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morpheustrading
10-08-2012, 07:31 AM
Hello everyone. I am Deron Wagner, a professional ETF and stock trader, the Founder of Morpheus Trading Group, and an author of several trading books. I was recently invited by several members who have been following my work for years to start contributing here on MrMarketIsHuge.com. As such, this is the start of my new thread.

As you will eventually see, my style of educating traders is low-key and without the hype. I will occasionally post links back to my trading blog, for the benefit of further clarifying certain points or explaining strategies, but I definitely will not spam or over promote my services.

Just to get it out of the way, here are a few links to check out to help you quickly get up to speed with details regarding my trading system with a proven 10-year track record of trading profits (http://www.morpheustrading.com/trading-strategy-performance-results):


- Overview of our stock trading strategy (http://www.morpheustrading.com/best-swing-trading-strategy)
- Overview of our market timing system (http://www.morpheustrading.com/blog/market-timing/)
- Homepage of our trading blog (http://www.morpheustrading.com/blog)
- Access to our free technical ETF and stock screener (http://www.morpheustrading.com/services/stock-screener)

I sincerely hope you find value and are able to profit from my future educational technical analysis, trade picks, videos, etc.

I always welcome feedback and questions, even if it's just to tell me that I am wrong.

Cheers,

Deron

morpheustrading
10-08-2012, 06:51 PM
After several months of being in “confirmed buy” mode, our market timing model just shifted to “neutral” at the close of trading on October 5 (last Friday). Along with several proprietary signals that comprise our market timing system, there are 5 objective, technical situations occurring right now that indicate the overall stock market may soon be headed for a substantial move lower. As a reader of our trading blog, we wanted to promptly alert you to these key developments that could impact your investing and trading accounts if you are complacent. Below is a summary of the 5 reasons we believe stocks will soon be headed lower, followed by more detailed analysis on each of the five points:

1.) Four “distribution days” on the Nasdaq
2.) Lack of increasing volume as the market has been rising
3.) Key short-term resistance levels being tested on the S&P and Dow ($SPY and $DIA)
4.) Head and Shoulders pattern on the Nasdaq 100 ($QQQ)
5.) Relative weakness in the small and mid-cap indexes ($IWM and $MDY)

Volume is one of the most reliable technical indicators at our disposal, and it is a leading (not lagging) indicator as well. That’s why we discuss the stock market’s price to volume ratio in our daily ETF market analysis. Last Friday (October 5), total volume in the Nasdaq ticked 3% higher than the previous day’s level, while the Nasdaq registered a 0.4% loss. The higher volume decline in the Nasdaq caused the index to register another bearish “distribution day,” indicative of selling amongst banks, mutual funds, hedge funds, and other institutions. This means the Nasdaq has now suffered four “distribution days” in recent weeks. As we mentioned last week, the presence of four or more days of higher volume selling (“distribution days”) in an index is frequently an early warning signal that the near to intermediate-term uptrend in a market is in danger of ending. Furthermore, it’s concerning that the broad market’s recovery off the September 26 “swing lows” has generally lacked increasing volume on the way up. Given recent volume patterns, there are now much greater odds of at least substantial price correction in the broad market on the horizon, particularly in the Nasdaq.

The first two of the five reasons we feel stocks are soon headed lower are discussed in the paragraph above. Next, let’s look at charts of the major indices that illustrate and explain the remaining three reasons. Specifically, we will briefly analyze chart patterns of the following ETFs that are popular ETF proxies for their respective underlying broad-based indexes: S&P 500 Index ($SPY), Dow Jones Industrial Average ($DIA), Nasdaq 100 Index ($QQQ), small-cap Russell 2000 Index ($IWM), and S&P Midcap 400 Index ($MDY).

Because it is a narrow index comprised of only 30 stocks, the direction of the Dow Jones Industrial Average is not really a good indicator of overall stock market health. Nevertheless, because the popular financial news media outlets always seem to focus on how many points the Dow is up or down each day, the technical importance of the index becomes self-fulfilling, due primarily to retail investors basing their market decisions largely on the performance of the Dow. That being said, let’s look at the daily chart of $DIA, the most well-known ETF that tracks the index:

http://www.morpheustrading.com/charts/2012/121008$DIAchartatresistance.png

The benchmark, broad-based S&P 500 Index has a similar chart pattern to the Dow, in that it is also testing resistance of its prior “swing highs,” although it has been showing slightly less relative strength during the most recent climb off the September lows. Below is the daily chart of the S&P 500 SPDR ($SPY), the main ETF proxy for the performance of the S&P 500 Index:

http://www.morpheustrading.com/charts/2012/121008$SPYchartatresistance.png

Although both DIA and SPY are testing resistance of their prior “swing highs” from September, such action alone would not be concerning because the indexes could simply form a multi-week base of consolidation near current price levels, then eventually continue to new highs again. However, of legitimate concern is the relative weakness in QQQ, IWM, and MDY. For example, QQQ is presently forming the right shoulder of a bearish head and shoulders pattern, which is most easily annotated with an intraday chart interval of 120 minutes (each bar is two hours of price action):

http://www.morpheustrading.com/charts/2012/121008$QQQheadandshoulders.png

A head and shoulders pattern that forms after an extended rally follows through to the downside a relatively high percentage of the time. However, with this pattern, we typically would not initiate a short position or use it exclusively as a signal to exit a position until it follows through to break the neckline after forming the right shoulder. This is because failed head and shoulders that rally above the “head” after forming the “right shoulder” often lead to explosive upside moves. Therefore, although QQQ is looking pretty bad in the near-term, due to the formation of the right shoulder, we would need to see a breakdown below the “neckline” before selling short QQQ or buying the corresponding inversely correlated ETFs ($PSQ or $QID).

Although our system for trading ETFs affords more flexibility than our stock trading strategy in flat to downtrending markets (with typically lower gains as well), our strategy for swing trading individual stocks is focused primarily on profiting from momentum in leading small and mid-cap stocks. As such, what may be even more concerning than the head and shoulders pattern on QQQ is the relative weakness both the small and mid-cap indexes have been exhibiting since rallying off their late September lows. Using the Fibonacci indicator on the daily chart patterns, notice that both IWM and MDY have only recovered about 50% of their respective declines from the mid-September highs to late September lows:

http://www.morpheustrading.com/charts/2012/121008$IWMrelativeweakness.png

http://www.morpheustrading.com/charts/2012/121008$IWMrelativeweakness.png

Unlike DIA and SPY, both of which have already rallied back to test resistance of their mid-September highs, notice that IWM and MDY have only managed to recover about 50% of their respective price retracements off their prior highs. Further, the two charts below show that the Relative Strength line (RS line) in both IWM and MDY is breaking down ahead of the price. This is another indication of relative weakness in small and mid-caps:

http://www.morpheustrading.com/~rick//charts/2012/121008IWMRS.png

http://www.morpheustrading.com/~rick//charts/2012/121008MDYRS.png

The four charts of IWM and MDY above indicate that institutions have been avoiding rotation into more volatile and aggressive small and mid-cap stocks in recent weeks, thereby pointing to a decreased appetite for risk. This recent decline of bullish momentum in small and mid-cap stocks is why we said in our October 3 newsletter were shifting to a more proactive stance with regard to tight stops on existing stock positions, as well as reducing share size on new trade entries.

The increasing occurrence of “distribution days” on the Nasdaq, the lack of increasing volume on the way up (“accumulation days”), resistance in the S&P and Dow, the head and shoulders pattern on QQQ, and relative weakness in small and mid-caps are 5 good reasons why the overall stock market may soon be setting up for a substantial downward price correction. Nevertheless, we are not in the business of predicting what the market will do; rather, we continually remain prepared for the most likely scenarios to occur, and then make the necessary reactions to what the market gives us. Put quite simply, it’s imperative to remember that our successful trading system relies on trading what we see, NOT what we think. We already have tightened our protective stops in the event of an anticipated correction, and are even prepared with a possible short position (or inverse ETF position) in QQQ should it break down below support of its neckline on the chart above.

skiracer
10-08-2012, 08:19 PM
Excellent information Deron. Thanks for becoming a member and for sharing your insights. Great stuff!

morpheustrading
10-09-2012, 07:02 AM
Hi SkiRacer,

Thanks for the warm welcome. I look forward to becoming an active participant on the board here and helping people learn a swing trading strategy that consistently works over the long-term.

Cheers,

Deron


Excellent information Deron. Thanks for becoming a member and for sharing your insights. Great stuff!

morpheustrading
10-09-2012, 07:46 AM
Last week, on October 2, we locked in an 11% gain on a swing trade in US Natural Gas Fund ($UNG), a commodity ETF designed to roughly track the price of natural gas futures contracts. As you may recall, we sold the ETF into strength as it came within pennies of our original upside price target. In the following day’s ETF commentary in our newsletter, we said we would be looking for a potential, low-risk re-entry buy point into UNG. Specifically, we said, “Even though we have closed this trade, UNG could still move much higher in the intermediate-term. The rally over the past week was a breakout above a valid base of consolidation, which could set into motion a new intermediate-term uptrend for this ETF. As such, UNG is now on our radar screen for potential re-entry after it either pulls back or forms a bull flag chart pattern. There is a good chance we will be able to re-enter the trade at a slightly lower price, or possibly near the current price, but with a more positive reward to risk ratio after UNG undergoes at least a near-term correction.”

Since then, UNG has indeed formed a bull flag on its daily chart. As such, we are now listing it in the ETF watchlist section of today’s (October 9) swing trading newsletter as a potential swing trade re-entry. Since it is a commodity ETF, it’s a bonus that this ETF has a low correlation to the direction of the main stock market indexes, which may be headed lower in the near-term. Below, we have annotated the bull flag chart pattern that we were anticipating to subsequently develop after exiting the trade on October 2:

http://www.morpheustrading.com/charts/2012/121009$UNGbullflag.png

wooish
10-09-2012, 11:11 AM
Welcome to the site Deron and thanks for your valueable contribution.

Deaddog
10-09-2012, 11:12 AM
Hi SkiRacer,

Thanks for the warm welcome. I look forward to becoming an active participant on the board here and helping people learn a swing trading strategy that consistently works over the long-term.

