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Found 19 results

  1. Scanning for reliable chart patterns is obviously one of the most important factors that determines which stocks and ETFs traders should buy. However, just because a stock has a bullish chart pattern does not mean you should automatically consider buying it. In addition to assessing overall market conditions, you must also determine if every potential stock trade also has the proper amount of volatility and liquidity. Read on to learn how to consistently choose only stocks with ample volatility, liquidity, and reliable chart patterns (the “triad of trading profits”), which directly impacts your long-term trading gains. The Perfect Balance In our style of stock trading (short to intermediate-term swing), we look to trade with the prevailing trend, which is usually in the direction of the 50-day moving average. When the market is in trend mode to the upside, it is important to expose our capital to as many bullish situations/setups as possible, in order to maximize trading profits. To do so, we focus on swing trading stocks that are volatile enough to produce gains of 20% or more in a short period of time, which allows us to rotate the portfolio, and again, maximize profits. Nevertheless, the process is not as simple as building a portfolio of the most volatile stocks in the market and letting the chips fall where they may. The goal in selecting the best stocks to buy (in a bullish market) is to achieve the perfect balance between volatility, liquidity, and reliable chart patterns. Finding The Triad How we screen for a stock that has the winning triad of volatility, liquidity, and chart pattern reliability is actually easier than it may sound. Volatility To determine the true volatility of a stock, we utilize a simple and highly effective formula known as the Price/ATR Ratio. When using a trading platform like TradeKing or TradeMONSTER (get free trades for 60 days), we start by displaying the ATR (average true range) of a stock. An objective, technical measurement of a stock’s volatility, ATR is calculated as the greatest of the following: *current high less the current low *the absolute value of the current high less the previous close *the absolute value of the current low less the previous close Put another way, ATR basically measures the average intraday trading range of a stock. We use a 40-day ATR, which tells us the average daily volatility of a stock, as averaged over the past 40 days. To balance out the effect of higher priced stocks automatically having a greater trading range because of their high prices, we next divide the last price of a stock by its 40-day ATR (average true range). For example, if a stock with a $40 share price has a 2-point ATR, it trades at 20x its ATR ($40/2). A $40 stock with a 1 point ATR trades at 40x its ATR ($40/1). With this ratio, a lower number indicates a more volatile stock than a higher number (which is better for momentum swing trading). When dividing the stock price by its ATR (Price/ATR Ratio), 40-50 is roughly an average number where most stocks will fall. However, we prefer to trade stocks with a 20-50 Price/ATR ratio. A stock with a ratio above 60 is usually (not always) too “slow” to trade. Conversely, a stock with a Price/ATR Ratio below 20 means the stock may be a bit too volatile for our tastes. Liquidity The second component of scanning for suitable stocks to trade is liquidity. To qualify as a potential swing trade with full position size, individual stocks should trade with a minimum average daily volume of at least 1 million shares. Some stocks we trade have far less than 1 million shares per day changing hands, but we always reduce our position size in such a situation. Higher priced stocks are ideal, as they allow funds to maneuver in and out of trades with ease, and you should never avoid a high-priced stock, even with a small trading account. Note that our requirement for 1 million shares per day is only for individual stocks; we have a much lower requirement for ETFs, as high average daily volume is largely irrelevant when trading ETFs. Reliable Chart Patterns The final component in the triad of stock selection is subjective and deals with spotting good-looking charts that can produce low-risk, reliable buy entry points. Fast-moving stocks require low-risk entry points, which allow us to minimize risk and maximize the reward to risk ratio for each new swing trade entry. This article is not about how to find the best and most reliable chart patterns, but this article will point you in the right direction for the third element of finding the top stocks to buy. Volatility & Liquidity In Action Based on our system, Tesla Motors ($TSLA) is an ideal stock with a Price/ATR Ratio in the 30s and plenty of liquidity: Another solid stock to trade is SolarCity Corp. ($SCTY), which is nicely volatile with a Price/ATR Ratio of just 23: With a Price/ATR Ratio of more than 70, Cisco Systems ($CSCO) is too slow for us and is an example of a low-volatility stock we would not look to trade: With individual stocks, we usually pass on trade setups with a Price/ATR Ratio over 50. The ratio can be a bit higher for ETFs, which are generally slower-moving than stocks, but you should avoid ETFs trading with a Price/ATR Ratio of more than 80-90. The iShares Long-term T-Bond ETF ($TLT) is, for example, an ETF we would typically not look to trade. Although it is high-priced (which is generally good), it has a very low ATR. As such, the ETF trades at a price of 118 times its ATR. With a Price/ATR Ratio of 118, $TLT is simply too slow to trade: Are You Maximizing Your Potential Trading Profits? Unless you have the luxury of a trading account with virtually unlimited funds, it is crucial to scan for stocks that provide you with the most potential “bang for the buck” (highest profit potential when they take off). Although there may be hundreds of stocks with nice-looking chart patterns in a typical bull market, getting in the habit of checking for ample volatility (Price/ATR Ratio) and liquidity is an excellent way to further narrow down your arsenal of potential stock trades to consider.
  2. Whenever I receive a question I think will be beneficial to other traders who may be wondering the same thing, I share the question and my reply with other traders. In this post, a trader is seeking advice on how to size positions within his portfolio, and also clarification on whether or not the share price of a stock is important. His questions are below, followed by my actual reply… Hi, I signed up for a 3 month stint with your company. I think it is worth at least three months to see if it fits my lifestyle. So far I like the approach you have. It is a cautious approach, which is what I need. I think the slow and cautious approach fits me well. I wonder if someone could share some philosophies with me and maybe answer some questions? I have been trading off and on for years so I have a decent understanding of how things work. I am not an expert. I do feel that the more money you have to invest per trade the better return you get on the investment. What I mean is that if you buy 10 shares of a 100 dollar stock, or a $1000 investment and that stock moves to $101 that is a 1% return or $10 which is a profit, but after trading fees that is a loss. However if you can invest $100,000 that same trade give you a $1000 profit. So the size of the portfolio does matter. I simply explain this to setup my questions. I know you guys understand the above. Honestly, my portfolio for this type of investing lingers between 25K and 30K. When I apply all your rules for the size of an investment I would typically be investing somewhere between $500 to $1000 per trade. So for stocks that trade around 10 or 11 dollars per share, I get more shares and a better opportunity to make a few hundred dollars if the swing trade is positive. Things become difficult when you suggest stocks that trade at 80, 90, or 100 dollars per share. Or even worse TSLA is above 200. Which is not a huge deal if you have a larger portfolio. Now with all of this being said, I guess I am simply looking for advice about how I should be approaching things? Or how would you approach things if you were in my position? The more money you have the easier things get, to a degree, and I do understand this. As I try to learn it helps to just hear from experts like yourselves about where my head should be at with respect to my level. Just thinking about it on my own I have wondered if I should make two or three investments that are worth 5K to 10K a piece and approach it like that. There is more risk, but with the stop loss approach I can minimize my risk to a degree. The larger investment give me a greater opportunity to make money, but it also has greater risk. Plus with my limited funds, I can’t always take advantage of a setup you suggest. Hopefully my minor confusion is something you can advise me on. Thanks, D.S. Hi D.S., Great questions. With 25-30k, you may have to stick with fewer positions to make decent gains. Maybe 4 to 5 positions at 5k each. Key here is that you want to take on more core trades when you can, which will enable you to hold stocks longer. You may still be able to take on a few swing trades, especially if you are not fully invested. So, for example, with 5 positions at 6k, you have 20% positions. Say we grab 3 full 20% positions; that will leave you with 2 empty slots. Now, those 2 empty slots can be 2 core positions at 20%…or maybe 4 quick swing trades at 5%. So you can grab 5 full, 10 half, or any sort of mix; it is a very fluid approach. When you have a full portfolio, you do nothing. If we stop out and you have a 20% position open, and the next trade is a swing trade with 33% size, maybe you take a 5-7% position. And you could even take another one until a new core position comes along and you need the money. Regarding cheaper vs more expensive stocks, it really should not make a difference [in your overall return]. Actually, if you stick with expensive stocks, you have cheaper execution cost due to fewer shares. With a $5 stock, you would need 1200 shares on a $6,000 position (resulting in $24 round trip at a broker like Interactive Brokers that charges 1 cent per share). For $TSLA [just over $200 per share], you would only need 25 shares, resulting in a $2 round trip commission fee. Now, if $TSLA were to go up 20%, then your $6,000 would increase to $7,200. Similarly, if the $5 stock rallied 20%, then your $6,000 would also become $7,200. It is the same difference [in profit]. Also, you get the added benefit of holding an “A rated” stock like $TSLA [accumulated by institutions] versus some junk stock that is cheap. Let me know if you have further questions. Regards, Rick It’s a common mistake among newer traders to shy away from expensive stocks, based on the assumption that not as many shares can be bought with a smaller account. But as explained above, this is a mistake because it does not make a difference to your bottom line; a 20% gain on a $100 stock is the same dollar return as a 20% gain on a $10 stock (actually, slightly more due to lower “per share” commission fees). Remember that expensive stocks are expensive for a reason — institutions are buying them (you should too). Also, if your trading account is not yet that large, you now have some ideas on how to be flexible with regard to buying stocks. In this case, focusing on our intermediate-term core trades may be more profitable than trying to enter all the shorter-term swing trades.
