC) right now (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 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.

 

[morpheustrading]

How To Profit From The New Sell Signal In The Market (Short Sell $QQQ)

In our February 22 post (see above), which was published immediately following two days of heavy selling on February 20 and 21, we said, “If and when the S&P attempts to bounce from its current level, the subsequent price and volume action that immediately follows any recovery attempt will be extremely important at determining whether stocks are merely take a breather, or if the rally is dead…If the S&P 500 generates another distribution day that follows just a feeble, light volume bounce off the current lows, that could be the nail in the coffin for the current rally.

The scenario highlighted in bold text above is exactly what has happened over the past two days. After just a one-day lighter volume bounce last Friday, stocks again got slammed on higher volume yesterday (February 25). Since the S&P 500 Index has now logged three distribution days within the past four sessions, and individual leadership stocks have begun to falter, we are now selectively targeting new stocks and ETFs for potential short sale entry.

Even though we have been trading exclusively on the long side of the market since the new buy signal was received at the start of 2013, we are objective, emotionless trend traders who simply follow and trade in the same direction as the dominant market trend (which now favors the downside, at least in the near-term).

The PowerShares Nasdaq 100 ETF ($QQQ) closed below support of its 50-day MA yesterday, with an ugly, wide-ranged reversal candle (all the major indices formed bearish engulfing candlestick patterns yesterday). Although support of the 200-day moving average of $QQQ is not far below its current price, prices can slice through important moving averages like a hot knife through butter whenever the market is in distribution mode. Moving averages work really well in a bull market, but not so much when conditions turn sour. The ugly pattern in $QQQ is shown on the daily chart below:

The recent relative weakness of $QQQ really becomes clear when comparing its price action throughout last rally with the S&P 500 SPDR ($SPY): On the chart below, notice that the S&P easily cleared its prior highs, but $QQQ struggled with its initial swing high from December 19 (attributed in no small part to the sharp correction in Apple ($AAPL) recently):

Operating with the idea that the 200-day moving average of $QQQ will not provide significant support, we now expect $QQQ to fall to test its prior swing low (around the $63 to $64 area) over the next two weeks. As such, we are now targeting this trade as an “official” momentum swing trade setup on today’s watchlist.

Rather than short selling $QQQ, we plan to buy the inversely correlated and leveraged ProShares UltraShort QQQ ($QID) instead. This enables our subscribers with non-marginable cash accounts (such as IRAs) to still take advantage of newfound bearish momentum in the market, without technically selling short (inverse ETFs move in opposite direction of the underlying index). As always, our exact entry, stop, and target prices for the $QID trade setup should be noted in the ETF Watchlist section of today’s report above.

In closing, the daily chart of the benchmark S&P 500 Index below shows that it’s always a negative technical signal when distribution days cluster over a very short period of time:

Numerous times in the past, a cluster of distribution days after an extended rally, combined with the suddenly poor performance of individual leadership stocks, has been enough to prompt us to exit long positions within just a few percent of a market top (check out this actual such example from mid-2012). This has once again been the case, as we have exited all long stock positions (mostly substantial winners), and nearly all of our ETF positions (a handful of small losers) over the past few days.

Overall, we had a positive, profitable run from the rally of the past two months (exact statistics to be reported soon), and now are focused on preserving those gains through the combination of sitting patiently in cash, combined with selective short selling of stocks and ETFs with relative weakness.

 

[morpheustrading]

Who Will Win The Present Tug Of War Between The Bulls And Bears?

We spent several hours extensively scanning the markets over the weekend, and came to the conclusion that the current market environment is a choppy, sloppy mess. Although large-cap stocks continue to show relative strength, which enabled the Dow Jones Industrial Average to finish at a new 52-week high (on the weekly chart), the important Nasdaq Composite remains well below its prior highs from September of 2012.

Clearly, the market has become fractured over the past two weeks. Like the Dow, the benchmark S&P 500 Index finished the week near its 52-week high. Nevertheless, it is becoming quite apparent that a tug of war between the bulls and bears are starting to take place. To illustrate that, just take a look at the following daily chart of the S&P 500 SPDR ($SPY), a popular ETF proxy for the S&P 500 Index:

When such major day-to-day volatility starts taking place after an extended rally, it is often a warning sign that a significant correction is about to take place. Furthermore, the Nasdaq remains in a rather precarious position, as the index has been struggling to hold on to key intermediate-term support of its 50-day moving average.

If the Nasdaq convincingly breaks down below its 50-day MA in the coming week (by closing below last week’s lows), it will certainly have a substantial drag on even the Dow and S&P 500. Below is the chart of the PowerShares QQQ Trust ($QQQ), an ETF which tracks the performance of the large Nasdaq 100 Index (the brother of the broader-based Nasdaq Composite):

Although the broad market has been “whiplash city” over the past week, it’s important to note the bearish volume patterns in the broad market continue to persist.

Since the February 19 peak, three of the four down days have been on higher volume (“distribution days”), while all four up days have been on lighter volume. While many technical indicators give false signals, volume is the one indicator that never lies because it is a clear footprint of institutional trading activity.