Cheers,

Deron
Greetings Deron:

Looking forward to your posts

Please feel free to critique my picks over on the lazy dog thread. Even if you use them as bad examples.:)

morpheustrading
10-09-2012, 02:16 PM
Hey guys,

Thanks again for the nice welcome. Looking forward to being part of the group here, which seems like a friendly gang.

By the way, the $UNG trade setup (from my premarket post) is following through nicely on the bull flag pattern so far today. We are long from $22.10 in our newsletter, with short-term trading target of new "swing high."

jiesen
10-09-2012, 08:10 PM
Hello everyone. I am Deron Wagner, a professional ETF and stock trader, the Founder of Morpheus Trading Group, and an author of several trading books. I was recently invited by several members who have been following my work for years to start contributing here on MrMarketIsHuge.com. As such, this is the start of my new thread.

As you will eventually see, my style of educating traders is low-key and without the hype. I will occasionally post links back to my trading blog, for the benefit of further clarifying certain points or explaining strategies, but I definitely will not spam or over promote my services.

Just to get it out of the way, here are a few links to check out to help you quickly get up to speed with details regarding my trading system with a proven 10-year track record of trading profits (http://www.morpheustrading.com/trading-strategy-performance-results):


- Overview of our stock trading strategy (http://www.morpheustrading.com/best-swing-trading-strategy)
- Overview of our market timing system (http://www.morpheustrading.com/blog/market-timing/)
- Homepage of our trading blog (http://www.morpheustrading.com/blog)
- Access to our free technical ETF and stock screener (http://www.morpheustrading.com/services/stock-screener)

I sincerely hope you find value and are able to profit from my future educational technical analysis, trade picks, videos, etc.

I always welcome feedback and questions, even if it's just to tell me that I am wrong.

Cheers,

Deron

Welcome to the forum, Deron! We all look forward to your contributions!!!

morpheustrading
10-10-2012, 07:59 AM
If you’re a swing trader who has been exclusively trading only ETFs or only trading individual stocks, you have been missing out on a stellar opportunity to increase your trading profits AND decrease your risk. In this post, we explain the massive benefits of trading a combination of both ETFs and individual stocks.

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

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

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

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

http://www.morpheustrading.com/charts/2012/121010$IBBpullback.png

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

Websman
10-12-2012, 10:47 AM
Awesome thread!

morpheustrading
10-14-2012, 11:51 PM
Thanks for the kind words, Websman.

Will work hard to keep the quality content coming.

Deron


Awesome thread!

morpheustrading
10-14-2012, 11:51 PM
Recently, we bought Bio-Reference Labs ($BRLI) as a stock swing trade in our newsletter. The trade followed-through as anticipated, enabling us to lock in a solid 11% gain on a 6-day holding period. Following is an educational, technical recap of the original trade setup and subsequent price action.

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

http://www.morpheustrading.com/~rick//charts/2012/121009BRLIA.png

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

http://www.morpheustrading.com/~rick//charts/2012/121009BRLIB.png

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

http://www.morpheustrading.com/~rick//charts/2012/121009BRLIC.png

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

http://www.morpheustrading.com/~rick//charts/2012/121009BRLID.png

morpheustrading
10-15-2012, 12:45 AM
Given that the Nasdaq 100 Index ($NDX) has been drifting lower for the past six days (including the flat closing price on October 12), the index may be becoming a bit “oversold” in the near-term. We hesitate to use the term “oversold” because it’s a relative term; stocks and ETFs can frequently become even much more “oversold” before eventually bouncing. Therefore, we use the term loosely. Nevertheless, odds now technically favor at least a short-term bounce off the lows in the coming week, which could create a new opportunity to short sell $QQQ (or buy an inversely correlated “short ETF”) for swing traders who missed the initial sell-off and breakdown in the Nasdaq.

Because of the anticipated near-term bounce, we have tightened the protective stop on our current ETF position in the inversely correlated ProShares Short QQQ ($PSQ), which is presently showing an unrealized gain since our October 9 entry (we bought PSQ, rather than selling short QQQ, so that subscribers with non-marginable cash accounts could still participate). Going into today, our new stop for PSQ has been moved to just below last Friday’s (October 12) intraday low ($25.09). This new stop price enables us to capture even more gains if the Nasdaq 100 fails to bounce today and continues extending its losing streak. However, with this new, tightened stop price, we will still quickly lock in a gain on our ETF trade, even if the Nasdaq suddenly bounces sharply higher or a “short squeeze” sets in.

Over the next week or two, we would ideally like to see a substantial bounce in the Nasdaq 100 Index up to new technical resistance of its 50-day moving average (remember that a prior level of support becomes the new level of resistance after the support is broken). Further, the 20-day exponential moving average (beige line on the chart below) is now converging with and is poised to cross below the 50-day moving average (teal line), thereby creating additional resistance.

If the Nasdaq 100 bounces into convergence of the 20 and 50-day moving average and stalls, we would then have a low-risk re-entry point for selling short the Nasdaq 100 Index, along with a much more positive reward-risk ratio, in anticipation of the index making another leg down. The ideal bounce for the Nasdaq 100 is annotated below on the daily chart of PowerShares QQQ trust ($QQQ), a very popular ETF proxy for the Nasdaq 100 Index:

http://www.morpheustrading.com/charts/2012/121015$QQQ.png

morpheustrading
10-19-2012, 12:37 PM
Earlier this week, in our swing trading newsletter, we posted a chart of CurrencyShares Euro Trust ($FXE) that showed a bullish consolidation above long-term support of the 200-day moving average. As a follow-up to that analysis, the longer-term weekly chart below shows the breakout above a year-long downtrend line, along with a coinciding pickup in volume:

http://www.morpheustrading.com/~rick//charts/2012/121019FXE1.png

With the strong move off the July 2012 low, the price action of FXE should continue to consolidate in a tight range, and ideally not retrace more than 38% of the rally from the July 27 low to September 14 high. Currently, the low of the present consolidation is only 33% off the high of the move.

We are now monitoring $FXE for a potential low-risk buy entry point on a pullback, especially if the price action can test the rising 20-day exponential moving average, along with forming a “higher low.” However, the price action does not have to pull back. Rather, there could be a correction by time, in which the price could just drift sideways for a day or two before breaking out above the October 17 high. This is explained in more detail on the daily chart of FXE below:

http://www.morpheustrading.com/~rick//charts/2012/121019FXE2.png

Since FXE is a currency ETF, one bonus is that it has a low correlation to the direction of the overall stock market. With our market timing system (http://www.morpheustrading.com/blog/market-timing-system/) now in “sell” mode, we focus more on ETFs that are not comprised of industry sectors. If FXE meets our strict criteria for buy entry, subscribers of our newsletter will be notified in advance of our exact entry, stop, and target prices.

morpheustrading
10-22-2012, 07:44 AM
After the major indices began pulling back from their highs in late September, then subsequently bounced in the beginning of October, our disciplined, rule-based market timing system shifted from “confirmed buy” mode to “neutral” mode on October 5. This change in our market bias perfectly coincided with the peak of the bounce off the lows of late September. In “neutral” mode, we can be positioned either long or short, but position size of all new trade entries will be lighter than usual, in order to reduce risk. Also, our portfolio will be primarily (or fully) in cash, with only a few positions in either direction.

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

http://www.morpheustrading.com/charts/2012/121022$QQQ.png

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

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

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

morpheustrading
10-23-2012, 01:54 AM
Over the past week, we have been noticing an interesting and notable divergence between the performance of U.S. broad-based ETFs and select emerging markets ETFs. The PowerShares QQQ Trust ($QQQ), which tracks the Nasdaq 100 Index, has convincingly broken down below key intermediate-term support of its 50-day moving average and is technically in bad shape. However, the iShares Emerging Market Index ($EEM) has been consolidating in a tight, sideways range during the same period, and also formed a “higher low” within its base of consolidation. With a little help from a bounce in the broad market, EEM will likely break out above the highs of its range and start making another leg higher. The daily chart of EEM below illustrates this:

http://www.morpheustrading.com/charts/2012/121023$EEMconsolidation.png

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

http://www.morpheustrading.com/charts/2012/121023$EEMreversal.png

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

http://www.morpheustrading.com/charts/2012/121023$EWHbreakout.png

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

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

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

morpheustrading
10-23-2012, 11:51 PM
As market conditions continue deteriorating, many traders and investors are now seeking guidance to help them determine where the S&P 500, Nasdaq, and Dow Jones may find support, as well as the levels where these major indices are likely to encounter resistance when eventually attempting to rebound. As such, this article will provide you with a clear, objective look at the technical chart patterns of broad-based ETFs that track the S&P 500 ($SPY), Nasdaq ($QQQ), and Dow Jones ($DIA). Let’s start by analyzing the daily chart of the S&P 500 SPDR ($SPY), a well-known ETF trading proxy for the benchmark S&P 500 Index:

http://www.morpheustrading.com/charts/2012/121024$SPYchart.png

Until yesterday, it would be fair to say that the chart pattern of SPY had not yet convincingly broken down. Rather, the index had been clinging to key intermediate-term support of its 50-day moving average. Furthermore, the “hammer” candlestick pattern that formed when on October 22 was slightly encouraging because a bullish reversal bar that coincides with an “undercut” of an obvious support level often precedes a rally. But not this time. The mere fact that SPY opened below the October 22 low in yesterday session was quite negative. Now, the 50-day moving average should act as a significant resistance level on any subsequent rally attempt. The prior lows from the previous trading range (the dashed horizontal line) will also act as a substantial area of resistance. New traders need to know the following basic tenet of technical analysis: a prior level of support becomes the new level of resistance, after the support is broken (and vice versa).