  3. Have you ever asked yourself, “What should be the minimum volume requirement for the stocks and ETFs I trade?” If so, you’re definitely not alone. It’s an important question, yet the answer is not black and white (despite what you may have heard from other traders). Read on and I will tell you why… What Is Average Daily Trading Volume? Why Does It Matter? Average Daily Trading Volume (“ADTV”) is a measure of the number of shares traded per day, averaged over a specific period of time (we use 50 days). While this is not a technical indicator that seeks to predict the future direction of an equity, it is nevertheless important because it helps traders to assess the liquidity of a stock or ETF. When a stock is highly liquid, you can easily enter and exit positions without directly influencing the stock’s price. Conversely, you can know which securities to avoid because they are too illiquid to trade. Knowing the ADTV of an equity is also important because it establishes a benchmark from which to spot key volume spikes that are the footprint of institutional accumulation. If, for example, a stock has an ADTV of 500,000 shares, but suddenly trades 2,000,000 shares one day, that means volume spiked to 4 times (400%) its average daily level. If such a volume surge was also accompanied by a substantial price gain for the day, it is a definitive sign that banks, mutual funds, hedge funds, and other institutions were supporting the stock. 4 Key Questions To Determine If A Stock Is Liquid Enough To Trade Although ADTV by itself could be used as a concrete “line in the sand” to determine if a stock is liquid enough to trade, there are too many other factors that play a part in that role. Following are four key questions that, when combined with ADTV, can help you to more accurately determine whether a stock can be traded or should be left alone. 1.) How Many Shares Will I Trade? (Size Matters) If you are only planning to buy 100 shares of a stock, the ADTV of an equity basically becomes a non-issue because it will be easy to liquidate such a small position, even in a very thinly traded stock. However, if you intend to buy 5,000 shares of that same stock, you need to more seriously consider whether or not it will be difficult to eventually exit the position with minimal slippage and volatility. Regardless of what you may have heard, size matters (at least in this scenario). 2.) How High Is The Average Dollar Volume? Average Dollar Volume (not to be confused with Average Daily Trading Volume) is a number that is determined by multiplying the share price of a stock times its average daily trading volume (ADTV). For example, a $25 stock with an ADTV of 800,000 shares has exactly the same dollar volume of a $50 stock with an ADTV of just 400,000 shares. In both cases, the Average Dollar Volume is 20 million ($25 X 800,000 or $50 X 400,000). For institutional investors and traders who rely on making big trades, Average Dollar Volume is a more important number than ADTV. In the example above, an institutional trader would consider both of those stocks to be equal with regard to liquidity. As a general rule of thumb, an Average Dollar Volume of 20 million or greater provides pretty good liquidity for most traders. If you trade a very large account (and accordingly large position size), consider an average dollar volume above 80 million to be extremely liquid. By knowing the Average Dollar Volume of a stock, you can lower your minimum ADTV requirement if the stock is trading at a higher price. 3.) How Long Will I Hold? Are you a daytrader, swing trader, or position trader? The length of time you typically hold stocks has a direct relationship to suitable minimum volume requirements. A daytrader who scalps for tiny 10 or 20 cent gains must limit himself to trading only in thick stocks where millions of shares per day change hands (equities with tight spreads and extremely high liquidity). On the other hand, a position trader who rides the profit in uptrending stocks for many months can trade in much thinner stocks because they can scale out of positions over the course of several days or weeks. Although I originally started as a daytrader (in the late ’90s), I now focus exclusively on swing and position trading stocks in my managed accounts and newsletter. 4.) Am I Trading Individual Stocks Or ETFs? In individual stocks, ADTV and/or Average Dollar Volume plays a big role in determining a stock’s liquidity. But with ETFs (exchange traded funds), average volume levels are largely irrelevant because ETFs are open-end funds. This means new units (shares) can be created or redeemed as necessary; supply and demand therefore has little effect. Even if an ETF has no buyers or sellers for several hours, the bid and ask prices continue to move in correlation with the market value of the ETF, which is derived from the prices of individual underlying stocks. As such, you should be much less concerned with the average volume of an ETF than with an individual stock. In my nightly stock and ETF pick newsletter, I generally use a minimum ADTV requirement of 100k-500k shares for individual stocks (depending on share size of the position), but may go as low as 50k shares for ETFs (in order to achieve greater asset class diversity). While liquidity is not of concern when trading ETFs, you should still be aware that ETFs with a very low ADTV may have wider spreads between the bid and ask prices. To remedy this, you may simply use limit orders in such situations. Since I trade for many points, not pennies, occasionally paying up a few cents does not bother me. For further details on the subject of ETFs and liquidity, check out Why ETF Trading Volume Does Note Determine ETF Liquidity. How To Easily Determine The Liquidity Of A Stock/ETF Although there are free financial websites that provide you with the ADTV and/or Average Dollar Volume of stocks, the fastest and best way to gauge the liquidity of a stock is by plotting the data on a stock chart of a quality trading platform. Below is the daily chart of SolarCity ($SCTY), which I bought in The Wagner Daily newsletter on December 19 (still long as of January 10, with an unrealized price gain of 26%): The chart above is pretty self-explanatory. The top section shows the price action (and a few moving averages), the middle shows daily volume bars and 50-day ADTV, and the bottom bars plot the Average Dollar Volume (in millions). With an ADTV of nearly 5 million shares and an Average Dollar Volume of 315 volume, $SCTY is a highly liquid stock that is “institutional-friendly.” It’s Important, But Don’t Get Hung Up If you want to avoid surprise price reactions when it comes time to close out your trades, pay attention to the ADTV and/or Average Dollar Volume of stocks. Doing so ensures there is sufficient liquidity to prevent your trades from directly affecting the stock prices. Nevertheless, you must realize that determining whether or not a stock has sufficient liquidity is not as clear-cut as merely picking an arbitrary number such as 500,000 minimum shares per day. Further, you should understand that Average Dollar Volume gives a more complete and accurate picture of a stock’s liquidity than ADTV alone. Your individual trading timeframe also plays a role in determining which stocks can be traded. Frankly, I feel many individual retail traders get too hung up about the average daily volume of a stock. Unless you’re a whale with a massive trading account, your individual transactions within a stock will usually have a minimal (if any) effect on the price. Of much greater importance is just focusing on buying leading stocks with strong institutional support (these stocks are typically quite active anyway). If a company has a history of outstanding earnings growth, or a revolutionary product that’s selling like suntan lotion at the beach, it’s even okay to buy thinly traded stocks. But just be sure to reduce your share size to compensate for greater price volatility (I always list our portfolio position size for each new stock/ETF pick.).