Since banks, mutual funds, hedge funds, pension funds, and other institutions control more than 50% of the market’s average daily volume, the direction of the stock market nearly always follows the institutional money flow. Right now, the volume patterns tell us that institutions remain in sell mode (so our market timing model is as well).

Although our timing model in sell mode, we continue to monitor leading stocks with the most relative strength. The top individual stock presently on our internal watchlist is LinkedIn Corp. ($LNKD), which we have already bought and sold twice for solid gains the past two months.

The first buy of $LNKD was in January, based on a “cup and handle” type chart pattern, which we sold into strength for an 11% gain ahead of earnings. The second buy was on a big gap up from its February 8 earnings report, which we also sold into strength for a nice profit (check our stock trading blog for an educational technical review of that second swing trade entry soon).

Not surprisingly, a majority of the ETFs in our weekend stock screening have similar chart patterns to the major indices, but we did spot one pocket of relative strength in the healthcare sector. iShares Biotech ($IBB), SPDR Health Care ETF ($XLV) and Vanguard Health Care ETF ($VHT) have either broken out to new 52-week highs or are poised to breakout within the next few days. However, given recent market conditions, a breakout in the current environment would have a higher than usual likelihood of failure. Conversely, low-risk short selling setups remain minimal as well.

Overall, we do not see any low-risk stock or ETF swing trade setups that are presently actionable. Therefore, the best plan of action is to sit on the sidelines primarily in cash until the market shows us the direction of its next move. Remember, we’re not in the business of predicting price action. Rather, we simply plan our trades according to the reaction the market is presenting us at any given time. It’s a much less stressful and more profitable way to run your trading operations over the long-term.

 

[morpheustrading]

2 ETFs Setting Up For Low-Risk Trend Reversal Buy Entries ($TBT, $TAN)

With our stock and ETF swing trading strategy, there are three main types of trade setups we take: breakouts above consolidation, pullbacks to near-term support (in uptrending stocks), and trend reversals. In healthy markets, we primarily focus on buying breakouts and pullbacks. However, we occasionally spot low-risk trend reversal setups, which often offer a very positive reward to risk ratio.

There are two new “official” ETF swing trade setups we are targeting for potential buy entry going into today’s session, both of which are trend reversal plays. The first is ProShares UltraShort 20+ Year Treasury Bond ETF ($TBT). The technical criteria for this setup is detailed on the weekly chart below:

Buying a trend reversal does NOT mean “bottom fishing,” which is akin to catching a falling knife. Rather, the stock or ETF must first indicate a high likelihood that a significant bottom has already been formed. For this, we specifically look for the stock or ETF to both trade in a sideways consolidation pattern for at least several months. More importantly, it must also form at least one “higher low” within that consolidation period (two is preferable).

Additionally, we always make sure the 10-week moving average (same as the 50-day moving average) has crossed above the 40-week moving average (same as 200-day moving average), which confirms the bearish momentum has reversed. Then, we buy the stock or ETF when it breaks out above the highs of its consolidation (horizontal price resistance).

As you can see on the chart above, $TBT meets all of these qualifications for a trend reversal play. The ETF has been consolidating in a sideways range since June 2012, and has formed two “higher lows” since then (November 2012 and February 2013). Then, after four weeks of tight consolidation near the high of its range, the ETF “undercut” support of its 10-week moving average just two weeks ago, but zoomed right back up to close at the highs of its range last week. Such price action is bullish and often precedes major breakouts.

Because $TBT is a leveraged inverse ETF, there is a degree of underperformance to the underlying index (long-term treasury bonds) as the holding period increases. Therefore, short selling iShares 20+ Year T-bond ETF ($TLT) is technically better than buying $TBT. However, since traders with a non-marginable cash account (IRA) are unable to short sell anything, $TBT or $TBF (non-leveraged version of $TBT) is a decent alternative. For this swing trade setup, members of The Wagner Daily trading newsletter should note our predefined and exact entry, stop, and target prices on the “watchlist” section of today’s report.

The second ETF trend reversal setup we are stalking for potential buy entry today is Guggenheim Solar ETF ($TAN). Like $TBT, this ETF meets the same trend reversal requirements on its weekly chart interval. However, it’s actually the daily chart pattern that makes this trade setup enticing. Take a look at the chart below:

In mid-February, $TAN attempted to break out above a five-week base of price consolidation (point “A”). However, the breakout failed, causing the ETF to fall back to the lows of its range (point “B”) less than two weeks later.

If you are new to trading, you may understandably assume failed breakouts are a bad thing. But the reality is that failed breakouts that hold support of the prior range often lead to some of the most explosive breakouts on the second breakout attempt. Since many traders buy the initial breakout attempt, then quickly sell when the breakout fails, it has the effect of absorbing overhead supply. In turn, this makes it easier for the stock or ETF to zoom higher on its next move up.