Although it is bearish that SPY now has a plethora of overhead supply and technical resistance levels to contend with, one potential ray of sunshine in the storm clouds is that SPY is coming into major support of a year-long uptrend line. This is annotated on the longer-term weekly chart of SPY below:

http://www.morpheustrading.com/charts/2012/121024$SPYweeklychart.png

The longer a trendline has been in place, the more likely the trend will remain intact. Therefore, it is positive that SPY is now coming into support of an uptrend line that began with the lows of October 2011. If SPY is looking for an excuse to bounce from current levels, this would fit the bill. HOWEVER, with our market timing model now in “sell” mode and the daily chart pattern starting to look at bit ominous, this does not mean swing traders should be looking to step in and start buying stocks. Rather, we view any stock market bounce from here merely as an opportunity to dump any badly losing positions one may still be holding (shame on traders who failed to honor their protective stops). Furthermore, one could be looking to establish new short positions when the broad market starts bouncing into its new resistance levels, which would thereby create positive reward to risk ratios and low-risk entry points for selling short and/or buying inversely correlated “short” ETFs.

For the sake of brevity, we will skip analysis of the Dow Jones SPDR ETF ($DIA) because both its daily and weekly chart patterns are quite similar to SPY above (broke down firmly below its 50-day moving average yesterday, and is also coming into support of its year-long uptrend line). Instead, let’s jump to the daily and weekly charts of PowerShares QQQ Trust ($QQQ), a popular ETF that tracks the performance of the tech-heavy Nasdaq 100 Index (which has been trading in similar fashion to its sibling, the Nasdaq Composite Index). Our annotated daily chart of QQQ key is below:

http://www.morpheustrading.com/charts/2012/121024$QQQchart.png

It takes only a quick glance at the chart above to notice that QQQ began breaking down well ahead of SPY, and is technically in much worse condition. In the October 8 issue of our swing trading newsletter (and on this blog post (http://www.morpheustrading.com/blog/5-reasons-stocks-will-move-lower/)), we provided five technical reasons we felt stocks were poised to move lower in the near to intermediate-term. One of those five reasons was the formation of a bearish “head and shoulders” pattern that was forming on the chart of QQQ key to at the time. Just one day later, QQQ began following through on the bearish pattern by slicing through its 50-day moving average. Technical analysis states the projected decline of a “head and shoulders” pattern is equal to the distance between the top of the “head’ and the “neckline.” That equated to a projected drop of approximately 4.2% at the time of our initial October 8 warning. Since then, QQQ has fallen 4.4%, which means it has fully followed-through on the projected decline of its “head and shoulders” pattern.

As for support on QQQ, the index is now approaching major long-term support of its 200-day moving average, which is just below yesterday’s low. The last time QQQ came into support of its 200 day MA was at the beginning of June 2012, which marked the low of the correction that spanned from March through May of 2012. As for the weekly chart pattern, QQQ is now trading just below its one-year uptrend line (similar to the one shown on the weekly chart of SPY). However, support of its 200-day moving average is at least equally as important as a one-year uptrend line.

As the chart patterns above clearly illustrate, we are now dealing with a stock market in which sentiment has clearly reversed over the past several weeks. As it is designed to do, our rule-based system for market timing provided the requisite signals for us to close our long positions (other than ETFs with low correlation) and get out of the way before downside momentum really started kicking in. Now that the change to an overall bearish sentiment has been confirmed, we are now patiently waiting for an eventual bounce in the broad market that will provide us with ideal, low-risk entry points on new short positions or inversely correlated “short” ETFs. In the coming days and weeks, we will be providing subscribers with our detailed entry, exit, and target prices of any swing trade setups that qualify.

morpheustrading
10-25-2012, 07:18 AM
Because fear is a more powerful human emotion than greed (http://deronwagner.hubpages.com/hub/stock-trading-psychology), stocks nearly always fall much faster and more violently than they rise. As such, there are key technical differences in our trading strategy with regard to the price levels where we look to sell short stocks, compared to the ways in which we buy stocks. In this article, we summarize our basic trading strategy for determining the most ideal, low-risk entry points for short selling stocks and ETFs.

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

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

Our most ideal short selling candidates are stocks and ETFs that have recently set new “swing lows” (or are testing prior lows), and have subsequently bounced into resistance over a period of three to ten days. But even though we prefer to wait for a bounce before entering a new short position, it is important to realize we do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce). Rather, we first wait for subsequent confirmation that the stock is about to stall again. This typically comes in the form of either a bearish reversal bar (such as a bearish engulfing or hanging man candlestick pattern) or sharp opening gap down, which signals the short-term bounce is losing steam. Similarly, we always take the same approach on the long side when buying pullbacks of uptrending stocks; we always wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback).

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

http://www.morpheustrading.com/~rick/charts/2012/121024ORLY.png

A lower risk way of initiating a new short sale, which also provides you with a more positive reward to risk ratio for the trade, is shown on the following chart of Check Point Software ($CHKP). This is an example of what we are looking for when entering a short position (although the declines are not always as dramatic):

http://www.morpheustrading.com/~rick/charts/2012/121025CHKP.png

On October 17, CHKP gapped down sharply, on huge volume, due to a negative reaction to its quarterly earnings report. This caused the stock to crash through a four-month level of price support at the $44 area (dashed horizontal line). But over the past week, notice that CHKP has been climbing its way back up to test new resistance of its breakdown level. If CHKP now manages to probe above the intraday high of October 17, it would see some short covering, as most traders would not have expected the price action to climb back to that level. Further, the 20-day EMA is also above to lend a little more resistance. It is at that point ($44.50 to $45 area) that we would look for the first bearish reversal candle OR opening gap down to initiate a very low-risk short selling entry with a positive reward-risk ratio. By waiting for a significant bounce into new resistance of the breakdown before selling short, we can “be right or be right out” by keeping a relatively tight protective stop.

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

morpheustrading
10-29-2012, 06:05 AM
In my last post on this thread (above), I summarized my basic strategy for finding the best entry points for short selling stocks and ETFs. It was the first time I had discussed my swing trading strategy for the short side of the market in quite a while because my market timing model only shifted to a new “sell” signal on October 12. Since the first and most important element of our rule-based trading system is to trade in the same direction of the dominant market trend, I simply was not interested in looking for short selling candidates when the broad market was previously in a steady uptrend.

Now, I follow-up that previous post with this short (3-minute) trading strategy video (http://www.morpheustrading.com/blog/how-to-find-best-stocks-for-short-selling/) that shows you how to easily and instantly find the best stocks that meet my strict technical criteria as short selling candidates (ie. weak stocks bouncing into resistance, after breaking down below obvious levels of support). Hope you find it useful.

Enjoy the day off from the market...let's hope New York endures the storm with minimal damage.

morpheustrading
10-30-2012, 11:53 AM
The Direxion 30-year Treasury Bull 3X ETF ($TMF), an index that tracks the performance of long-term US government T-bonds, has been in a long-term uptrend since February of 2011, but has been in an intermediate-term downtrend (correction) off its highs since July of 2012. Now, it appears as though TMF is setting up to break out above resistance of its 3-month downtrend line and resume the long-term uptrend that has been in place for nearly 2 years. The weekly chart below shows the long-term uptrend in TMF, while the daily chart that follows shows the potential breakout above the intermediate-term downtrend line.

http://www.morpheustrading.com/charts/2012/121029$TMFweeklychart.png

http://www.morpheustrading.com/charts/2012/121029$TMFchartpattern.png

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

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

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

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

morpheustrading
11-01-2012, 01:40 PM
With the market finally bouncing off its recent lows (as of this moment anyway), it may be tempting to start initiating new short positions in the weakest stocks and ETFs during the recent decline. But I have learned the hard way over the years that patience is crucial when trading on the short side of the market. This 3-minute trading strategy video on YouTube (http://youtu.be/LNdaC8xf434) explains and illustrates why.

Hope you find it to be helpful.

morpheustrading
11-05-2012, 09:15 AM
After just a one-day bounce off its lows on November 1, the Nasdaq 100 Index ($NDX) plunged right back down to pivotal, long-term support of its 200-day moving average just one day later. Why is the Nasdaq displaying such relative weakness to the rest of the major indices? Blame it in no small part on the persistent bearishness and downright ugly chart pattern of Apple ($AAPL), a former market leader and heavily-weighted stock within the Nasdaq 100 Index.

Last Friday (November 2), AAPL sliced through crucial support of its 200-day moving average for the first time since June of 2011. Now, AAPL is also in danger of losing horizontal price support of its prior “swing low” from July of 2012. If it does, it will become the first convincing “lower low” that AAPL has formed in years. As an example of just how negative recent price action has been, notice on the annotated chart below that AAPL plunged 3.3% last Friday, well below its recent low, even though the main stock market indexes still retained a portion of their previous day’s gains. AAPL has become a clear example of a stock exhibiting bearish divergence and relative weakness to the broad market:

http://www.morpheustrading.com/charts/2012/121105AAPLchartpattern.png

Although our bearish analysis will undoubtedly anger the loyal army of Apple fanboys, we are merely being objective by saying that recent price action of AAPL (and quite a few other former market leaders) indicates a changing of the guards is on the horizon. However, the big problem is the replacement guards have not yet arrived. Until new leadership stocks start popping up, there will likely be no impetus for a sustainable broad-based rally. Therefore, if you've been holding AAPL for a while, did not sell on the breakdown, and are still holding out hope that the stock will recover (http://deronwagner.hubpages.com/hub/stock-trading-psychology), be warned that you are playing a very dangerous game. We personally view any substantial bounce in the stock as a chance to sell into strength and/or initiate a new short position, as the technical are indicating further downside to come.

The broad-based decline of November 2 put the overall stock market in a rather precarious position. Specifically, each of the major indices will now kick off the week following the formation of a bearish engulfing candlestick pattern. This chart pattern forms when an index or stock opens above the previous day's high, but sells off to close all the way below the previous day's low. This bearish pattern can be clearly seen on the daily chart of PowerShares QQQ Trust ($QQQ), a popular ETF proxy for trading the Nasdaq 100 Index:

http://www.morpheustrading.com/charts/2012/121105QQQchartpattern.png

As we’ve mentioned several times over the past two weeks, we’ve been monitoring both PowerShares QQQ Trust ($QQQ) for potential short sale entry on a significant rally into resistance. However, the major weakness of November 2 already sent QQQ right back down to near its recent lows. As such, there simply is not a positive reward-risk ratio for selling short this ETF at this time. Nevertheless, we are now targeting ProShares UltraShort Real Estate ETF ($SRS), an inversely correlated “short ETF,” for potential swing trade buy entry going into today. Detailed trigger, stop, and target prices were already provided to newsletter subscribers.