  4. Many traders, particularly newbies, are on a continual quest to find the holy grail of trading. “If I could just find that one perfect trading system, the one that works every time, I’d be rich!” “Stock trading is too hard for me, but I know I will definitely make it big time if I start trading FOREX.” “FOREX is not working for me either, but I am certain I’ll make the big bucks once I switch to trading futures.” These and similar statements are signs that a trader is living in a fantasy world. Although Indiana Jones indeed found his holy grail (and a lion’s head), remember it was pure Hollywood fiction (albeit a fantastic work of art). I’ll talk more about the non-existent holy grail of trading later, but let’s get into the actual inspiration for this thought in the first place… A Sudden Flip Flop In Our Stock Market Bias After a few days of tight-ranged trading, stocks broke out to the upside on higher volume Wednesday (November 13), then built on those gains in the following session. The S&P 500, Dow Jones Industrials, and S&P Midcap 400 indices have all once again rallied to fresh all-time highs. The NASDAQ Composite has also broken out once more, and is trading at its highest level since the year 2000 “dot com” bubble. Although last week’s ugly selling action in leadership stocks and the main stock market indexes forced our timing model into "Neutral" mode on the close of November 6, the November 13 price and volume action in the stock market was convincingly bullish. While a few of the best leadership stocks were indeed hit hard last week, we have seen enough bullish price action this week to suggest that the market may still be able to push higher from here. The Trend Is Always Our Friend Because of the reasons above, we have placed our stock market timing model back into "Buy" mode. This does not mean the stock market will go higher from here, as the possibility for false breakouts in the major averages still exists. Nevertheless, with most leadership stocks still holding up well, we do not mind taking a few new shots on the long side. If new stock and ETF swing trade setups in our momentum swing trading newsletter trigger for buy entry and extend higher, then we will look to add more long exposure as new setups develop. If, however, our setups trigger for entry and quickly fall apart, we will simply be stopped out and forced back into cash. MTG Market Timing Model – Simple And Effective The core of our model for timing the stock marke (a key component of our Wagner Daily newsletter) is primarily based on the three elements below: * Accumulation/distribution patterns in the S&P 500 and NASDAQ Composite * The trend of all major averages – Are the S&P, NASDAQ, and Dow making ‘higher highs” and “higher lows” on the daily charts? Are they trading above their 50-day moving averages? * Price and volume action of leading stocks – This component is the heaviest weighting in determining our overall market bias * As you may have surmised, the composition of our market timing system is not fancy, but is quite effective and has a solid track record for accuracy. Still, determining the proper bias for the timing model requires a bit of elbow grease (scanning through tons of charts every night), as well as some discretion. Although many traders are on a quest to find the “holy grail” of trading systems, it simply does not exist. For example, absolutely no system in the world for timing the market works 100% of the time. Once a trader learns to accept that no trading strategy is perfect, and begins to understand that one only needs to slightly skew the mathematical probabilities in one’s favor to be a consistently profitable trader, only then can true progress be made.
  5. After the October 17 breakouts to new highs in the S&P 500 and NASDAQ Composite, I got to thinking about bull markets. I was pondering over how much traders and investors must be loving and profiting from this powerful rally stocks have had in 2013. But then a worrying thought popped into my head. It occurred to me it’s quite possible that not all traders and investors have actually been raking in the trading profits, despite the major indices being at new highs. Why? Because I fear that many traders and investors have been feeling the pain of the biggest mistake traders make in a bull market. I’m speaking from personal experience when I say it’s a very real concern. I’ll tell you why in just a moment, but first take a quick look at the breakouts in both the S&P and Nasdaq. The October 17 rally in the S&P 500 Index ($SPX) put the index at a new closing high for the year, which is a great sign considering where this benchmark index was only six sessions ago: The tech-heavy NASDAQ continues to extend above its prior swing high, and has now gained approximately 6% since our September 6 market commentary that suggested another breakout to new highs in the NASDAQ was coming soon: With stocks on a seemingly unstoppable upward trajectory, it’s easy to get sloppy and make careless mistakes in the stock market without having majorly negative repercussions. Yet, there is indeed one mistake that has some pretty damaging consequences (in the form of opportunity cost), even in a bull market. Have You Ever Made The Greatest Mistake? In a raging bull market such as the present, approximately 80% of stocks and ETFs will be dragged alongside of the main stock market indexes and move higher. Small and mid-cap growth stocks with a strong history of solid earnings growth will typically outperform the percentage gains of the S&P 500 and Nasdaq by a wide margin. These are the same stocks we focus on trading in bull markets. But even if you fail to buy the best stocks in the market, you can basically throw a dart right now and still have a good chance that the stock you buy will move higher (note this only applies in healthy bull markets). Nevertheless, roughly 20% of stocks and ETFs will still fail to move higher in a bull market. Obviously, it is a frustrating experience if you make the unfortunate mistake of buying one of these dogs. Yet, this biggest mistake is surprisingly common among traders, especially newer ones. So, let’s talk about an easy way to avoid this problem. Failing To Overcome Gravity When I was a new trader many years ago, I’m not ashamed to admit that I intentionally focused on buying stocks and ETFs that were NOT rallying alongside of the broad market (showing relative weakness). Why? Because I wrongly assumed they would “catch up” to all the other stocks in the market. Furthermore, I mistakenly thought stocks and ETFs that had already rallied a large percentage would probably not go much higher. Damn, I sure was proven wrong! What was the outcome of buying these stocks and ETFs with relative weakness? I was painfully forced to watch (what seemed like) every other stock in the market rally, while my positions failed miserably to overcome gravity. Adding insult to injury, the leading stocks that I thought “couldn’t possibly move any higher” ended up being the same ones that once again made the biggest gains on their next waves up. The worst part is I also discovered that when a stock is so weak that it fails to set new highs alongside of the broad market, that stock is typically the first to sell off sharply (often to new lows) when the broad market eventually enters into even the slightest pullback from its high. Once in a blue moon, a stock or ETF with relative weakness will suddenly start to show relative strength. However, that typically only occurs with the luck of some major news event. Betting on future news that may or may not cause a stock to rally is akin to betting on red or black in a casino (maybe worse). It’s All Relative, And That’s All You Need To Know As momentum trend traders, we focus on buying stocks and ETFs that are making “higher highs” and “higher lows,” along with chart patterns that indicate relative strength to the benchmark S&P 500 Index. In a moment, I will show you about a great way to quickly and easily identify relative strength, but let’s first discuss what relative strength (don’t confuse this with the RSI indicator) actually means. Relative strength - Any stock or ETF that has broken out over the past few weeks automatically is showing great relative strength to the S&P 500 because it has rallied to new highs ahead of the benchmark index. One such example is Guggenheim Solar Energy ETF ($TAN), which recently netted us a 44% gain. On the individual stock side, we are currently showing an unrealized price gain of more than 55% in Silica ($SLCA) since our July 8 buy entry, so this is another great example (we will remain long until the price action gives us a valid technical reason to sell). Neutral - Stocks or ETFs that are breaking out right now (in sync with S&P 500) are also decent buy candidates and may eventually outperform during the rally. These stocks and ETFs may not be as good as buying equities with relative strength (on a pullback), but can still offer substantial returns. One such example is Direxion Daily Semiconductor Bull 3X ($SOXL), which we are currently long in The Wagner Daily. Relative weakness - While stocks and ETFs that broke out ahead of the S&P 500 are the best stocks to buy, and some equities only breaking out now may be fine, you definitely want to avoid stocks and ETFs that are lagging behind. I’m speaking from personal experience here. Any stock or ETF that is failing to even keep pace with the current breakouts to new highs in the S&P 500 and Nasdaq has relative weakness. However, don’t confuse this with stocks and ETFs that already broke out to new highs within the past few weeks (ahead of the broad market) and are now building another base of consolidation. A Tool To Stop Being A Fool The good news is there’s a simple tool that enables traders to quickly and easily spot patterns of relative strength and weakness. This tool is a great way to know which stocks and ETFs to avoid right now (the 20% mentioned earlier). Surprisingly, the tool is utilized by simply comparing the daily chart patterns of any stock or ETF versus the S&P 500 Index. The chart below, comparing the price action in a Real Estate ETF ($IYR) against the S&P 500 ETF ($SPY), clearly shows how this works: It’s as simple as that. If you thought our tool for spotting relative strength or weakness was going to be complicated, I’m sorry to disappoint you. However, our proven trading strategy has always been about keeping our analysis of stocks simple, and this tool is in line with that philosophy. Putting The Wind On Your Back Notice that we compared an industry sector ETF (real estate) to the S&P 500, rather than an individual stock. We did this because it’s a great way to determine if a particular industry group or sector has relative strength or weakness. This is important to know because you don’t want to buy an individual stock that has a great looking chart pattern, but belongs to an industry sector with relative weakness. If you do, the stock will struggle to move higher, despite its bullish chart pattern. In trading, you always want the wind to be on your back. Making sure the individual stocks you buy are part of an industry sector with relative strength (or at least not with relative weakness) is one of the most effective ways to do so. Now that you know this highly effective and easy way to eliminate stocks and ETFs with relative weakness from your watchlist, you have no excuse for continuing to make one of the biggest mistakes traders make in a bull market.