In the case of $TAN, we like that the ETF firmly found support at the lows of its prior range, which has conveniently converged with major support of its 200-day moving average (orange line). If this ETF triggers for buy entry, bullish momentum should cause it to surge above last month’s high shortly thereafter. Again, Wagner Daily subscribers should note our detailed parameters for this trade setup on today’s watchlist.

 

[morpheustrading]

3 New ETF Swing Trade Setups – Breakout, Trend Reversal, & Short Sale

In yesterday’s ETF commentary, we pointed out the developing bullish setup in SPDR Energy ETF ($XLE). However, as the ETF had not yet broken out to new highs, we said it may need another week or two of consolidation, as well as tightening of the price action near its prior high.

While $XLE remains on our internal watchlist as a potential buy entry in the near-term, further research enabled us to actually find a better ETFs swing trade setup within the same industry sector. Below, take a look at the daily chart of SPDR Oil & Gas Exploration and Production ETF ($XOP):

The primary difference between $XLE and $XOP is that the former has not yet broken out above resistance of its February 2013 high, while the latter already has. This means $XOP has been showing slightly more relative strength than $XLE. On the longer-term weekly chart below, notice that $XOP has also just broken out above key horizontal price resistance of its prior high from September of 2012, which should further spark bullish momentum from here:

Over the next few days, $XOP may form a bull flag chart pattern by drifting slightly lower from the high of this week’s breakout (as shown on the first chart above). If it does, it could lead to an ideal swing trade setup, as new support of the February 2013 breakout level is just below the current price. However, just in case the ETF immediately continues higher from here, without forming a bull flag first, we have added $XOP to today’s watchlist as an “official” trade setup going into today’s session.

Since $XOP is presently only 1% above its breakout level, it’s not too far extended to take a shot from here if it continues higher. However, if the ETF trades through our trigger price (above the two-day high), we will reduce risk by only entering with partial share size on this momentum trade setup. Conversely, we may be more inclined to enter with larger share size if a bull flag pattern first develops from here instead, as that would increase the odds of follow-through to the upside.

In addition to $XOP, there are two other “official” ETF swing trade setups, as well as two new individual stock trade setups, going into today.

One new ETF setup is a buy entry into ProShares Short 20+ Year Treasury Bond ETF ($TBF) if it rallies above last week’s high. A similar trade to buy $TBT on a breakout above last week’s high was listed on our watchlist earlier this week (Monday), but it did not trigger and we removed it.

Now, we have added the short ETF back to our watchlist, but are targeting the non-leveraged ETF ($TBF), rather than the leveraged one ($TBT), because there will be a slightly better correlation to the underlying index if $TBF triggers for buy entry. Please reference our March 11 forum post (scroll up) for a technical review of this potential Trend Reversal setup in $TBT/$TBF (or $TLT short if you are able)

The third and final new ETF trade setup on today’s watchlist is a potential short selling entry into SPDR Metals & Mining ETF ($XME). Although our market timing model is still in “buy” mode, this sector has been absolutely dead, trading near the 52-week lows while the market trades at its highs. Therefore, because of its relative weakness, even the slightest pullback in the market should cause this ETF to fall apart to new lows. We will explain the actual technical criteria behind the $XME setup in tomorrow’s Wagner Daily newsletter.

In the meantime, regular subscribers should note our exact entry, stop, and target prices of the $XOP breakout, $TBF trend reversal, and $XME short selling setup in today’s report. Trade details for our two new stock swing trade setups ($ALNY and $SWFT) are also discussed in today’s stock swing trading report.

 

[morpheustrading]

How To Trade The Bearish Head & Shoulders Pattern In $QQQ (Nasdaq 100)

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

 

[morpheustrading]

How To Trade Around Earnings Reports With Maximum Profits And Low Risk

The challenge of trading around quarterly earnings reports

When I first began my trading career about 15 years ago, I had no idea how to manage trades that coincided with the quarterly earnings reports of various stocks. Whenever I simply held my positions through earnings and hoped for the best, I was somehow wrong a majority of the time, and the stocks gapped sharply against me. Conversely, I found that I missed out on a lot of potential profits whenever I simply stood aside and let the stocks react and do their thing after earnings.

Fortunately, many years later, I discovered a system for trading around earnings reports that enabled me to have minimal risk, while still capitalizing on the majority of the gains. It became the best of both worlds, and that is what I want to share with you in this article, using an actual recent trade example.

How we traded LinkedIn Corp ($LNKD) for a total 22% gain around its Q1, 2013 earnings report

Throughout January and February of this year, we made two separate swing trades to buy LinkedIn Corp ($LNKD) in The Wagner Daily newsletter. The first trade netted a gain of 11%, from our predefined entry and exit points, over a 14-day holding period. The second trade also scored an 11% gain, but with just a 9-day hold.

What’s notable about that total 22% gain with an overall holding period of 23 days is that the trades were made ahead of and immediately after the quarterly earnings report of $LNKD.

In this YouTube video, we walk you through the Earnings Trading Technique that enabled us to lock in these solid gains, despite both trades being centered around earnings reports.

Hope you find it to be educational and helpful. As always, feedback and questions are welcome!