As for the bullish ETFs, a handful of Emerging Markets ETFs continue to hold up well and show relative strength. But as the November 2 price action demonstrated, the broad market simply remains much too weak to attempt any bullish entries right now because current breakout attempts, even in stocks and ETFs with decent relative strength, have a high likelihood of failure. This is typical of overall price action when our stock market timing model is in “sell” mode.

morpheustrading
11-07-2012, 07:07 AM
Going into today, we’re stalking a new potential ETF buy entry in Market Vectors Coal ETF ($KOL). After being in downtrend from April 2011 until September 2012, KOL is now setting up as a short-term, momentum-based bullish trend reversal play. On the daily chart below, notice that the 20 day moving averages recently crossed above the 50 day moving average, which is a bullish signal, although the 200-day moving average (orange line above the current price) has not yet started sloping higher. Nevertheless, there is a clearly defined area of horizontal price support and daily chart, and the ETF is also formed a pattern that is similar to an inverse head and shoulders.

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

http://www.morpheustrading.com/charts/2012/121107$KOLchartpattern.png

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

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

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

morpheustrading
11-09-2012, 08:19 AM
Going into today, we are targeting two more ETFs for potential swing trade entry. The first is ProShares UltraShort Financials ($SKF), which is another trend reversal play of a “short ETF.” After forming a month-long base near its multi-year lows, the ETF recently formed a “higher low,” then broke out above intermediate-term resistance of its 50-day moving average on higher than average volume.

As you may recall from yesterday’s ETF analysis, in which we pointed out the breakdown in Select Sector Financial SPDR ($XLF), bearish momentum has started picking up in the financial sector. As such, we are looking to take advantage of this newfound weakness through buying SKF. However, because the ETF has rallied so much over the past two days, we are only interested in buying SKF if it pulls back slightly from its current level (buy limit order). Otherwise, our reward to risk ratio on the trade would be lower than we prefer.

The trade setup and potential entry point is shown on the chart below (regular subscribers should note our exact entry, stop, and target prices on the ETF Trading Watchlist section of today’s newsletter):

http://www.morpheustrading.com/charts/2012/121109$SKFchartpattern.PNG

The second ETF on our watchlist for potential buy entry today is US Natural Gas Fund ETF ($UNG), a commodity ETF that tracks the price of the natural gas futures contracts.

UNG is now setting up for an ideal re-entry point that is lower risk than last month’s initial buy entry because the ETF has come into intermediate-term support of its 50-day moving average. In addition to trading in a tight, sideways range for the past four days, UNG also formed a bullish engulfing candlestick (http://www.investopedia.com/terms/b/bullishengulfingpattern.asp) pattern yesterday, which enables us to have a more clearly defined stop price.

The combination of technical factors above indicates selling pressure has subsided, and the ETF is now positioned to resume its uptrend from the April 2012 lows. The setup for this ETF pullback trade is shown below:

http://www.morpheustrading.com/charts/2012/121109$UNGchartpattern.PNG

Thanks to our market timing system (http://www.morpheustrading.com/blog/market-timing-system/) remaining in “sell” mode (since October 12), we continue to be positioned primarily on the short side of the market (including being long “short ETFs”). Over the past two days, with the main stock market indexes falling sharply, those bearish positions have started working out nicely.

We bought ProShares UltraShort Basic Materials ETF ($SMN) on Nov. 7 and ProShares UltraShort Real Estate ETF ($SRS) on Nov. 5, two inversely correlated ETFs that move in the opposite direction of their underlying indexes. Both were entered as bullish trend reversal plays. Yesterday, SMN gained 2.8% and SRS rallied 1.9%, as both ETFs broke out above key horizontal price resistance levels. This is annotated on the daily charts of these “short ETFs” below:

http://www.morpheustrading.com/charts/2012/121109$SMNchartpattern.PNG

http://www.morpheustrading.com/charts/2012/121109$SRSchartpattern.PNG

In addition to SMN and SRS, our position in Direxion 20-Year Treasury Bull 3x ($TMF) also had a great day. Government treasury bonds rallied sharply, enabling our position in TMF to rocket 4.5% higher yesterday. Although it is not a short position or inverse ETF, our ETF trading strategy enabled us to recently buy TMF because it is a fixed-income ETF that is not necessarily correlated to the direction of the stock market. The same is generally true of currency and commodity ETFs, both of which enable investors and traders to have a low correlation to the direction of the stock market, without the need to sell short or buy a “short ETF.”

As you can see on the chart below, TMF has now confirmed its intermediate-term trend reversal, and has convincingly broken out above horizontal price resistance as well:

http://www.morpheustrading.com/charts/2012/121109$TMFchartpattern.PNG

When will the near and intermediate-term selling pressure in the broad market finally subside? We have no idea, nor does anybody else. But the beauty of following a rule-based trading system is that it really doesn’t matter because we can profit from trends in either direction. Moreover, remember that we are NOT in the business of predicting what the market will do next. Rather, our strategy is simply designed to dynamically react to whatever type of price action the broad market throws at us at any given time.

Developing a mindset to not care about market direction or duration of trends is not easy at first, but once you condition yourself to be indifferent about the market’s direction, or how long a trend will persist, it will definitely ease any level of mental stress or anxiety. In turn, this will enable you to think more clearly and maximize your short-term trading profits.

morpheustrading
11-12-2012, 10:57 AM
Last week’s bearish price action caused the main stock market indexes to plunge through major levels of technical price support, including key moving averages and prior “swing lows.” Now, those technical levels of prior price support will act as the new levels of price resistance on any rally attempt. This is because the most basic tenet of technical analysis is that a prior level of support always becomes the new level of resistance, after support is broken (and vice versa).

Since last week concluded with a modest rally attempt on November 9, it may have been the start of a significant counter-trend bounce. However, with an abundance of overhead supply now in the broad market, it would not be long before benchmark indexes such as the S&P 500 ($SPX) and Nasdaq Composite ($COMPQ) start running into new overhead resistance levels that could easily stall any decent rally attempt.

In the video below, we use simple and objective technical analysis to highlight pivotal price levels where both the S&P and Nasdaq could run out of gas in the near-term if stocks start bouncing higher in the coming week. Click the link below to watch this short technical analysis video on YouTube:

How High Will The Nasdaq and S&P 500 Bounce? (video) (http://www.youtube.com/watch?v=M_WUqUq69V8)

If you use direct access stock trading software, it may be a good idea to set price alerts for the S&P 500 and Nasdaq Composite at the resistance levels mentioned in the video. Doing so will enable you to be instantly notified when the broad market inevitably enters into a counter-trend bounce and eventually starts bumping into technical resistance levels that will likely be difficult for the broad market to overcome in the short-term.

morpheustrading
11-14-2012, 07:42 AM
Although our market timing system remains in “sell” mode, and our near to intermediate-term focus remains on the short side of the market, it’s never a bad idea to keep an eye on ETFs and stocks that are exhibiting relative strength to the broad market, as these will be the first equities to move higher when the broad market eventually finds support and bounces.

One of the very few ETFs showing relative strength since the two-month selloff in the US broad market began is iShares Xinhua China 25 Index Fund ETF ($FXI). Although the main stock market indexes of the USA have been in a downtrend since mid-September, FXI actually started trending higher just as the domestic markets started selling off. But despite its relative strength, FXI began correcting last week, and is now in pullback mode. However, this is still an ETF to consider buying if the stock market suddenly surprises us with a confirmed buy signal. Looking at the daily chart of FXI below, notice that FXI pulled back yesterday to close right at support of its 200-day moving average, following an extended run up from its October breakout. Support of the 200-day MA also coincides with new horizontal price support form the prior highs:

http://www.morpheustrading.com/~rick//charts/2012/121114FXI.png

At the present time, we are NOT looking to buy FXI because the domestic broad market has yet to put in a convincing near-term bottom. Until it does, increasing or persistent bearish momentum in the US markets is likely to hold this ETF in check. Still, FXI should be on your watchlist as one of the first ETFs to consider buying when stocks eventually find a meaningful bottom. Therefore, it has been added to our internal watchlist as a potential long candidate, just in case our rule-based market timing model (http://www.morpheustrading.com/blog/market-timing-system/) happens to shift back into “neutral” or “buy” mode any time soon.

High volatility and intraday indecision, such as was exhibited in yesterday’s broad market action, can be nerve-racking and frustrating for short-term swing traders. However, there is one benefit to such price action. Since stocks formed a similar intraday pattern (morning strength followed by afternoon weakness) on November 9, we now have two failed intraday rally attempts within the past three days. The benefit of this is that it makes it easy to adjust protective stop prices on short positions because if the main stock market indexes manage to rally above their three-day highs, bullish momentum will probably move stocks substantially higher in the near-term.

Presently, our model ETF trading portfolio is showing an unrealized gain of approximately $1,100 in trading profits (just over a 2% portfolio gain based on the $50,000 model account value). But because of the price action described above, we have now trailed the protective stops on our ETF and stock positions much tighter, so that we will still lock in substantial trading profit even if the major indices suddenly jump back above their three-day highs. Nevertheless, the weak action of the past three days also means there is an equally good chance that stocks could now tumble to new lows, due to the back to back failed reversal attempts (including the November 12 “inside day”). If that happens, our existing short and inverse ETF positions would realize substantially larger gains, and we would then immediately trail the protective stops even tighter, or look to take profits, the following day.

morpheustrading
11-15-2012, 01:57 PM
In the last paragraph of this post (starting with the red text), we will tell you why stocks may now be nearing a significant bottom. But first, let's take a look at another trade setup to put on your radar screen as well as a quick recap on our existing open positions...