  6. 4 Winning Tips For Profitable ETF Trading

    On July 2 of this year, we bought Guggenheim Solar Energy ETF ($TAN) in our swing trading newsletter. Three months later, we sold those shares of $TAN for a cool price gain of 44.3%. In this trading strategy article, we detail the top 4 technical tips that prompted us to buy $TAN when we did. Then, we walk you through to the day when we eventually exited the trade to lock in the profits. Here’s a snapshot of how the daily chart of $TAN appeared at the time of our initial trade entry. The 4 reasons we bought this ETF immediately follow: 4 Big Tips For ETF Traders 1.) Sector Relative Strength - As detailed in my first ETF book, one of the first steps of my ETF trading strategy is to identify the industry sector showing the most relative strength to the benchmark S&P 500 Index. In early May, the relative strength of the solar energy sector became very apparent to us, prompting us to add $TAN to our watchlist for potential trade entry. 2.) Uptrend Confirmed - When a stock or ETF breaks out to the upside, we have a basic trend qualifier that we utilize in order to confirm a valid uptrend is in place before tending to buy the stock. Specifically, the 20-day exponential moving average must be above the 50-day moving average, and 50-day MA must be above the 200-day MA. Additionally, all three moving averages must be trending upwards. Although $TAN initially pushed above its 50-day MA back on April 8 (the big green bar accompanied by the volume spike), it wasn’t until mid-May that $TAN met our trend qualifier requirement. 3.) Big Volume Breakout - The best breakouts are always accompanied by increasing volume in which turnover spikes to 2 to 3 times its average daily level. After mid-May, when bullish momentum really started pushing tan higher, notice how volume picked up as well. Such volume spikes are like stepping on the gas pedal for a breakout, and help to confirm the legitimacy of a breakout as well. Unlike other technical indicators that frequently give false readings, volume is the one indicator that never lies. 4.) First pullback to 50-day MA - Because of the relative strength in the solar energy sector, the high volume breakout, and the trend qualifier requirement being fulfilled, we knew we had to buy $TAN. It then became a matter of simply waiting for a proper, low-risk entry point. Rather than chasing the price of the ETF after the initial breakout, we simply waited for a pullback that would give us a low-risk buy entry point. Specifically, we were looking for an “undercut” of the 20-day EMA, or even a pullback to more significant support of the 50-day MA. After zooming to the $28 area, $TAN entered into a 4-week base of consolidation, then dipped to “undercut” key support of its 50-day MA for one day before heading right back up. Whenever a stock or ETF breaks out on big volume and leads the market, the first touch of the 50-day MA usually leads to a resumption of the new uptrend because many institutions (“smart money”) use the 50-day MA as an indicator for when to begin accumulating leading stocks and ETFs on a pullback. After $TAN successfully tested support of its 50-day MA, it would’ve been a valid buy entry the following day, when the price moved above that day’s high. However, we prefered to wait for the confirmation of the break of the 6-week downtrend line that formed off the highs of May. That downtrend line breakout occurred on July 1, and we bought the following day at a price of $24.20. So, What Happened Next? Below is a snapshot of the price action that followed our July 2 buy entry into $TAN: After our initial buy entry on July 2, $TAN acted as anticipated by subsequently cruising to a new high less than two weeks later. Thereafter, $TAN appeared to be forming a bull flag chart pattern, which prompted us to add to the position on July 22 (at $27.91). However, since the bull flag pattern did not follow-through to the upside, we maintained a very tight stop on the additional shares, which we closed for a tiny loss of 1.6% on August 2. After chopping around in a range for a few weeks, and again coming into support of its 50-day moving average several times, $TAN eventually broke out to new highs again. As we frequently remind traders, one important psychological aspect of profitable trading is having the discipline and willingness to quickly close out losing trades when you’re wrong, while still not being afraid to re-enter the trade if it still looks good. As such, we again bought additional shares of $TAN when it broke out on September 6 (bear in mind that we still held the initial position from our July 2 entry because those shares never went against us). After buying the breakout to new highs in early September, $TAN consolidated for a few more weeks, then ripped higher as volume began surging higher again. Rather than attempting to guess when a powerful rally will end, we often close winning trades by trailing protective stops tighter and tighter, until a pullback eventually causes us to lock in the profits. But in the case of $TAN, we instead made the decision to sell into strength of the rally due to prior resistance from back in February 2012 (visible on a weekly chart). Upon selling $TAN on October 1, the final tally was a 44.3% share price gain from our initial July 2 entry, and a 15.4% gain from our September 6 buy entry. Is 44% A Big Gain For An ETF Trade? When trading individual stocks, we typically shoot for an average price gain of 20 to 30% for short to intermediate-term momentum trades. Sometimes, bullish momentum propels stocks with massive relative strength 40 to 50% higher before we eventually sell and take profits. For example, in our Wagner Daily ETF and stock picking portfolio, we are presently sitting on unrealized gains of 49% in Silica ($SLCA) and 35% in Yelp ($YELP). On October 8, we also closed a swing trade in Bitauto ($BITA) for a price gain of 36.7% with just a 1-month holding period. However, because they are comprised of a basket of actual stocks, ETFs are generally much less volatile than the individual small to mid-cap growth stocks we trade in bull markets. As such, we consider a solid gain for an ETF swing trade to be in the neighborhood of 10 to 15%, rather than 20 to 30%. In addition to the various leveraged ETFs, $TAN is one of the few non-leveraged ETFs that trades with the volatility of a typical small to mid-cap stock. That’s why we managed to snag a 44.3% gain by trading $TAN, despite it being an ETF. In between, there was just a tiny 1.6% loss from our bull flag entry attempt on July 22. You can screw up a lot of things in trading, but still be profitable if you consistently get just one thing right: Let the profits ride when you’re right, but get the hell outta’ Dodge when you’re wrong!
  7. After suffering a nasty, two-day decline on October 8 and 9, the stock market ripped higher on October 10, closing the day with massive gains of more than 2% across the board. Feeling a bit of whiplash lately? While the big gains with bullish closing action on October 10 were a positive sign for the market, that powerful and sudden reversal immediately put traders who just stopped out of stock trades into regret mode, one of the Four Most Dangerous Emotions For Traders. Driving A Car While Staring In The Rear-View Mirror Is Hazardous To Your Health Regardless of whether or not you sold your stocks at lower prices and are now feeling regret, let’s get one thing straight… This is not the time to be worrying about what happened in the past because you must be focused on what is happening NOW! Whenever traders mentally struggle over whether or not they made a correct trading decision, such as if they bought or sold at the right time, they will often be wrong…but that’s completely okay! What is not okay is to STAY wrong! If you’re wrong, simply move along. During the whipsaw action of October 8-10, you may have found yourself stopped out of a stock position that subsequently made an abrupt u-turn and once again looks to be in good shape. If this happened to you, the correct thing to do is to calmly and objectively jump back into the trade (even if you need to reduce your share size a bit to make that happen). The current daily chart of Michael Kors ($KORS) is a good example of a stock that can be re-entered, even if the trader was recently forced to sell: When $KORS sliced through key support of its 50-day moving average on October 8, it undoubtedly triggered many sell stops (which was the correct thing to do). However, just two days later, $KORS jumped back above support of 20 and 50-day moving averages, and back into its prior range. As long as $KORS holds the newly reclaimed support levels, it is valid to re-enter the stock (regardless of one’s previous outcome in the trade). Remember that each new trade entry is completely independent of itself. Furthermore, we have learned over the years that trade re-entries (after stopping out because we bought too early) are often the most profitable trades because the “shakeout” absorbs overhead supply that would have otherwise created additional resistance on the way back up. Just one note of caution, though, with regard to re-entering trades: Don’t confuse re-entering a bullish stock with “revenge trading,” which occurs when a trader re-enters a stock that fell apart, but still has not shown a valid technical reason to get back in (ego, be damned). Now What? Yesterday’s strong gap up was certainly a bullish sign, and we could see a solid, broad-based rally develop if the recent lows in the major averages hold up. Unfortunately, yesterday’s volume was lighter in both exchanges, meaning the rally was not led by banks, mutual funds, hedge funds, and other institutions. Nevertheless, with so many stocks changing hands the past few days, it’s quite apparent that buyers were stepping in to accumulate leading stocks off the lows. Just check out the charts of $LNKD, $KORS, and $TSLA to see what we mean. Although we reduced our long exposure on October 8, our remaining stock positions are still in pretty good shape. U.S. Silica Holdings ($SLCA), for example, has shown incredible relative strength over the past few days, as the stock basically ignored the October 8 sell-off. Below is an annotated chart of $SLCA that we recently posted on our new Google+ page: When a stock breaks out with strong price and volume action, it is always a very bullish sign. In fact, price and volume are the two most important and powerful technical indicators at a trader’s disposal. We all have the urge to lock in profits at times, but to make the big money in trading, one’s focus must simply be on consistently doing the right thing. If a trader does so, the large profits will eventually follow. Overall, we feel that $LNKD, $KORS, $YELP, and $TSLA are the top dogs in this market right now, and are “must own” stocks for institutions. As of now, we view the recent shakeout action as a buying opportunity (with stops placed beneath that week’s lows). Either the lows of October 8 and 9 hold up, or the market will end up going much lower over the next few months. As always, remember to trade what you see, not what you think!