Deron:idea:

 

[morpheustrading]

Why MagnaChip Semiconductor Corp ($MX) May Soon Explode Higher

After a nasty shakeout from a false breakout in mid-February, MagnaChip Semiconductor Corp. ($MX) (which IPO’d in March 2011) has tightened up nicely above intermediate-term support of its 50-day moving average, and is holding above near-term support of its 20-day exponential moving average as well.

Big breakouts are typically preceded by a tightening of price action, which $MX is now exhibiting. The recent “false breakout” absorbed overhead supply, which should make it easier for $MX to surge higher after it breaks out above the high of its recent range. The technical swing trade setup for $MX is shown on the annotated daily chart below:

Although our stock picking strategy for swing trading is based primarily on technical trend following and market timing, we also incorporate certain elements of the popular and proven CANSLIM model into our stock selection process (although we tweak the indicators to be applicable for shorter holding periods than CANSLIM is intended for).

The IBD Relative Strength Ranking for $MX is very strong at 92, along with an equally strong EPS (earnings per share) ranking of 94. The earnings and revenues of $MX have ramped up over the past three quarters, and the ROE (return on equity) is at an impressive 35%. Furthermore, there has been a strong increase in fund sponsorship over the past 7 quarters, signaling that institutions want a piece. Finally, the IBD Industry Group rank is 20 out of 197 (stocks in the top 40 groups are ideal buy candidates).

As we have mentioned several times in recent weeks, the king of technical analysis is always price action (volume is queen). Therefore, until key leadership groups and stocks in the market start clearly breaking down, our bias must remain on the long side (albeit cautiously).

With that in mind, we have added several new individual stock and ETF buy setups, including $MX, to today’s “official” watchlist of The Wagner Daily stock picks newsletter. Regular subscribers should note our preset trigger, stop, and target prices for this $MX trade setup in today’s report, as well as several additional new stock and ETFs we are stalking for potential momentum trade entry.

Navigating the stock market over the past few weeks has been challenging due to the mixed signals being received by our stock market timing model. However, don’t forget that price action is always king. For the moment, the market is holding up and new technical trade setups are emerging, both of which are bullish signs.

Although the stock market continues to advance on light volume, it’s tough to ignore the fact that chart patterns of many leading stocks still look good. Yes, we have seen a few market leaders break down, such as 3d Systems Corp ($DDD) or Ocwen Financial Group ($OCN), but the majority of leading individual stocks are still holding above their 50-day moving averages and trending higher (or forming bullish basing patterns).

 

[morpheustrading]

Don’t Miss This Explosive Breakout In US Natural Gas Fund ($UNG)

In this April 2 blog post, we explained in detail how to trade a bullish technical chart pattern known as the “cup and handle.” At the time, United States Natural Gas Fund ($UNG) was still forming the “handle” portion of the pattern. However, since the ETF broke out last Friday (April 5), $UNG is now in play as a valid swing trade entry. Here is a follow-up look at the current price action…

In our initial analysis of $UNG, we said, “While forming (the handle), price action will typically slope lower. In the case of $UNG, even an ‘undercut’ of the March 25 low and 20-day exponential moving average would be acceptable.” On April 4, an “undercut” of the March 25 low and 20-day EMA is exactly what happened. The following day, $UNG jumped 4.5% and broke out above the high of its 3-week range. The move was also confirmed by an impressive volume spike. This is all shown on the daily chart below:

Since this ETF closed only slightly above the highs of its range, it is not too far extended to buy near the current price level. As such, regular subscribers of our nightly ETF and stock picking newsletter should note we have listed this trade setup as a new potential buy entry. Our exact trigger, stop, and target prices for this ETF swing trade can be found in the “watchlist” section of today’s report.

One of the things we like about the $UNG trade setup is that it is a commodity ETF. Since our market timing model is now in “sell” mode, we are generally avoiding the long side of the market. However, one exception is ETFs with a low correlation to the direction of the stock market. Commodity, currency, fixed-income, and international ETFs are all such examples.

 

[morpheustrading]

Don’t Miss The Breakouts In Hot Asian ETFs

Our technical ETF and stock scans have produced several high quality stock and ETF swing trade setups over the past several days. Within the realm of ETFs, a majority of the most bullish chart patterns are presently found in international ETFs. More specifically, ETFs of the Asian region are showing the most relative strength. In this article, we analyze the current chart patterns of two of them, both of which may be actionable within the next several days.

iShares MSCI Singapore Index Fund ($EWS) is back on our watchlist after a failed breakout attempt last February. Since then, the price action has undercut the 50-day moving average and popped back above it. After another false breakout attempt on April 3, $EWS found support from the rising 50-day MA and prior swing high (dotted black line), around $13.75. The daily chart of $EWS is shown below:

When possible, it is important to have multiple time frames confirming a potential trade (on recent IPOs we can’t). This means that we like to see something interesting happening on the weekly or monthly charts to support our analysis on the daily chart. That also goes for intraday charts, as the majority of our buy entries are placed above all major moving averages on the 5, 15, and 60-minute time frames.