After rallying off the summer lows and clearing the 200-day MA in early-September, SPDR S&P Oil & Gas Exploration ($XOP) stalled out after one thrust above the 200-day MA. Over the past few months, the price action has deteriorated, starting with the uptrend line break in late October, which coincided with a break of the 50 and 200-day MAs. The 20-day EMA is now below the 50-day MA, and the 50-day MA is beginning to slope lower. We also see a series of "lower highs" and "lower lows" the past two months, signaling a reversal of the uptrend. At its current level, $XOP is NOT actionable on the short side, but swing traders should add this to their watchlist for potential short entry on a bounce to resistance, in the area of the 200-day MA. This is shown on the daily chart of XOP below:

http://www.morpheustrading.com/~rick//charts/2012/121115XOP.png

Earlier today, we sold ProShares UltraShort Basic Materials ($SMN) for a 9.2% gain since our November 7 swing trade entry. Yesterday morning, we sold our swing trade position in Direxion 20+ Year Treasury Bull 3x ETF ($TMF) for a net gain of 6.8% (just over 5 points). The trade setup was initially pointed out on this October 30 blog post. Later in the day, as the market broke down, ProShares UltraShort Real Estate ($SRS) hit our predetermined target price of $27.48. As such, we sold SRS into strength and closed it for a nice gain of 8% since our November 5 buy entry.


Our only recent disappointment was yesterday's price action in Global X Silver Miners ETF ($SIL), which hit our stop price when it fell below the prior day's low. Nevertheless, our stop was in the right place because SIL subsequently sold off another 7% below our exit price by the closing bell. This type of selling action after the ETF broke technical support was a great reminder of the crucial importance of always trading with and honoring your protective stop prices. Losing trades are a normal and unavoidable part of the business, but the only way to be a consistently profitable swing trader is to ensure the losses of your average losing trades are less than the gains of your average winning trades.

We now have three remaining open positions in our model trading portfolio, which consist of one inverse ETFs ($SKF) and two individual stocks on the short side ($COH and $SBUX). With these open positions, each of which is now showing a solid unrealized gain, we have once again tightened the stop prices so that we can protect at least half of the unrealized gains each position is showing (based on Wednesday's close). Regular subscribers of our swing trading newsletter should note our updated stop prices on the "Open Positions" section of today's report. Do not look at these updated stop prices as magical resistance levels that we identified using technical analysis. Rather, we simply placed them just below the half way point of yesterday's wide-ranged candlesticks. They are basically "money stops." If our positions continue moving further in our favor, that's great. But if the price action suddenly reverses, we will still keep the majority of our profits (barring any surprise opening gaps).

For a weak market to form a significant bottom, there typically needs to be at least one or two days of panic selling, where investors finally give up and just want to sell at any price. It seems as though Wednesday's action might have been the beginning of such a move, as there isn't much out there that is still holding up. Our nightly scans for new short selling setups (http://www.morpheustrading.com/blog/how-to-find-best-stocks-for-short-selling/) have dried up this week, as most sector ETFs have already been hit hard and are now too extended to offer low-risk entry points. Because of this, we will continue to lay low with regard to new positions and just focus on managing our existing winning trades.

morpheustrading
11-16-2012, 08:13 AM
http://upload.wikimedia.org/wikipedia/commons/f/fe/Don%27t_worry%2C_be_happy.jpg

In yesterday’s (November 15) blog post, we said the stock market may be nearing a significant short-term bottom because Wednesday’s price action resembled the start of panic selling that typically precedes exhaustion in a downward trend. However, given yesterday’s relatively tame price action, the stock market may still need more time to wash out the last of the remaining bulls…or maybe not. So, what plan of action does this provide us with? It comfortably puts us into “SOH mode” (sitting on hands). In swing trading, sometimes the best plan of action is doing absolutely nothing. In this educational trading psychology article, we explain why.

After shifting from “buy” mode to “neutral” mode on October 5, then from “neutral” to “sell” mode on October 12, our rule-based system for market timing once again precisely got us out of the long side of the market within a few percent of the highs, then prompted us to sell short (and buy inverse ETFs) right as the current sell-off began. However, even though our market timing system is still in “sell” mode, as it has been since October 12, we are now in a situation where the reward to risk ratio for entering new short positions at current levels is simply not positive.

Extremely short-term traders (such as daytraders) may now be looking for entry points to go long (buy) the stock market, with the goal of profiting from a near-term counter-trend bounce to the upside. However, as professional swing traders, we are not interested in trying to pick a bottom because our stock trading strategy is NOT designed to catch every “nook and cranny” of price movement in the stock market.

Instead, the combination of our stock trading system and market timing model is designed for us to only trade in the direction of the dominant market trend and seek to capture the “meat” of every significant move in either direction. This means we are not concerned with selling at the absolute top of market rallies, nor buying at the dead lows of downtrends. Once in a while, we get lucky and this actually happens, but it is never our intention because focusing on precisely nailing the tops and bottoms of market trends is simply too risky of a trading methodology. Think of our overall stock trading system as being designed to take large bites out of the middle of a sandwich, but not eat the crust.

When our market timing model is in “buy” mode (as it was from August 16 to October 5 of this year), we exclusively buy stocks and ETFs on the long side of the market. This means we view normal, short-term pullbacks in uptrending stocks as buying opportunities to enter new long positions; our trend-following system does NOT allow us to sell short quick pullbacks of strong stocks and ETFs in an uptrending stock market. Instead, we simply focus on selling long positions into strength of each major upward thrust, then reverting back to cash while waiting for stocks to pull back and set up for the next low-risk buying opportunities.

The same is true of how we trade in downtrending markets, except in reverse. For example, now that the broad market is in a confirmed downtrend (at least two “lower highs” and “lower lows” have been set), we are NOT interested in going long (buying) counter-trend bounces into resistance of downtrending stocks. Rather, we prefer to keep our powder dry by waiting in cash for ETFs and stocks to rally into new resistance of key moving averages and prior lows, then initiate new short positions (or buy inverse ETFs after they pull back to support). This will remain the case until we eventually receive the necessary proprietary signals for our market timing system to revert back to “buy” mode.

If you are new to swing trading, you may feel the urge to be actively trading the stock market at all times, either on the long or short side. However, the most profitable stock traders we know are actually out of the market more than they are in the market. But when the proper technical signals line up, the reward to risk ratios are good, and entry points are low-risk, successful traders take action and aggressively trade in the direction of the dominant market trend. This is exactly what we have done over the past several weeks, and with winning results.

On November 14, we closed several ETF swing trade positions for a substantial net profit. One day later (yesterday), we closed our remaining two open ETF positions. ProShares UltraShort Basic Materials ETF ($SMN) rallied to our target price, so we sold and locked in a 9.2% gain with just an 8-day holding period. Subsequently, ProShares UltraShort Financial ETF ($SKF) pulled back and hit our adjusted stop price, which knocked us out of the swing trade with a decent gain as well.

Mid-way through November, we have closed six ETF trades so far this month. Four of the six trades were winners, equating to a net gain in our $50,000 model ETF trading portfolio of more than 2% (approx. $1,100). During this same time period, the Nasdaq Composite has lost 4.7%. This means, the ETF trades in our Wagner Daily newsletter have outperformed the Nasdaq by nearly 7% over the past two weeks alone. On the individual stock side, we still have two open short positions. $COH short is showing an unrealized gain of 5.7% since entry, while $SBUX short is presently 4.1% in our favor. We will be taking profits on both swing trades on today’s open (approximately 1.7% net gain based on the $50,000 model stock trading portfolio).

We are now back to 100% cash in our model trading portfolios, which is a great place to be considering the current price levels of the market. There is not yet any technical reason to assume the broad market has formed a significant bottom, but it is equally risky to enter new short positions right now because stocks are due for a substantial bounce (the Nasdaq is on pace for its sixth consecutive week of losses). Now that we are flat, our plan is simply to wait for the broad market to bounce into resistance, then initiate new short positions and/or buy inverse ETFs (as previously explained). After having locked in solid gains on a string of winning ETF trades over the past few days, we are now “Flat and Happy,” patiently waiting in SOH mode for the stock market to provide us with our next low-risk swing trading opportunities.

If you are not a newsletter subscriber and have been losing money in recent weeks, we highly suggest you pause and take the time to do an honest, personal reflection of what you did wrong. Were you fighting the dominant market trend? Were you clinging to long positions that should have been sold weeks ago, but you ignored the stops? These are the types of questions you need to ask yourself if you have been losing money lately. Unless you learn from your mistakes and devise a way to prevent repeating them, you will never be a successful trader. Without taking the time for honest self-reflection when losing money, you will not even be aware of any trading mistakes are making.

morpheustrading
11-19-2012, 10:42 AM
In the stock trading strategy video below, we do an educational technical review of an actual swing trade in ProShares UltraShort Basic Materials ETF ($SMN), an inversely correlated “short ETF,’ which we bought November 8 and sold on November 15. Upon closing the swing trade, we had scored a solid 9.2% gain on an 8-day swing trade.

In this 3-minute video, you will learn the specific technical analysis signals that prompted us to buy this “short ETF,” which has recently reversed its primary downtrend. For best quality, play the video below and click on the bottom right corner of the video player window to view in full-screen mode:

How To Profit From Swing Trading "Short ETFs" (Trading Strategy Video) - YouTube (http://youtu.be/-GqmaxGzYuE)

As discussed in the video, many traders fail to successfully trade on both sides of the market because, even if they have the right technical chart patterns, they simply buy or sell at the wrong time (http://www.morpheustrading.com/blog/market-timing-system/). Following a proven, objective system to indicate the proper timing for buying or selling ANY stock or ETF in the market is one of the most critical elements that determines whether or not a trade will be profitable.

Although the stock market has sold off sharply in recent weeks, adhering to the signals of our rule-based market timing system has enabled subscribers of our nightly stock picking service to realize substantial profits from swing trading ETFs and stocks on the short side (combined with buying "short ETFs").

morpheustrading
11-20-2012, 08:51 AM
Over the past several days, we have been clearly explaining that our current plan of action is to be in “SOH mode” while waiting for the weakest ETFs and stocks to bounce into significant technical resistance levels, such as moving averages and prior lows. Then, we would wait for the bearish reversal patterns as a signal to initiate new short positions (and/or buy inversely correlated “short ETFs”). As such, we were pleased with yesterday’s (lighter volume) relief rally because it puts us closer to getting back into the market with new swing trades, albeit likely on the short side.