  8. Trading with Institutional Money Moves

    Identifying and trading along with institutional money moves works for all asset classes: Stocks, Commodities, Currencies, and Treasuries. In this article, we focus on stocks. Who are institutional investors and what is their core focus? Table 1: Key Institutional Investors Table-1 shows: “Prop Traders” also act as “Liquidity Providers”: On one hand, some institutions trade their own money and on the other hand, they are providing liquidity. Hence, if a core “Prop Trading Company” wants to accumulate or dispose stocks, they have to bypass their key competitors. Even so, they try to hide their actions, the other market forces spot what is going on and trade along with it – and you can do the same. Graphic 1: GOOG – Spot Institutional Money Moves Table 2: Spot Institutional Money Moves The highlighted trade situations on the chart identify that: Price consolidation is going hand in hand with decreasing volumes. Price expansions to the up- or downside is going hand in hand with increasing or collapsing volume. Putting it all together provides you a chart-based strategy to trade right at the highlighted instances: With the direction of the price range breakout. With the Gap. With a Strong Directional Candle. Graphic-2: AAPL Trading Institutional Price Moves Over the years, we developed multiple indicators and studies, which highlight institutional price moves by spelling out potential trade entries and exits. For an example, please check: http://www.neverlosstrading.com/Top_Line.html After we clarified when to initiate a trade, the next question is which stocks to trade? To follow institutional price moves, pick stocks which are widely held by multiple institutions. When you select the S&P 100 and the NASDAQ 100, you already found the core of the trading opportunities. Each of those stocks is held in most mutual funds and by multiple institutional investors. The next challenge is to find trading opportunities. We developed special scanning programs; however, you can find tradable stocks by picking those with a stronger price move than the referring index: For the S&P 100 choose OEX. For the NASDAQ 100 choose QQQ. Stocks to trade are those with an above or below the comparison index price-moves. With the NeverLossTrading mentorships, students will receive daily reports on trading opportunities. If you want to be part of some specific reports, please sign up with our free report link…click here. To be a successful private investor, the skills and experience for being able to make money when the markets go up and down is essential. When a major price move occurs, expect to trade one direction for no more than 10 trading days and after that expect a reversal. If you want to catch a longer trend trade, trail your stop: To the upside: Below the low of the prior candle. To the downside: Above the high of the prior candle. Why is an institutional follower strategy successful? Private investors have the advantage of speed: They can enter and exit entire positions, while Institutions need a longer time to get in and out of a position by sheer size and SEC (Security Exchange Commission) regulations. By the smaller size, you have an easier way to leverage and hedge trading positions. With a short- rather than long-term strategy, money can be made on up- or down-moves. Short-term trading allows for constantly generating and compounding interest, which gives you accelerating returns. With modern technology on hand and competitive commissions, the private investor can access all markets real time, similar to institutions.
  9. Because fear is a more powerful human emotion than greed, stocks nearly always fall much faster and more violently than they rise. As such, there are key technical differences in our trading strategy between the way we analyze and buy stocks, compared to short selling stocks. First, it is crucial to realize that trading in the same direction as the dominant broad market trend is the most important element of our swing trading system because approximately 80% of all stocks move in the same direction as the major indices. This is where our objective, rule-based market timing model really shines, as it prevents us from selling short when the main stock market indexes are still trending higher (or going long when the broad market is in a confirmed downtrend). Although it may seem counter-intuitive to new traders, we do not sell short stocks as they are breaking down below obvious levels of technical price support, as they tend to rebound and rip higher after just one to two days of weakness. Rather, our most ideal short selling candidates are stocks and ETFs that have recently set new “swing lows” (or are testing prior lows), and have subsequently bounced into resistance over a period of three to ten days. Yet, even though we prefer to wait for a bounce before entering a new short position, we also do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce). Instead, we first wait for subsequent confirmation that the stock is about to stall again. This typically comes in the form of either a bearish reversal bar (such as a bearish engulfing or hanging man candlestick pattern) or sharp opening gap down, which signals the short-term bounce is losing steam. Similarly, we always take the same approach on the long side when buying pullbacks of strong stocks; we wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback). The daily chart of O’Reilly Automotive ($ORLY) below is a good example of what frequently happens when attempting to sell short a stock as it breaks down below an obvious level of price support. Again, entering a new short position while a stock is breaking down below the low of a range is not something we are very comfortable doing: A lower risk way of initiating a new short sale, which also provides traders with a more positive reward to risk ratio for short selling, is shown on the following chart of Check Point Software ($CHKP). This is an example of what we look for for when entering a short position (although the declines are not always as dramatic): On October 17, $CHKP gapped down sharply, on huge volume, due to a negative reaction to its quarterly earnings report. This caused the stock to crash through a four-month level of price support at the $44 area (dashed horizontal line). But over the week that followed, notice that $CHKP climbed its way back up to test new resistance of its breakdown level. If $CHKP subsequently manages to probe above the intraday high of October 17, it would see some short covering, as most traders would not have expected the price action to climb back to that level. Further, the 20-day exponential moving average is also just overhead, which lends a little more resistance. It is at that point ($44.50 to $45 area) that we would look for the first bearish reversal candle OR opening gap down to initiate a very low-risk short selling entry with a positive reward-risk ratio. By waiting for a significant bounce into new resistance of the breakdown before selling short, we can “be right or be right out” by keeping a relatively tight protective stop. Finally, drill it in your head that having the patience to wait for the proper entry points is crucial when short selling stocks, as the short side of the market is less forgiving to ill-timed trade entries than the long side.
  10. Stock breakouts are about more than simply buying stocks that are trading at new highs. In order for a breakout to be valid and without a high risk of failure, a stock must first possess a valid base of consolidation on its chart pattern. In this educational article, we clearly show you how to spot two “basing” chart patterns that precede the best breakouts: Deep Correction (Cup and Handle) and Shallow Correction (Flat Base). We suggest studying these chart patterns closely, as it will enable you to develop your eye and eventually read stock charts like a pro. Deep Correction – “Cup And Handle” Type Pattern Following are the technical characteristics of a deep correction, along with an actual visual example. *The pattern must form within an existing uptrend, and stock must be at least 30-40% off the lows. This rule is very important. Do not go looking for cup and handle patterns with stocks trading at or near 52-week lows! The best cup and handle patterns form near 52-week highs. Stocks that are breaking out to new all time highs are ideal because they lack overhead resistance. *The 50-day moving average should be above the 200-day moving average, and the 200-day moving average should have already been trending higher for at least a few months. The base typically forms on a pullback of 20-35% off the highs, and is at least seven weeks in length. *As the base rounds out and the price returns back above the 50-day moving average and holds, be on the lookout for the “handle” to form. The handle usually forms 5-10% below the highs of the left side of the pattern. *The handle itself should drift lower, and is typically 5-10% or so in width. Handles that retrace more than 15% are too volatile and prone to failure. *Handles should be at least 5 days in length and not form below the 50-day moving average. Putting it all together, this chart of LinkedIn ($LNKD) shows a valid cup and handle type pattern, based on the technical criteria above: On the chart above, notice the 200-day moving average (orange line) is in a clear uptrend. The 50-day moving average (teal line) is above the 200-day moving average, and the 20-day exponential moving average has crossed above the 50-day moving average. When the 20-day exponential moving average is above the 50-day moving average, and the price action is above both averages, it is the ideal time for a handle to form. The key to the handle is that price action should drift lower to shake out the “weak hands.” The buy point for this type of swing trade setup is a breakout above the high of the handle. However, over the years, we have learned to establish partial position size at or near the lows of a handle, and add to the position on the breakout above the high of the handle. This enables us to lower our average cost and provides a better reward to risk ratio. Shallow Correction – Flat Base A shallow correction is also known as a flat base, and the pattern should possess the following characteristics: *As with the cup and handle type pattern, a flat base must form within an existing uptrend. Typically, it will form after a breakout from a deeper correction (like a cup and handle base). *The best way to identify a flat base is by using the weekly chart timeframe. The majority of the base should form above the rising 10-week moving average (or 50-day moving average on daily chart). *The 10-week moving average should be trading well above the 40-week moving average *A flat base should be at least 5 weeks in length. *Flat bases usually correct no more than 15% off the highs The following chart of Pharmacyclics ($PCYC) illustrates what a flat base should look like: Although the weekly chart above is a great example of a flat base, the pullback was just a bit over 15% at 17%. A flat base should form around 10-15% off the highs, but 16-18% is okay, especially if the stock is volatile. If the pattern is 25% wide, it is probably not a flat base. Please just use common sense with these rules. Also on the chart of $PCYC, notice the entire base finds support at the rising 10-week moving average, which is a very bullish sign. Further, the 10-week moving average is well above the 40-week moving average, and both indicators are in a clear uptrend. The buy point of a flat base is on a breakout above the highs of the pattern. As with cup and handle patterns, we usually try to establish partial size before the breakout if possible. Keep It Tight! When finding bullish stocks patterns, it is crucial to look for a tightening of the price action on the right hand side of the base. The left hand side is the initial drop off the highs, where the price action cracks and becomes wide and loose. For the first few weeks, the price action is volatile and there can be quite a bit of selling. But after a few weeks of bottoming action, the stock begins to settle down and push higher. When the majority of price action is above the 50-day moving average, and the 20-day exponential moving average is above the 50-day moving average, this is when the stock should begin to tighten up. The following daily chart of Tesaro ($TSRO) clearly shows a tightening of the right hand side of the basing pattern: On the chart above, the initial decline off the highs (around $20) produced volatile price action for several weeks. However, notice the price action never really broke below the 50-day moving average for more than a few days. In early January 2013, the price action tightened up. By later in the same month, an extremely tight range develops above the 20-day exponential moving average. This is a classic snapshot of tightening price action, which is something we always look for. The rules above may be rather precise, but the details are worth studying and memorizing because they have been developed through years and years of experience. Since the most profitable stock picks in our swing trading newsletter nearly always possess the above qualities, the proverbial proof is in the pudding.