With $EWS, the monthly chart below shows a downtrend line in place with multiple touches of the anchor points. A breakout above the high of the current range should lead to a breakout above the monthly downtrend line:

One of the best looking country ETF charts we found was the Market Vectors Vietnam ETF ($VNM).

The weekly chart is quite powerful, as it shows the huge pick up in volume during the rally as the price action cleared the 40-week MA (in orange). The price action is now consolidating in a tight range around 10-week MA (teal line). Also, note the dry up in volume two weeks ago, which indicates that investors have lost interest in trading $VNM as it continues to base out (this is bullish):

The daily chart in $VNM shows the tight price range just below the 20-day EMA. We can easily see the nice drop off in volume since March 27 as well.

A break above the three-day high is our buy entry, as this would put the price action above the 20-day EMA and the short-term downtrend line of the tight range. A break above $21 would also confirm that a higher swing low is in place on the daily chart:

In addition to $EWS and $VNM, iShares Indonesia Index ($EIDO), iShares Thailand Index ($THD), and iShares Philippines ($EPHE) are also on our internal watchlist. However, all three ETFs ideally need several more weeks of consolidation in order for their basing patterns to tighten up. Conversely, $EWS and $VNM have already formed potentially buyable patterns that could trigger in the next few days.

Whenever there are 5 or more “distribution days” (losses on higher volume) in a major index within a 3 to 4 week period, and leading stocks begin selling off on heavy volume, it is always a major concern. However, if the stock market is able to fight off the distribution AND quality bullish stock setups can still be found, then we must buy.

Sometimes it is easy to forget that we are swing trading individual stocks and ETFs, not the main stock market indexes. Above all, don’t forget our trading system is designed to react to price action, rather than attempting to predict it.

 

[morpheustrading]

Stock Market Breaks Down, But Two Of Our Swing Trades Breakout

Stocks continued to sell off on Thursday, with tech stocks getting hit the hardest. The Nasdaq Composite sold off 1.2%, while most averages closed lower by 0.6% to 0.7%. The Nasdaq sliced through key intermediate-term support of its 50-day moving average, joining the Russell 2000 and S&P Midcap 400.

The S&P 500 closed just below (but not a decisive break of) its 50-day moving average yesterday, after undercutting its prior “swing lows” at the 1538-1539 support level:

The 50-day moving average is a very important support level during a rally, as it is basically the line in the sand for the bulls. When the major averages all break below the 50-day MA within a few days of each other, it is usually a good time to raise cash and sit on the sidelines.

The evidence below suggests that the market is now in a corrective phase, which forces our rule-based timing model into “sell” mode:

There are at least 5-6 distribution days in the market (strike 1).
Most of the main stock market indexes are trading below the 50-day MA (strike 2). We do not count the Dow.
Leading individual stocks are beginning to break down below key support levels (strike 3).
How long will a stock market correction last? No one knows, but there is one main clue to watch out for.

Can leading stocks that have recently broken down find support and stabilize? There is a big difference between leading stocks pulling back 15-20% off a swing high versus completely breaking down and selling off 40% or more from their highs. If most stocks hold above or around their 50-day MAs and fall no more than 20-25% or so off their swing highs, then we would expect any correction in the S&P 500 to be limited to around 4-6%.

US Natural Gas Fund ($UNG), a current holding in the model portfolio of The Wagner Daily, is in pretty good shape after yesterday’s (April 18) strong advance. The weekly chart below shows $UNG zooming above the breakout pivot, which is always a bullish sign:

As annotated on the chart above, $UNG is holding support of a steep uptrend line (black dotted line), while the 10-week MA (teal line) is beginning to pull away from the 40-week MA (orange line) after the bullish crossover a few weeks ago. One great thing about $UNG is that it has a low correlation to the direction of the overall stock market because it is a commodity ETF.

As you may recall, our actual swing trade buy entry into $UNG was based on the “cup and handle” chart pattern we originally pointed out in the 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.

 

[morpheustrading]

Funds Rotate Into Nasdaq, But Light Volume Is A Concern ($QQQ, $SMH)

Led by solid gains in the Nasdaq 100 and Nasdaq Composite, stocks closed higher across the board yesterday (April 22). The Nasdaq Composite easily outperformed the S&P 500 on Monday, signaling that money is beginning to rotate out of the S&P 500 (and Dow) and into the Nasdaq. This is a positive sign for the bulls, but there is one main concern about this — a lack of higher volume.

Over the past two sessions, the Nasdaq has climbed about 2.5% off last Thursday’s low. However, volume declined in each of those past two sessions, which means the move was unconfirmed by institutional buying. The Nasdaq may need a bit more time to consolidate, as there is quite a bit of overhead resistance.

Looking at the daily chart of the Nasdaq 100 ETF ($QQQ) below, we see price action running into resistance clustered around the $69 level:

The five weeks of stalling action near $69, along with the 10 and 20-day moving averages, make for quite a bit of resistance. However, if $QQQ can power through this level without further consolidation, it would be a very bullish sign.