Given yesterday’s large percentage gains, the current bullish momentum could easily cause stocks to move higher for at least another week or two before the bears return to the market, causing the established downtrend to start taking hold again. Nevertheless, it’s important to remember that the stock market is very dynamic. For example, the sudden presence of an “accumulation day” (higher volume gains), followed by a confirmation day in which stocks jump another 1.5% to 2% at least three to four days later, could actually generate a new “buy” signal in our model for market timing. If that happens, no problem; we don’t care either way. Our proven stock trading strategy is based on trading either side of the market by simply reacting to current price action in front of us, rather than making predictions about market direction. Simply put, we always trade what we see, not what we think!

In yesterday’s newsletter, we said we were looking for pullback re-entry points into our recent winning ETF trades ($SRS, $SMN, $SKF, and $TMF). We also said we were looking for new short entry points in non-inverse ETFs such $IBB and $QQQ. Yesterday’s rally was a good start, as the inverse ETFs we’re stalking for re-entry pulled back substantially, while the non-inverse ETFs conversely bounced sharply higher (approaching resistance). Still, none of these ETFs we have been discussing are near the levels where we would consider entering them just yet. However, we came across one ETF that is already set up for possible short entry in today’s session.

The SPDR S&P Homebuilders ETF ($XHB) was one of the last ETFs to break down below support during the recent decline, but now the ETF has a lot of immediate overhead supply and resistance to contend with. Just like many other stocks and ETFs, XHB jumped 2% higher yesterday. However, it formed a bearish reversal candlestick (similar to a shooting star candlestick) after running into resistance of both its 20-day exponential moving average and 50-day moving average. The ETF closed near its intraday low, and below both moving averages. This is shown on the daily chart of XHB below:

http://www.morpheustrading.com/charts/2012/121120$XHBshootingstar.png

The setup for this swing trade is that we will only sell short XHB if it trades below yesterday’s low. This would provide us with a valid short entry point because its current relative weakness would indicate a resumption of downward momentum if that happens. Note that entering before a break of yesterday’s low is risky and not a valid short entry point. We are listing XHB as an “official” setup on our ETF Trading Watchlist today, so regular subscribers of our swing trading newsletter should note our exact, preset trigger, stop, and target prices for this swing trade setup on the short side. By the way, if you are new to short selling stocks, we recommend taking a quick look at this short trading education video (http://www.morpheustrading.com/blog/patience-short-selling-stocks/), as it provides a general overview of a basic short selling strategy.

morpheustrading
11-21-2012, 06:31 PM
One ETF we are stalking for technical swing trading buy entry today is ProShares UltraShort Emerging Markets ETF ($EEV), an inversely correlated short ETF. As you can see on the chart below, EEV broke out above a six-month downtrend last week, and has now pulled back to near-term support of its 20-day exponential moving average, which recently crossed above the 50-day moving average. This is a bullish trend reversal signal. With the ETF moving higher in yesterday’s session, but closing just below the previous day’s (November 19) low, we are now monitoring EEV as a potential short-term trade above the two-day high. Regular subscribers should note our exact entry, stop, and target prices for this short-term momentum trade setup in the ETF Watchlist section of today’s newsletter. The technical trade setup for EEV is shown on the daily chart below:

http://www.morpheustrading.com/charts/2012/121121$EEVpullback.png

Although the main stock market indexes were flat yesterday, there were at least two ETFs we have been monitoring that pulled back to near-term technical support levels. Specifically, they retraced to test or “undercut” their 20-day exponential moving averages. One of those ETFs was Direxion 20-Year Treasury Bull 3x ($TMF), a fixed-income ETF that roughly follows the price of the US long-term treasury bond, but is leveraged at a 3 to 1 ratio. Last week, we sold this ETF for a substantial trading profit, after it broke out above resistance of a four-month downtrend line. However, the ETF has remained on our radar as a potential swing trade re-entry on a pullback. The current pullback that followed the recent breakout above the downtrend line is shown on the daily chart of TMF below:

http://www.morpheustrading.com/charts/2012/121121$TMFpullback.png

As you can see, TMF sold off sharply yesterday, and closed just below near-term technical support of its 20-day exponential moving average. Such a price retracement off its recent highs provides a low-risk re-entry point to buy this ETF. However, remember that we do not blindly try to anticipate where a pullback will end and find support. Rather, we must now wait for the formation of a bullish reversal candlestick within the next several days, then look to buy TMF above the previous day’s high, which would confirm the pullback off the highs has ended, and TMF is likely to resume its bullish trend reversal. Therefore, although TMF is not yet listed on today’s watchlist as an “official” buy entry, it is now on our internal watchlist as a potential technical swing trade setup we are monitoring for the proper trigger point for buy entry.

Another ETF with a similar pattern is ProShares UltraShort Basic Materials ETF ($SMN), another short ETF. After buying the breakout above its downtrend line, we sold this ETF into strength last week for a 9.2% gain on an 8-day holding period (click here (http://youtu.be/-GqmaxGzYuE) for a quick educational video recap on YouTube of the technical setup of this recent swing trade). Now, it has pulled back to near-term support of its 20-day EMA, but probably needs another day or two to either “undercut” support of the 20-day EMA, or at least form a bullish reversal candle, before we would look for an actual re-entry point into this ETF. Like TMF, this setup in SMN has been added to our internal watchlist as a potential near-term buy entry. The daily chart pattern of SMN is shown below:

http://www.morpheustrading.com/charts/2012/121121$SMNpullback.png

Going into yesterday’s session, we were stalking SPDR S&P Homebuilders ETF ($XHB) as a potential short sale entry if it traded below the November 19 low. However, the ETF opened slightly higher, then rallied to close near the previous day’s high. As such, the ETF did NOT trigger for short sale entry, and has been temporarily removed from our “official” watchlist as a swing trade setup. Whenever we list a swing trading setup that does not hit our trigger price, we don’t care because there is “no harm, no foul” for disciplined traders.

morpheustrading
11-26-2012, 10:17 AM
It was obviously positive that stocks continued building on their gains since bouncing off their mid-November lows, and did so on higher volume last Friday. However, it’s still too early to declare an end of the broad market’s multi-month downtrend from its September 2012 highs. One of the biggest reasons we say this is because the main stock market indexes still have an abundance of overhead supply to contend with. Furthermore, several of the major indices are now bumping into, or are quickly approaching, key technical resistance levels. One good example of this can be seen on the daily chart pattern of PowerShares QQQ Trust ($QQQ), a popular ETF proxy for trading the Nasdaq 100 index:

http://www.morpheustrading.com/~rick//charts/2012/121126QQQ.png

As you can see, $QQQ broke out above resistance of its 20-day exponential moving average last Friday. However, notice the horizontal price resistance just overhead, which was formed by the prior swing lows from late October, as well as the prior highs from July. Furthermore, the 200-day moving average, which formerly acted as support and now will provide formidable resistance, is less than 1% above the current price of $QQQ. Above that resistance level is the 50-day moving average, which has been sloping lower since mid-October, and is in danger of crossing below the 200-day moving average.

Whenever a market is trying to form a significant bottom, but has a plethora of overhead resistance levels, it is common for there to be at least one shakeout that tests or “undercuts” the prior low (from November 16), before the index can reset itself and start heading back up. For these reasons, it is still too early to declare the Nasdaq has found a significant bottom.

Another key broad-based ETF, the iShares Russell 2000 Index ETF ($IWM), has a similar chart pattern to $QQQ. The one difference is that it has already bounced to close right at its 200-day moving average last Friday. Furthermore, $IWM is still trading below the upper channel of its downtrend line from the September 2012 highs (the red line on the chart below), which may be difficult to overcome on the first few attempts. Take a look:

http://www.morpheustrading.com/charts/2012/121126$IWM.png

We’ll be closely monitoring the price action of both $QQQ and $IWM in the coming days, as the ability or inability of these indexes to move back above their 200-day moving averages, horizontal price resistance, and trend channel resistance may determine the tone of the broad market trend for the rest of the year. We focused on these broad-based ETFs, rather than the S&P 500 SPDR ($SPY) and Dow Jones Industrial SPDR ($DIA), because they better represent the performance of leading stocks (solid breakouts of leading individual stocks is a key component of a healthy market). Additionally, $QQQ and $IWM showed the most relative weakness of the broad-based ETFs on the way down, so they have the most technical damage to overcome.

Although we are still monitoring for new, low-risk entry points for ETF swing trades on the short side (and/or buying inverse ETFs), we can not ignore last Friday’s “accumulation day” (higher volume gains) in the market. Nevertheless, it’s important to realize a market bottom is never a one-day event, so we need to see more evidence accumulate over the next two weeks to confirm that an intermediate-term bottom is in place. Specifically, we need to see convincing breakouts of fresh leadership stocks, while the major indices need to avoid printing a bearish “distribution day” (higher volume loss) over the next five days.

morpheustrading
11-28-2012, 02:08 PM
As stocks attempt to form a significant bottom since bouncing off their November 16 lows, many traders of stocks and ETFs may now be wondering how to find the best, most bullish chart patterns and stocks to buy now. Specifically, swing traders need to know which technical criteria and types of chart patterns they should be looking for, in order to find the best stocks to buy right now.

In the short (3 minute) video below, we will answer the question above by showing you a few basic examples of bullish chart patterns you should be looking for as market conditions improve. We will also show you a quick and easy way to screen for stocks and ETFs that meet our technical criteria for these patterns. Ticker symbols discussed in the video include: $AFFY, $LCC, and $AAPL.

Play video on YouTube by clicking on the following link:

How To Quickly Find The Best Stocks And Chart Patterns To Buy Now (http://youtu.be/wBVWqBbZXP8)

morpheustrading
11-29-2012, 09:30 AM
Two weeks ago, in our November 14 ETF commentary, we initially pointed out the relative strength of iShares China Xinhua 25 Index ($FXI) and said, "Although the main stock market indexes of the USA have been in a downtrend since mid-September, FXI actually started trending higher right as the domestic markets started selling off...and is now in pullback mode."