  11. Being a consistently profitable swing trader is a juggling act that requires one to constantly be focused on a variety of key elements of success: picking the right stocks, managing risk, determining when to sell, and even mastering the psychology of trading. In this educational trading strategy article, we will dive into the topic of knowing how and when to sell winning ETF and stock swing trades for maximum profit, using the example of an actual swing trade we are currently positioned in. As for when to sell losing trades, there’s frankly not much to say other than always have a predetermined stop before entering every trade and simply honor it. Since April 12, the model trading portfolio of our swing trading newsletter (The Wagner Daily) has been long Market Vectors Semiconductor ETF ($SMH). We initially alerted traders of the technical reasons we were bullish on the semiconductor sector (and $SMH) in this March 28 post on our trading blog. Since then, we have also reminded regular readers of our trading blog several more times about the increasing relative strength in semis. In the “open positions” section of today’s (May 13) Wagner Daily, subscribing members will notice we have trailed our $SMH protective stop higher for the fourth consecutive day. Because the ETF is already nearing our original target area of $40, while remaining on a very steep angled climb, we have been continually squeezing the stop tighter in order to protect gains, while still allowing for maximum profit. On the daily chart of $SMH below, we have labeled the increasingly higher stop prices we have used in each of the past four sessions: As you can see, our stop in each of the past four trading sessions has been raised to just below the low of the prior day’s session. Whenever an ETF or stock is nearing your target area and you wish to maximize profits while still protecting gains, setting a stop just below the previous day’s low (allowing for a tiny bit of “wiggle room”) is a great strategy. This is because basic technical analysis states the prior day’s lows and highs act as very near-term support and resistance (respectively). By using this method for trailing stops, you will be out of a winning position before the start of a significant pullback, while still allowing the gains to build as long as buying momentum remains. This system also provides an objective way for knowing when to close a winning swing trade, rather than guessing and potentially leaving significant profits on the table. Of course, there are many different ways to manage exits on winning momentum trades, and some of those methods are equally as effective as what is explained above. The reality is that any trading system can be a great one if the trader proves to be profitable with it over the long-term (even if the system involves trading by the cycles of the moon). As such, we would never imply that our system is absolutely the best way to manage stops on winning swing trades. But what we truly love about our exit strategy is its utter simplicity; simple trading strategies are the easiest to follow and thereby profit from. Why complicate a technique that has already been proven to work so well?
  12. Many active traders make the mistake of assuming that a winning system for swing trading stocks needs to be complicated. On the contrary, the best trading strategies are typically the most simple because they can be more easily and consistently followed. Our methodology for picking stocks is simple, as 99% of the stocks we buy in our model trading portfolio come from one of the following three setups: 1. Combo Setup – The stock must have a combination of great earnings growth and strong technical price action (some type of bullish chart pattern). Typically, these stocks are growing their earnings at a rate of 30 to 40% (or more) quarter after quarter. Furthermore, these stocks will usually have an IBD relative strength rating of 80 or higher. Since we consider these stocks to be A-rated, they can usually be held for several weeks or more. 2. Price momentum - With this swing trade setup, earnings growth is not important, but the stock must have a top relative strength rating (95 or higher) and belong to an industry sector group that is outperforming the S&P 500. These stocks can be held for a few days to a few weeks. Our recent trade in Celldex Therapuetics ($CLDX), a biotechnology stock with a relative strength rating greater than 95, is a good example of a swing trade setup based purely on momentum (bullish price action). Last month, we netted a 15% gain on our swing trade in $CLDX and will soon be posting an educational video review of that trade on our blog. 3. Blast Off - Neither earnings growth nor a top relative strength rating is necessary with this type of swing trading setup. We are simply looking for a monster spike in volume on the daily chart, combined with a 4% or more gain in that same session. This indicates huge demand. If demand is sharply greater than supply, the price has no choice but to surge higher (which is why volume is such a great technical indicator). With this setup, the one-day volume spike should be at least 2.5 to 3 times greater than the 50-day moving average of volume. These stocks can be held for a few days to a few weeks (as long as the price action remains excellent). A current example of the “Combo” setup (#1 above) can be found in Michael Kors Holding Limited ($KORS). So, let’s take a closer look at how this trade meets our parameters. For starters, the expected earnings growth of $KORS in the coming quarter is 81%, so the requirement for strong earnings growth is definitely covered. Its IBD relative strength rating is only 71, but that is compensated for by the monstrous earnings growth the company has been experiencing. Next, let’s take a look at the technical chart pattern. After several months of choppy price action, $KORS is starting to come together nicely. Upon completing a 20% pullback off its February 2013 high, $KORS found support at its 200-day moving average, then rallied to reclaim its 50-day moving average last week. Now, $KORS is working on forming a bullish chart pattern known as a “cup and handle,” which looks like this: As shown on the chart below, $KORS formed the left side of the cup and handle pattern from March to late April, and is now working on the right side of the pattern. The right side of the pattern will need several weeks to develop and form a handle with a proper buy point. During this time, the stock needs to hold above its 50-day moving average as well. This annotated chart of $KORS shows what we are looking for: YRC Worldwide, Inc. ($YRCW) is a great example of a “Blast Off” setup (#3 above). Notice the huge volume and sharp gap above resistance that occurred last Friday (May 3): As of the first 30 minutes of trading in today’s session (May 6), $YRCW is trading more than 20% higher than the previous day’s close. Obviously, such a huge follow-up price gap is not common; nevertheless, it shows you just how powerful the “Blast Off” setup can be: If not already holding this stock, the setup is definitely NOT buyable for swing trading right now (we never chase stocks). However, if/when it forms a proper base of consolidation from here, we can begin to look for a low-risk buy point (at which time we would notify Wagner Daily subscribers of our exact entry, stop, and target prices). As previously mentioned, we will soon be posting on our stock trading blog an educational review of last month’s winning swing trade in $CLDX, which will be an example of our “Price Momentum” setup.