Market Vectors Semiconductor ETF ($SMH), an ETF we have been bullish on since the initial March 28 analysis on our trading blog, continues to chop around near the pivotal, intermediate-term indicator of its 50-day moving average, with support coming in around $34.50 last week.

If $SMH can set a higher swing low and close above Monday’s high on a pick up in volume, then it may attract enough buying interest to break the short-term downtrend line and test the highs of the base:

In today’s Wagner Daily trading newsletter, we are stalking $SMH for potential swing trade buy entry if it meets our technical criteria (looking to add to our existing position on strength). Subscribing members should note the details for $SMH in the “watchlist” section of today’s report. Presently, all five of the open positions in our model trading portfolio (3 ETFs and 2 individual stocks) are showing unrealized gains.

 

[morpheustrading]

Why Short Selling Gold Is Now A Low-Risk Momentum Trade ($GLD, $DZZ)

On April 14, we wrote a blog post titled How To Profit From The Break Of 6-Year Uptrend in Gold. At that time, we said of SPDR Gold Trust ($GLD) that a bounce into new resistance of its prior support level (around the $150 area) would provide an ideal, low-risk short selling entry point.

But since the gold ETF plunged nearly 20% over just a two-day period (April 12 and 15), the odds of a quick bounce all the way back to the breakdown level became minimal. Nevertheless, two weeks after the meltdown, $GLD is now technically setting up for a secondary short selling entry point, based on momentum, that is also ideal.

Since its April 15 low, $GLD has been bouncing from near-term, oversold conditions. Last Friday, the gold ETF bumped into and “overcut” resistance of its 20-day exponential moving average on an intraday basis. However, by the closing bell, $GLD had fallen back down below its 20-day EMA and closed near its low of the day. This is shown on the daily chart below:

When looking to profit from a stock or ETF that breaks down below support, then subsequently bounces into resistance, we prefer to avoid entering a new short position while the equity is still moving higher. Rather, after the breakdown, we wait for the first day that the equity closes substantially lower following a rally into resistance.

In the case of $GLD, last Friday’s probe above the 20-day EMA and formation of a bearish reversal candlestick is especially attractive because it followed a strong move higher that occurred on April 25 (bulls are forced to sell). As such, $GLD now presents us with a low-risk entry point on the short side only if the price falls below the April 26 low (all bets are off for short selling entry until that happens).

With this swing trade setup, we want to clarify that we are NOT necessarily expecting $GLD to make another leg lower within its current downtrend. Rather, we are merely anticipating at least a retest of the April 15 low (such as an “undercut”) before $GLD stabilizes and tries to make any type of significant move higher. As such, note that our projected holding period of this momentum trade setup is expected to be shorter-term than our typical ETF swing trade.

Also, note that our actual trade setup on today’s official “watchlist” is actually to buy the inversely correlated DB Gold Double Short ETN ($DZZ), rather than selling short $GLD. We do this because many Wagner Daily subscribers have non-marginable cash accounts, such as an IRA accounts, that prohibit short selling of any kind. But through buying a “short ETF” instead, these traders can still benefit from the downside movement of certain market sectors. Still, we are basing our entry and exit points on the actual chart of $GLD, rather than $DZZ, to ensure the most accurate tracking to the price of spot gold. Subscribers to our ETF and stock picks newsletter should note our preset and exact trigger, stop, and target prices for the $DZZ momentum trading setup in today’s report.

On a separate note, here is a brief update on the open stock and ETF positions presently in our model swing trading portfolio: We sold a partial position of Celldex Therapeutics ($CLDX) for an 18% gain on April 25, but remain long about half the original shares). LinkedIn ($LNKD) is currently 7.8% above our April 9 entry point and we continue to ride the profit. The other three individual stocks in our model portfolio are each slightly higher than their recent entry points, and we remain long.

On the ETF side, our existing long position in Semiconductor HOLDR ($SMH) has been following through to the upside nicely. It held last week’s breakout to a new 52-week high and its currently up about 3% from our average entry price. US Natural Gas Fund ($UNG), also showing an unrealized gain going into today, formed a bullish “hammer” candlestick after finding support at its 20-day EMA last Friday. It looks well positioned for further gains in the coming week. On today’s watchlist, subscribing members of our technical stock picking newsletter should also note the trade details for three additional swing trade setups (2 stock picks and 1 ETF pick).

 

[morpheustrading]

Why First Trust Internet Index Fund May Be The Next ETF To Breakout ($FDN)

One ETF on our radar screen for potential buy entry right now is First Trust Internet Index ($FDN). Unlike many of the strongest ETFs in the market that are near-term extended to the upside, $FDN has not yet broken out above its range. As such, one could understandably argue that the ETF has relative weakness and should be avoided. In many cases, that would be true.