In our subsequent November 19 ETF analysis, just a few days later, we revisited the chart pattern of $FXI and said that, "very short-term traders only might consider buying FXI if it moves above the November 16 high of $35.88." Because US stocks had not yet confirmed at least a near-term low had been formed, we passed on "officially" adding this trade setup to our ETF Trade Watchlist. Nevertheless, we still pointed out the trade so that more aggressive, very short-term traders could take advantage of an anticipated "quick pop" is the desired. Fast forwarding to the present, take a look at the updated chart of $FXI below:

http://www.morpheustrading.com/charts/2012/121129FXI.png

Note on the chart the level where we initially said aggressive traders could buy above the two-day high (circled in pink). This was due to the relative strength of FXI, a major level of horizontal price support (the blue line), and convergence of the 50 and 200-day moving averages (teal and orange lines respectively). Thereafter, FXI generally trended higher, but not in a very steady fashion.

Yesterday (November 28), like most stocks and ETFs in the market, FXI gapped down sharply lower, but reversed to close at its intraday high and back above its 20-day exponential moving average (beige line). This followed a normal four-day pullback from its November 23 high. This has created an ideal pullback buy setup in FXI, which has a positive reward to risk ratio for swing trade entry above yesterday's high. Regular subscribers to our trading newsletter should note our preset, exact entry, stop, and target prices for this swing trade setup.

morpheustrading
12-03-2012, 01:34 PM
Since the last two weeks of December are typically dead in terms of trading volume, there are really only two more “tradeable” weeks remaining in 2012. Therefore, it is fair to say the overall price action of the broad market over the next several days could easily set the tone for the remainder of the year. As such, today’s technical trading commentary will focus on a few key factors to monitor this week in order to help determine whether stocks might finish the year with a bang, fizzle, or plunge.

The potential challenge as we enter the final month of 2012 is that stocks must still contend with an abundance of overhead supply and technical resistance levels. “Overhead supply” is formed by traders who formerly bought near the highs, but did not quickly cut their losses when stocks headed south. Still holding on to these losing positions, these individuals are typically eager to sell into strength of any further broad market gains, simply in the hope of “just breaking even” (learn why hope is a very dangerous emotion for traders). This selling pressure formed by the overhead supply is what makes it difficult for a confirmed down trending market to fully reverse into a new uptrend, at least without a substantial period of correction by time (“back and fill” price action).

With the Nasdaq and S&P 500 still trading below their September 2012 highs by about 5% and 3% respectively, only a sudden surge in institutional buying (high volume) would enable the broad market to rally all the way to new highs in a short period of time. On the daily chart of S&P 500 SPDR ($SPY), a popular ETF proxy for the benchmark S&P 500 Index, we have annotated the key resistance levels to pay attention to this week:

http://www.morpheustrading.com/charts/2012/121203SPYdailychart.png

Overall, the month of November was basically a scratch. The main stock market indexes printed significant losses in the first half of the month, then reversed to recover those losses in the latter half of the month. In the end, prices were little changed for the month. Despite this, the accurate signals received from our market timing model enabled us to still score decent gains in November by swing trading on both sides of the market (updated stats of our trading profits through November 2012 will soon be posted on “performance” page of our website).

Our market timing model has been in “buy” mode since November 23, the day it reversed from the previous “sell mode” after receiving signals that a significant market bottom may be forming. We still have two short positions in our model ETF trading portfolio, but the majority weighting of our swing trades (combining ETF and individual stock positions) remains on the long side of the market. Furthermore, if our timing model receives the proper technical signals to shift into a new “confirmed buy” mode, all bets on the short side would be off, and exposure on the long side would also be increased. But for now, maintaining a small percentage allocation of short/bearish exposure may help to reduce overall portfolio risk by basically “hedging” until/unless the downtrend from the September 2012 highs is convincingly reversed by the formation of two “higher lows” and “higher highs” on the daily charts. Trading objectively with a rule-based market timing system removes the guesswork and emotion out of knowing which side of the market to be on, and with how much exposure.

Going into today’s session, last Friday’s new swing trade setup in iShares Poland Index ($EPOL) remains an “official” buy setup with exactly the same trade parameters (subscribers to our swing trading newsletter should note our exact trigger, stop, and target prices for this ETF trade setup on the Watchlist section above). We continue scanning for new ETF trading opportunities, such as buying the incredibly strong iShares Philippines ($EPHE) on a pullback to support. However, remember the best swing trade setups with a positive reward-risk ratio will eventually come to you. Avoid half-baked swing trading setups just for the sake of being in the action. If action is all you’re looking for, go to Vegas and get your fix. But if you’re serious about consistently raking in short-term trading profits over the long-term, you must develop the patience and discipline to follow our proven swing trading system taught every day in this newsletter.

morpheustrading
12-05-2012, 09:48 AM
In the November 19 issue of our swing trading newsletter, we initially pointed out that iShares Nasdaq Biotechnology ETF ($IBB) may be in the process of forming a bearish “head and shoulders” pattern (http://www.morpheustrading.com/blog/trading-the-head-and-shoulders-chart-pattern/) on its weekly chart. Now, after a month-long bounce off support of its 200-day moving average, $IBB is forming the “right shoulder,” after stalling at resistance of its 50-day moving average the past few days. This is shown on the weekly chart of $IBB below:

http://www.morpheustrading.com/~rick//charts/2012/121205IBB1.png

Notice how the recent highs of $IBB over the past few days correspond to the highs of the “left shoulder.” The best quality head and shoulders chart patterns should form with a right shoulder that is equal to or less than the high of the left shoulder. For us, a head and shoulders pattern is no longer valid once the right shoulder extends much beyond the high of the left shoulder.

Drilling down to the shorter-term daily chart interval below, notice how the volume was heaviest on the decline from the top of the head to the bottom of the right shoulder. Higher volume on the selloff from the top of the head, followed by lighter volume on the bounce that forms the right shoulder, is what we look for to confirm the pattern:

http://www.morpheustrading.com/~rick//charts/2012/121205IBB2.png

Based on the weekly and daily chart patterns above, we have officially added $IBB to our watchlist as a potential swing trade setup on the short side. Regular subscribers should note our exact, predefined entry, stop, and target prices in the ETF Trading Watchlist section of today’s newsletter.

We mentioned recently that the broad market was showing signs of weakness during its current counter-trend rally off the lows, and one major concern is the lack of explosive price action in leadership stocks. If we were to focus only on the chart patterns of the major averages when analyzing the market, we would be missing a big piece of the puzzle, which is market leadership.

When our rule-based market timing model shifts to a new “buy” mode after a significant correction, our attention always turns to leadership stocks and how well they are breaking out from valid basing patterns. Are leading stocks break out on strong volume and holding up, or are they breaking out and selling off (false breakouts)? This information is critical to our decision making.

If leadership is strong, we can increase our long exposure, as well as our average share size per trade. But if leadership is weak and the market suffers a few “distribution days” (higher volume declines) over a short period of time, we are then forced to reduce long exposure and look for potential short setups. Though our market timing system is still showing a “buy” signal, we are now seeking the necessary confirmation for it to remain so.

morpheustrading
12-06-2012, 10:15 AM
In this educational stock trading strategy video, we walk you through the clear, technical criteria that recently prompted us to buy Qihoo 360 Technology Co ($QIHU) for a short-term momentum trade.

We point out the basic, objective technical analysis that prompted us to buy $QIHU when we did, and conclude the video by explaining our rationale for selling the stock 4 days later for a quick 11% gain. Overall market timing strategy for our swing trading methodology is also discussed in the video.

Press the link below to view the YouTube video:

How We Made 11% Gain in 4 Days on $QIHU – Trading Strategy Video (http://youtu.be/kydesZidCrA)

Hope you find the video to be informative.

billyjoe
12-11-2012, 12:26 PM
morpheus,
I'm doing great on FXI (posts #27 and #35) and EPOL. Thanks

-------------------billy

skiracer
12-12-2012, 04:24 PM
morpheus,
I'm doing great on FXI (posts #27 and #35) and EPOL. Thanks

-------------------billy

And to think that for years I tried in vain to turn you guys on to Deron and Morpheus. Remember Skiracer in your will please.

morpheustrading
12-14-2012, 12:19 AM
Hey Billy,

Yes, they have had nice rallies. Glad they are working out for you. However, just as an FYI, we took profits on both of them by selling on yesterday's (December 13) open. Subscribers of our swing trading newsletter were notified of that plan the night before.

Thanks for your feedback on this thread.

Deron



morpheus,
I'm doing great on FXI (posts #27 and #35) and EPOL. Thanks

-------------------billy

morpheustrading
12-14-2012, 12:20 AM
Ha ha. Awww, shucks. Thanks for the kind words, Skiracer.

Deron


And to think that for years I tried in vain to turn you guys on to Deron and Morpheus. Remember Skiracer in your will please.

morpheustrading
12-14-2012, 12:21 AM
We just uploaded a short, 3-minute trader education video to our YouTube channel that shows swing traders how to quickly and easily find strong stocks that have been forming a base of price support over the past 4 to 8 weeks and are now poised to breakout to new highs in the coming days. Click the link below to view the video (best viewed in full-screen mode):

How To Find The Best Daily Stock Picks (http://youtu.be/-bCPZjr_G4A)

Bullish chart patterns discussed in today’s video include: $IMH, $DK, $PHM. Although all the stocks discussed in this video have bullish chart patterns that could push higher in the near-term IF the broad market remains healthy, these are NOT specific swing trade buy recommendations.

morpheustrading
12-14-2012, 08:31 AM
On the close of December 13, our stock market timing system (http://www.morpheustrading.com/blog/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:

http://www.morpheustrading.com/charts/2012/121214SPYchartpattern.png

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:

http://www.morpheustrading.com/charts/2012/121214QQQchartpattern.png

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.