  13. Stocks continued to sell off on Thursday, with tech stocks getting hit the hardest. The Nasdaq Composite sold off 1.2%, while most averages closed lower by 0.6% to 0.7%. The Nasdaq sliced through key intermediate-term support of its 50-day moving average, joining the Russell 2000 and S&P Midcap 400. The S&P 500 closed just below (but not a decisive break of) its 50-day moving average yesterday, after undercutting its prior “swing lows” at the 1538-1539 support level: The 50-day moving average is a very important support level during a rally, as it is basically the line in the sand for the bulls. When the major averages all break below the 50-day MA within a few days of each other, it is usually a good time to raise cash and sit on the sidelines. The evidence below suggests that the market is now in a corrective phase, which forces our rule-based timing model into “sell” mode: There are at least 5-6 distribution days in the market (strike 1). Most of the main stock market indexes are trading below the 50-day MA (strike 2). We do not count the Dow. Leading individual stocks are beginning to break down below key support levels (strike 3). How long will a stock market correction last? No one knows, but there is one main clue to watch out for. Can leading stocks that have recently broken down find support and stabilize? There is a big difference between leading stocks pulling back 15-20% off a swing high versus completely breaking down and selling off 40% or more from their highs. If most stocks hold above or around their 50-day MAs and fall no more than 20-25% or so off their swing highs, then we would expect any correction in the S&P 500 to be limited to around 4-6%. US Natural Gas Fund ($UNG), a current holding in the model portfolio of The Wagner Daily, is in pretty good shape after yesterday’s (April 18) strong advance. The weekly chart below shows $UNG zooming above the breakout pivot, which is always a bullish sign: As annotated on the chart above, $UNG is holding support of a steep uptrend line (black dotted line), while the 10-week MA (teal line) is beginning to pull away from the 40-week MA (orange line) after the bullish crossover a few weeks ago. One great thing about $UNG is that it has a low correlation to the direction of the overall stock market because it is a commodity ETF. As you may recall, our actual swing trade buy entry into $UNG was based on the “cup and handle” chart pattern we originally pointed out in this April 2 post on our trading blog. Presently, $UNG is showing an unrealized gain of 6% since our April 8 buy entry, and is well positioned to continue higher in the near-term. In addition to $UNG, we also continue to hold Market Vectors Semiconductor ETF ($SMH). Presently, this ETF is holding above its prior swing low, but is struggling to reclaim its 50-day MA. Nevertheless, based on our March 28 technical analysis of the semiconductor sector, we are still bullish on the intermediate-term bias of $SMH. Alongside of $UNG and $SMH, our model portfolio is still long two individual stocks (bought when our timing model was in “buy” mode): Celldex Therapeutics ($CLDX) and LinkedIn ($LNKD). Despite yesterday’s decline in the broad market, $CLDX broke out to a fresh all-time high and is currently showing an unrealized gain of 8.9% since our April 9 buy entry. The daily chart of $CLDX below shows our recent breakout entry point: Our other individual stock holding, $LNKD, is roughly break-even since our swing trade entry point. However, we do not mind holding this A-rated stock through a corrective phase in the broad market, just as long as our stop is not triggered. If the price action can remain above the 10-week MA, then we may be able to hold through earnings in early May and potentially catch the next big wave up. As detailed in this article that explains our strategy for trading around earnings reports, we previously netted a handsome gain of 22% trading $LNKD before and after its January 2013 earnings report.
  14. For the second day in a row, the American broad market sold off across the board on higher volume. Although the percent losses were not as bad as Wednesday, the S&P 500 followed through to the downside for the first time in 2013. With turnover increasing on the both the Nasdaq and NYSE, the S&P 500 and Nasdaq have posted back to back distribution days. Whenever distribution begins to cluster, we take notice. Although we never care whether or not stocks are “overbought,” the increasing presence of institutional selling is indeed one of the most important factors we use when assessing the health of a rally. Given the sudden reversal in market sentiment over the past two days, this is the perfect time to share with momentum swing traders our top 2 tips for managing your trading account in a stock market that may be forming a top: Be sure you know and are on aggressive mental defense against these 4 most dangerous psychological emotions for stock traders (greed, fear, hope, and regret). In particular, given the sharp losses of the past two days, traders absolutely must be on alert for the natural human emotion of paralyzing fear that may prevent you from simply cutting your losses on any losing trades that have already hit your stop prices. To ignore your predetermined stop losses is always tantamount to playing Russian roulette with your trading account. But this is even more so the case right now, as the recent rally is beginning to show valid technical signals of a potential top. In case you missed most or all of the rally of the past two months, perhaps because you didn’t believe in it for whatever reason, you are now probably feeling the pain of regret. If this is the case, you must be very careful to avoid being a “late to the party Charlie” (LTPC) right now (explanation of that term here). While the stock market’s current pullback may indeed turn out to be a low-risk buying opportunity, it is dangerous and way too early to make that determination right now. Continue reading to learn why… As far as the charts of the major averages go, the S&P 500, small-cap Russell 2000, and S&P Midcap 400 appear to be in decent shape. The same can not be said of the Nasdaq Composite, which has taken a beating the past two sessions, and is already closing in on intermediate-term support of its 50-day moving average. The Nasdaq 100 Index, which basically did not budge during the entire rally in the rest of the broad market, is already trading below key support of its 50-day MA. Looking at the daily chart of the S&P 500 below, it appears the price may be headed for an “undercut” of the prior swing low, around the 1,494 area: If and when the S&P attempts to bounce from its current level, the subsequent price and volume action that immediately follows any recovery attempt will be extremely important at determining whether stocks are merely take a breather, or if the rally is dead. Next week’s price action in the S&P is important because there is a cluster of technical price resistance around the 1,515 to 1,520 area (annotated by the black rectangle on the chart above). Four sessions of stalling action last week created overhead supply around 1,520, while the 1,515 level represents resistance of a 50% Fibonacci retracement (based on the range from the February 20 high down to the February 21 low). If the S&P 500 generates another distribution day that follows just a feeble, light volume bounce off the current lows, that could be the nail in the coffin for the current rally. Still, unless leadership stocks suddenly begin breaking down en masse, a pullback to the 50-day moving average of the S&P 500 would be considered normal within the context of the strong rally of the past two months. As we closely monitor price and volume action of the broad market over the next week, we will gain a much better idea as to the likely direction of the stock market’s next major move, which will automatically cause our rule-based stock market timing system (details here) to be adjusted accordingly. But in the meantime, be sure to read the two articles mentioned above so that you will be on guard against the most dangerous emotions that could seriously harm your trading account right now, while also avoiding becoming a member of the “late to the party Charlie” club.
  15. In the January 30 article we published here on this thread (see above), we touched on a key psychological element of how to make consistent trading profits. Specifically, the article addressed the importance of trend trading in the same direction as the overall market trend, and continuing trading on that side of the trend as long as the trend continues. Then, in our trading blog one day later, we stressed why the most profitable swing traders are those who learn to merely react to the market's price action that is presented to them at any give time, rather than those who attempt to predict the direction of the next move. The substantial broad market rally that came last Friday, which closed out the week on a high note, perfectly confirmed the trader psychology lessons of our previous two posts. When stocks sold off on higher volume ("distribution") last Thursday, January 31, the weak price action was sure to attract some short sellers who keep trying to catch a top, despite the fact the uptrend remains intact. Traders who went ahead and sold short that day quickly got caught with their hands in the cookie jar the following day, as the main stock market indexes gapped about 1% higher on the open and held up throughout the entire day. If you are new to our short to intermediate-term momentum trading system, please be assured we have no problems selling short when our proprietary market timing system indicates the dominant trend has reversed. There were several months just last year when we profited on the short side. However, we simply do not sell short against the prevailing trend when there is a clear and objective "buy" signal in place. Top 2 Reasons We Don't Fight The Trend We'll be really honest with you here. Trying to call a top by entering new short positions when the market is still in a firm technical uptrend is something we have tried to do in the past. Upon doing so, we learned that it hardly ever works. Even in the times when we eventually got it right, it was always after several initial failed attempts, which usually led to a net wash (breakeven result) at best. Perhaps more important than the actual losses sustained from those failed countertrend short selling attempts was the psychological damage done, as it was (and always is) emotionally draining to fight a clearly established trend. It's a bit like trying to swim directly back to shore while stuck in a rip current, rather than swim parallel to the beach until the rip dissipates. Overall, you must realize there is nothing more important to your long-term trading success than protecting capital and preserving confidence. Weakness or lack of discipline in either of these two areas will eventually prevent you from living to trade another day. All these powerful tidbits of knowledge, and many other psychological trading lessons we've learned over the past 11 years, are regularly shared with subscribers of The Wagner Daily end-of-day trading newsletter, and we we proudly display the cumulative trading performance results of our long-term efforts to prove it (Q4 of 2012 will be updated this week). Moving on from the area of trading psychology lessons, let's look at the current technical situation of the benchmark SPDR S&P 500 Index ETF ($SPY), as we ask ourselves, "Can a market continue to rally while in overbought territory?" Since pictures are always more powerful than words, just take a look at the following daily chart of $SPY from the year 2007. Specifically, notice how the ETF held very short-term support of its 10-day moving average for several months before eventually entering into a correction. Note the tight price range throughout the rally, which kept finding support at the rising 10-day moving average on the way up, after pulling back slightly for just 2 to 3 days. There are hundreds of other charts over the years in which we could show the same thing. Therefore, the answer is clearly "yes"...an overbought market can continue to run even higher without a deep pullback. Nevertheless, we are not implying the current market rally will match the chart above, in terms of the percentage gain or length of time, as every market rally is unique. Still, this chart simply serves as a guide and reminder for what could and frequently happens in "overbought" (we use the term quite loosely) markets. Although Friday's action was bullish, and we now have solid unrealized gains in the open ETF and stock swing trade positions in our model portfolio, we continue to trail tight stops in order to reduce risk and lock in gains whenever possible. As regular subscribers should note on the "Open Positions" section of today's report, many protective stops have now placed below their respective 20-day exponential moving average, which should provide near-term support during any pullback in the market.