Even though $FDN has not yet broken out, the difference here is that the ETF has been forming a constructive base of consolidation at its all-time highs. This is much different than buying an ETF that is trading near its lows and is only now attempting to reverse its downtrend. The weekly chart of $FDN below shows how the ETF has been consolidating for the past few months:

On the week ending March 8, notice that $FDN attempted to break out to a new high, but failed the following week. When this happens to an ETF or stock that is trading near its highs, it does not necessarily mean the setup becomes invalid. On the contrary, some of the most explosive upside moves occur when the first breakout attempt fails, but the equity subsequently breaks out and hold. Often, failed breakouts at the highs simply indicate a lengthier period of base building is required.

Zooming into the shorter-term daily chart interval, notice that a rally above yesterday’s (May 1) high would present a valid buy entry point for a partial position. Additional shares could be added to the position on confirmation of a breakout above the highs of the range:

Despite the major indices losing 0.9% yesterday, $FDN showed relative strength on the day by slipping just 0.5%. This was aided by shares of LinkedIn ($LNKD), which ignored the weakness in the broad market and climbed 1.4% to another fresh record high. $FDN is primarily comprised of mid to large-cap internet stocks like Google ($GOOG), Netflix ($NFLX), and Yahoo! ($YHOO), each of which are trading at or near their 52-week highs. Click here to see the current portfolio of stocks that comprise the portfolio of $FDN.

Speaking of internet stocks, our open position in $LNKD is now showing an unrealized gain of nearly 12% (20 points) since our April 9 buy entry. As we said in yesterday’s The Wagner Daily, “$LNKD is scheduled to report earnings after the close on May 2, so if you are uncomfortable holding through earnings you should exit the position into strength ahead of the report (in today’s session). Because we have a decent profit buffer we do not mind holding $LNKD through earnings.” To further your trading education, may also wish to check out how we traded around last quarter’s $LNKD earnings report for a total gain of 22%.

 

[morpheustrading]

The Top 3 Most Simple & Profitable Buy Setups For Swing Trading Stocks

Many active traders make the mistake of assuming that a winning system for swing trading stocks needs to be complicated. On the contrary, the best trading strategies are typically the most simple because they can be more easily and consistently followed.

Our methodology for picking stocks is simple, as 99% of the stocks we buy in our model trading portfolio come from one of the following three setups:

1. Combo Setup – The stock must have a combination of great earnings growth and strong technical price action (some type of bullish chart pattern). Typically, these stocks are growing their earnings at a rate of 30 to 40% (or more) quarter after quarter. Furthermore, these stocks will usually have an IBD relative strength rating of 80 or higher. Since we consider these stocks to be A-rated, they can usually be held for several weeks or more.

2. Price momentum - With this swing trade setup, earnings growth is not important, but the stock must have a top relative strength rating (95 or higher) and belong to an industry sector group that is outperforming the S&P 500. These stocks can be held for a few days to a few weeks.

Our recent trade in Celldex Therapuetics ($CLDX), a biotechnology stock with a relative strength rating greater than 95, is a good example of a swing trade setup based purely on momentum (bullish price action). Last month, we netted a 15% gain on our swing trade in $CLDX and will soon be posting an educational video review of that trade on our blog.

3. Blast Off - Neither earnings growth nor a top relative strength rating is necessary with this type of swing trading setup. We are simply looking for a monster spike in volume on the daily chart, combined with a 4% or more gain in that same session. This indicates huge demand. If demand is sharply greater than supply, the price has no choice but to surge higher (which is why volume is such a great technical indicator).

With this setup, the one-day volume spike should be at least 2.5 to 3 times greater than the 50-day moving average of volume. These stocks can be held for a few days to a few weeks (as long as the price action remains excellent).

A current example of the “Combo” setup (#1 above) can be found in Michael Kors Holding Limited ($KORS). So, let’s take a closer look at how this trade meets our parameters.

For starters, the expected earnings growth of $KORS in the coming quarter is 81%, so the requirement for strong earnings growth is definitely covered. Its IBD relative strength rating is only 71, but that is compensated for by the monstrous earnings growth the company has been experiencing. Next, let’s take a look at the technical chart pattern.

After several months of choppy price action, $KORS is starting to come together nicely. Upon completing a 20% pullback off its February 2013 high, $KORS found support at its 200-day moving average, then rallied to reclaim its 50-day moving average last week. Now, $KORS is working on forming a bullish chart pattern known as a “cup and handle,” which looks like this:

As shown on the chart below, $KORS formed the left side of the cup and handle pattern from March to late April, and is now working on the right side of the pattern. The right side of the pattern will need several weeks to develop and form a handle with a proper buy point. During this time, the stock needs to hold above its 50-day moving average as well. This annotated chart of $KORS shows what we are looking for:

YRC Worldwide, Inc. ($YRCW) is a great example of a “Blast Off” setup (#3 above). Notice the huge volume and sharp gap above resistance that occurred last Friday (May 3):

As of the first 30 minutes of trading in today’s session (May 6), $YRCW is trading more than 20% higher than the previous day’s close. Obviously, such a huge follow-up price gap is not common; nevertheless, it shows you just how powerful the “Blast Off” setup can be:

If not already holding this stock, the setup is definitely NOT buyable for swing trading right now (we never chase stocks). However, if/when it forms a proper base of consolidation from here, we can begin to look for a low-risk buy point (at which time we would notify Wagner Daily subscribers of our exact entry, stop, and target prices).