  16. When a stock market is in runaway uptrend mode and refuses to pull back substantially, most investors and traders think, “I am not buying stocks at this level; I’ll just wait for a pullback.” Eventually that pullback will come, but often only after a multi-month advance has passed. This is why, in strongly uptrending markets, we find it much easier and more profitable to focus on the price action and technical patterns of individual leadership stocks and ETFs, rather than paying much attention to whether or not the charts of the S&P, Nasdaq, and Dow are “overbought” (we hate that useless term). As long as there remains institutional rotation among leading stocks, with new breakouts continually emerging, the broad market will continue to push higher (although the major averages must also avoid significant distribution). That’s why “overbought” markets often become even more “overbought” than traders would expect before eventually entering into a substantial correction. We are trend traders, so we simply follow the dominant trend as long as it remains intact. When the trend eventually reverses, our rule-based stock market timing system will prompt us to exit long positions and/or start selling short…and that’s just fine by us. We are equally content trading on either side of the market because being objective and as emotionless as possible is a key element of successful swing trading. The majority of ETF positions presently in the Model ETF Portfolio of our end-of-day trading newsletter are international ETFs because they continue to show the most relative strength (compared to other ETFs in the domestic market). One of our open positions, Global X FTSE Colombia 20 ($GXG), has not yet moved much from our original buy entry point, but we like the current price action: Since undergoing a false breakout on January 15, $GXG has pulled back to and held support of the 20-day exponential moving average (beige line on the chart above). In the process, it also formed a higher “swing low,” which is bullish. Notice that the price has also tightened up nicely since mid-December of 2012. All of this means $GXG could finally be ready to break out above the $22.60 area. If it does, we plan to add to our existing position in The Wagner Daily swing trade newsletter. Regular subscribers should note our exact buy trigger and adjusted stop price for the additional shares of $GXG in the ETF Watchlist section of today’s report. While on the theme of international ETFs, let’s take an updated look at the technical chart pattern of the diversified iShares MSCI Emerging Markets Index ($EEM), which we initially mentioned last week as a potential buy setup if it made a higher “swing low” and held support of its 20-day exponential moving average: Although the price of $EEM did not hold above the 20-day EMA, a quick dip (“undercut”) below that moving average, followed by a quick recovery back above it, would keep this bullish setup intact. Therefore, if $EEM can rally above the short-term downtrend line annotated on the chart above, and subsequently put in a “higher low,” we might be able to grab a low-risk buy entry point as early as next week. As always, we will keep subscribers updated if any action is taken on $EEM, or any other ETF with a buyable chart pattern that crosses our radar screen while doing our extensive nightly stock scanning.
  17. On the close of December 13, our stock market timing system shifted from “buy” to “neutral” mode. This means we now have no firm bias with regard to near to intermediate-term market trend for swing trading. The lack of substantial bullish follow-through in leading individual stocks in recent weeks, the absence of leadership in most ETFs (other than international ETFs), and the bearish pattern on the weekly chart of the S&P 500 Index (below) are all valid reasons to avoid the long side of the market now. Nevertheless, recent price action in the stock market has not yet convincingly confirmed the balance of power has shifted back to the bears, so we are a bit cautious about aggressively jumping in the short side of the market just yet. Below is a longer-term weekly chart pattern of S&P 500 SPDR ($SPY), a popular ETF proxy for trading the benchmark S&P 500 Index. Notice that $SPY will likely print a bearish “shooting star” candlestick pattern for the week. This is a topping pattern that often indicates near-term bullish momentum is running out. Since a weekly chart is a longer-term interval than a daily chart, the formation of this shooting star pattern on the weekly chart is more important than if the the same pattern occurred on a daily chart: Notice that the formation of the shooting star candlestick also occurred as $SPY “overcut” resistance of its downtrend line from the September high. This overcut of the downtrend line is significant because it sucks in new buyers, just as institutions are starting to sell into strength. This creates additional overhead supply that subsequently increases the odds of a resumption of the dominant downtrend. This would be confirmed if $SPY breaks below the horizontal price support shown above, which is merely a move below the low of its current weekly candlestick. Although the weekly pattern of $SPY looks a bit ominous, at least in still trading above technical support of its 20, 50, and 200-day moving averages on the shorter-term daily chart. That’s more than one can say about the Nasdaq 100 Index, which sliced back below its 50 and 200 day moving averages yesterday. As you can see on the daily chart of $QQQ (an ETF proxy that tracks the Nasdaq 100), a break below yesterday’s low would coincide to the Nasdaq sliding back below its 20-day exponential moving average as well: We concluded yesterday’s technical commentary by saying, “Given the lack of explosive price action in leadership stocks and the late day selling in the averages the past two days, the market could be vulnerable to a sell off in the short term…We are not calling the current rally dead, but we do not mind stepping aside for a few days and monitoring the price action.” To coincide with this statement, we made a judgment call to take profits on all long positions in our model trading portfolio by selling at market on yesterday’s open. Given that the broad market subsequently trended lower throughout the entire session, this worked out pretty well. Now, we are back to “flat and happy,” sitting on the sidelines 100% in cash. One big challenge for swing traders right now is that volume levels in the broad market will likely begin heavily receding next week, as we approach the Christmas holiday. As we have warned several times in recent weeks, swing trading in low-volume environments is challenging because day-to-day price action tends to be more erratic and indecisive. Therefore, we’re not in a hurry to enter multiple new positions (either long or short) ahead of the holidays, but will still consider new stock and/or ETF trade entries (possibly on the short side and/or inverse ETFs) with reduced share size if an ideal trade setup with a firmly positive reward-risk ratio presents itself.
  18. Once you’ve placed some trades with your strategy you can begin to analyze the data. A paper trade account is a great way to tweak and fine tune, but switching to a live trading account WILL change your results (this could be good or bad). The more data the better, as a rule of thumb place at least 100 trades with your specific setup before analyzing the data. Use these calculations to help analyze your data: Winning and Losing %: Winning % = # of Winners / Total # of Trades Losing % = 100 - Winning % Average $ of Your Winners and Losers: Avg. Winner $ Amount = Sum of Profitable Trades / Total # of Winning Trades Avg. Loser $ Amount = Sum of Losing Trades / Total # of Losing Trades Average Hold Time of Your Winners and Losers: How long do you stay in a winner versus a loser, are there noticeable differences? Find that sweet spot. Reward / Risk Ratio: How much do you winners beat your losers = Avg. W / Avg. L Profit / Loss Expectancy: This is the calculation that often gets overlooked, but is inevitably the most important. Expectancy forecasts your futures profits. It tells you the average $ amount you can expect to win (or loose) per trade. Expectancy = [(W % x Avg. W) – (L % x Avg. L)] – round turn commission Record Keeping Tips: Keep track of your profit loss, commission, daily winners and losers, weekly profits, and individual trade setups. This will help you spot trends in your trading and fine tune even more. In my post Ideas for Building Your Personal Trading Journal I outline some more ways to make this process easier. Tools to Help Fine Tune Your Trading Strategy Trading Journal Spreadsheets – The best trading spreadsheets around. StockTickr – A web based platform with a breadth of in-depth analysis tools and charts. FinViz – My favorite stock screening tool. Jing – Makes capturing screenshots a breeze. Both Trading Journal Spreadsheets and StockTickr are great tools to help with the analytical side of your trading and in essence do all these calculation for you. To become successful you must focus on trading effectively and not on the profit/loss. Do your research, and then act. Here is Part 1 of this article Developing a Profitable Trading Strategy Step by Step.
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