As previously mentioned, we will soon be posting an educational review of last month’s winning swing trade in $CLDX, which will be an example of our “Price Momentum” setup.

 

[morpheustrading]

How We Gained 15% On A Momentum Swing Trade In $CLDX Stock

On May 6, we shared with you our Top 3 Most Simple & Profitable Buy Setups For Swing Trading Stocks. In that trading strategy article, we showed you an example of a “Combo Setup,” as well as a “Blast Off” setup. For the third type of swing trade setup, the “Price Momentum” trade, we promised we would show you an example of that as well, and here it is.

Recently, we netted an average 15% gain on a momentum stock trade that was held just over 3 weeks.

In this 4-minute swing trading strategy video, we walk you through the technical criteria that prompted the initial buy entry, show you the placement of our protective stop, and explain our rationale for exiting the momentum trade for a solid profit.

For best viewing quality, view in full screen HD mode by clicking the icon on the bottom right of the video player window. Here is the link to the video on YouTube.

 

[morpheustrading]

How To Trail Stops On Winning Swing Trades For Maximum Profit

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 our March 28 post on this forum. 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?

 

[morpheustrading]

How We Gained 9% Selling Short Gold Into The Bounce – Trading Strategy

Yesterday, we sold our swing trade in DB Gold Double Short ($DZZ), a “short ETF” that inversely tracks the price of spot gold, for a solid gain of 9% over a two-week holding period. Since the trade followed through as anticipated, we thought it would be helpful to share an educational technical review of why we originally entered the trade and subsequently sold when we did.

For several months prior to entering this trade, we had been closely monitoring the price action of SPDR Gold Trust ($GLD), an ETF proxy for the price of spot gold. Specifically, we were expecting $GLD to eventually break down below major horizontal price support around the $150 level. The trade idea was originally mentioned in this thread on March 18, and then again on April 29 (scroll back to review if you like).

The breakdown we were planning for finally occurred on April 12, which led to a massive drop of 13% over the course of just two days. But since the April 12 decline was so large, and because we run an end-of-day swing trading service, we were unable to immediately take advantage of selling short the breakdown in $GLD (or buying the breakout in $DZZ). However, we were not really concerned because we knew we would probably get a second chance.

Whenever a stock or ETF experiences a massive drop within a very short period of time, it will typically make a substantial counter-trend bounce shortly thereafter. When that bounce occurs, traders and investors who got stuck and did not sell for one reason or another sell into strength of the bounce, hoping to minimize their losses. It is this “overhead supply” that prevents the equity from moving higher in the near-term, which subsequently attracts the bears who start selling short.

The end result of all the selling into strength of the bounce is that the recovery attempt is usually short-lived. What happens next is that the price will typically head back down to at least re-test the prior low before stabilizing. There are exceptions, of course, but it is highly unusual for a stock or ETF to experience a huge plunge, bounce off the lows, and not subsequently fall back down to test the prior lows at least once. It is this knowledge that prompted our short sale of gold as it bounced into resistance of its 20-day exponential moving average, then started heading back down.

On the chart of $DZZ below, we have annotated our entry and exit points, which will make it easy to understand the concept above. Since our entry was into an inverse ETF, the price action is opposite of $GLD. Therefore, our entry was on a pullback from the highs, rather than a bounce off the lows:

As you can see, we bought $DZZ on May 1, after it gapped above the previous day’s high. When buying a pullback to support (or selling short a bounce into resistance), we always wait for price confirmation that the dominant trend is likely to resume. The confirmation we are looking for is either a big, ugly reversal bar or a substantial opening gap in the direction of the dominant trend.

The fact that we always patiently wait for such price confirmation is the reason we did not immediately buy $DZZ on its first touch of support of its 20-day exponential moving average (beige line) three days prior. Entering before the price confirmation occurs is always riskier because there is no confirmation that the counter-trend move is finished. Therefore, we happily give up a bit of the trade’s profit potential in return for a lower-risk entry point.

The initial protective stop was set at $5.49. We set the stop at this price because it was below convergence of the low of the pullback (intraday low of April 26) and support of the 20-day EMA. After the gap up of May 1, we did not want to see the price action break below that convergence of support, so we set the stop below that level, including some “wiggle room” below the exact price of the low.

Finally, as for the exit point, our target on this type of momentum trade is simply a retest of the prior swing high (or prior swing low if selling short). As such, we set a target price of $6.40 going into yesterday’s session (just one cent shy of the April 15 high). Gapping higher on the open, $DZZ neatly hit that target and we sold.

Although $DZZ could go on to set a new high from here, that was not the intention of the trade at the time of entry. Rather, we were simply looking to catch a substantial piece of the first move back in the direction of the dominant trend. Furthermore, the odds of $DZZ going to a new high are much lower than the odds of it simply going back to retest its prior highs because now there is resistance of a major swing high (support of a key swing low in $GLD).