We do have one new setup to possibly sell short iShares Nasdaq Biotechnology ($IBB) on a slight bounce in today’s session. Review this recent trading blog post (http://www.morpheustrading.com/blog/ibb-head-shoulders-pattern/) to see the bearish setup for $IBB. Our exact, preset entry, stop, and target prices for this swing trade setup are available to regular subscribers of our swing trading newsletter.

morpheustrading
12-17-2012, 12:29 AM
In our most recent ETF trading commentary (previous post in this thread), we pointed out the bearish shooting star candlestick pattern that S&P 500 SPDR ($SPY) formed on its longer-term weekly chart interval. The rest of the major indices closed with the same topping pattern on their weekly charts. Last Friday, we also illustrated the bearish pattern and relative weakness in PowerShares QQQ Trust ($QQQ), a popular ETF for trading the Nasdaq 100 Index. On the updated daily chart below, notice that $QQQ is now trading below its 20, 50, and 200-day moving averages, each of which should now act as resistance on any bounce attempt. The blue horizontal line marks horizontal price support of the recent “swing lows” set earlier this month:

http://www.morpheustrading.com/charts/2012/121217QQQchartpattern.png

As marked by the brown, downward facing arrows, we anticipate that a break of horizontal price support in $QQQ will swiftly lead to a retest of the prior low from mid-November. Why? The reason is simply that the stock market rally off the mid-November lows has technically been nothing more than a countertrend bounce from near-term “oversold” conditions. Now, it looks as though the rally may have already run its course, as $QQQ has run into major resistance of its downtrend line from the September 2012 high. Below is a second daily chart of $QQQ, which clearly illustrates how the ETF reversed after bumping into its multi-month downtrend last week (the red descending line):

http://www.morpheustrading.com/charts/2012/121217QQQ2chartpattern.png

We recently profited in a few ETF and stock swing trades on the long side after our system for timing the stock market shifted to “buy” mode. Yet, we were still fully aware at the time that the rally off the lows had not yet proven itself to be anything more than a countertrend bounce within the dominant downtrend. This is one of several reasons our market timing system shifted from “buy” to “neutral” mode on December 13, after several major indices formed “shooting stars” on their weekly charts while running into the downtrend lines from their September 2012 highs. Furthermore, if selling pressure in the broad market persists and we receive the necessary signals, the timing model may soon revert back to “sell” mode. We locked in solid profits on the short side of the market (and through inversely correlated “short ETFs”) when our stock market timing system was formerly in “sell” mode throughout most of October and part of November.

Going into today, we have “officially” added ProShares UltraShort QQQ ($QID) to our watchlist as a potential ETF to buy for swing trade entry. This inversely correlated ETF that tracks the price action of $QQQ, but moves in the opposite direction. We are looking to buy $QID, rather than sell short $QQQ, because subscribers with non-marginable cash accounts are unable to initiate short positions, but are not restricted from buying “short ETFs” such as $QID. Also, even though it is leveraged, $QID has shown only fractional underperformance to its underlying index for short-term trading.

Our short setup in iShares Nasdaq Biotechnology Index ($IBB) remains on our watchlist as a candidate for potential swing trade short sale entry going into today (December 17). Regular subscribers of our swing trading newsletter should note our clear, predefined trigger, stop, and target prices for the $QQQ and $IBB trade setups in the ETF Trading Watchlist section of today’s report. Also, if you are new to our ETF and stock short selling strategy, be sure to check out this article on our trading blog (http://www.morpheustrading.com/blog/best-entry-short-selling-stocks/) for a good primer on how we enter new short positions.

As for the long side of the market, many international ETFs continue to show clear relative strength and bullish price divergence to the US markets. A handful of these ETFs even closed at fresh 52-week highs last Friday. We recently profited from the sale of two ETF swing trades on the long side of the market, $FXI (China) and $EPOL (Poland), and we continue to monitor select international ETFs for potential buy entry on a pullback. When emerging markets ETFs start forming price retracements that present positive reward to risk ratios for buy entry, we will highlight and bring to your attention some of the better-looking charts for possible buy entry. But other than international ETFs, there are practically no industry sector or other domestic ETFs on the long side of the market to get excited about.

morpheustrading
12-26-2012, 01:29 PM
In this stock trading strategy video, we use our new swing trading stock screener to show you how to identify the top-ranked stock breakout candidates of the US, Canadian, German, or Indian stock markets in 30 minutes or less every day.

Specifically, we show you the power and simplicity of our preset “potential breakout scan” that enables short-term traders to scan for the stocks that automatically meet the following technical analysis criteria:



Stock is showing a high relative strength (RS) ranking (our propriety indicator that compares individual stock performance versus the broad market over the past 6 to 12 months)
Stock is trading not more than 20% below its 52-week high
Stock is trading above its 50-day moving average
The 50-day moving average is above the 200-day moving average


Stocks that meet all the technical trading requirements above are stocks with a high likelihood of breaking out to new highs within the next week or two (assuming the overall broad market remains healthy). Actual stock picks highlighted in this video as current potential breakouts include the following ticker symbols: $SPF, $SWI, and $VAC.

In this trading education video, we also show you how to quickly and easily export the list of the best stock breakout candidates to Excel or CSV format, so that data can be imported into your own stock trading software.

To view this 4-minute video (on our YouTube channel), press the “play” button on the window below. For best quality, be sure to watch in full-screen and HD mode (720p) by clicking the icons on bottom right of video player window:

How To Find Top-Ranked Stock Breakouts In US, Canada, Germany, or India - Video (http://youtu.be/YPMbwTEC8Uo)

Still in beta mode for at least a few more weeks, the MTG Stock Screener (http://screener.morpheustrading.com) is presently free for anyone to use, and no website registration is required.

Since the stock scanner is web-based software, there is nothing to download. You can even run this technical stock screener on your iPad, iPhone, or Android smart device, making it easy to do your daily stock scanning research on the go.

Enjoy and here's to a great start to 2013!

Websman
01-01-2013, 10:58 PM
Your stock scanner looks to be a valuable tool. I'm going to check it out!

morpheustrading
01-02-2013, 10:18 AM
The weekly chart of SPDR S&P Homebuilders ($XHB) shows three months of tight basing action at the highs, with a false breakout in early November of 2012 that led to another nine weeks of consolidation. This is the bullish type of price action that leads to sustainable breakouts and ideal, low-risk swing trade entries. This is shown on the weekly chart of $XHB below:

http://www.morpheustrading.com/~rick//charts/2012/130102XHB1.png

Dropping down to the shorter-term daily chart interval, we also see a tight base of consolidation trading around the 50-day moving average, with two higher lows in early and late December. This is the shorter-term type of price confirmation that we like to see confirming longer-term bases of the weekly chart. The daily chart of $XHB is shown below:

http://www.morpheustrading.com/~rick//charts/2012/130102XHB.png

The last day of 2012 proved to be quite powerful, as major averages blasted higher in what was an impressive day of accumulation. The main stock market indexes closed more than 1.5% higher across the board, with volume increasing on both the NYSE and Nasdaq by 30%. The Nasdaq Composite, which had been quite the laggard in December, closed out the year with a strong 2.0% advance, and is now back above the 50 and 200-day moving averages.

The combination of Monday’s heavy volume advance and the Nasdaq reclaiming the 50-day MA was enough to cause our stock market timing system to shift to a different mode. Regular subscribers of our swing trading newsletter should note details of the change in the beginning of today’s report.

With the new change to our stock market timing model, we want to continue building our long exposure as new, low-risk swing trade setups develop. The iShares Peru Index ($EPU) triggered a new buy entry in our ETF trading portfolio on Monday.

In addition to $XHB, there is another new ETF swing trade buy setup on today’s “official” watchlist. Several individual stock trade setups have been added to today’s watchlist as well.

morpheustrading
01-03-2013, 10:28 AM
Great, please do check it out and let me know what you think.

Since it is still in beta mode, we greatly value the input (both good and bad) from everyone. So, feel free to lay it on me, man!


Your stock scanner looks to be a valuable tool. I'm going to check it out!

morpheustrading
01-03-2013, 10:29 AM
Our nightly ETF screening did not turn up many actionable swing trade setups at the moment, which is to be expected after such a big gap up in the market. Nevertheless, we were able to find one ETF that has been consolidating in a tight range over the past few months, after breaking above a weekly downtrend line.

Market Vectors Coal ETF ($KOL) is currently forming a “base at the lows,” after undergoing a significant decline from the highs of 2011. These lower level bases can be tricky to enter, as we usually see one or more false breakouts along the way before the real breakout occurs. The recent basing at the lows is shown on the weekly chart pattern of $KOL below:

http://www.morpheustrading.com/~rick//charts/2012/130103KOL.png

The shorter-term daily chart of $KOL below shows the 50-day MA (teal line) starting to trend higher over the past few months and the 20-day EMA has now crossed above the 50-day MA and is pointing higher. The 50-day MA is still trading below the 200-day MA, but that is to be expected on a lower level base breakout. Still, we should always see the price action above the 50-day MA before doing any buying of a base at the lows:

http://www.morpheustrading.com/~rick//charts/2012/130103KOL2.png

With this type of technical ETF trading setup, the idea is not to catch a bottom; rather, we wait for some bullish momentum to build before establishing a position. We also see higher “swing lows” forming within the base, which is a bullish sign. If the price action pauses for a day or two in the $25.30 to $26.00 area, we might be able to grab a low-risk entry point on a breakout above a two or three-day high, which would also put the price back above the 200-day MA. If this ETF meets our strict technical criteria for swing trade buy entry, regular newsletter subscribers will be notified in advance with exact trade details for the setup.

With the main stock market indexes posting back to back accumulation days (higher volume gains), the odds of the broad market staging a significant rally have increased dramatically in just a few days. Yet, the true test will come over the next two to three weeks, as we look for new ETF and stock breakouts to hold and extend higher, as new technical setups are developing. Such a constant rotation of fresh potential ETF and stock breakouts is one of the key factors we look for to confirm that a new bull market may be under way. Obviously, that hasn’t happened yet, but this at least gives you an idea of what to be looking for as a reliable indicator of whether or not recent strength in the stock market will be sustainable.

morpheustrading
01-10-2013, 05:00 PM
Market Vectors Coal ETF ($KOL), which we initially pointed out as a potential trend reversal buy setup in our January 3 technical commentary, continues to chop around in a sideways range since clearing resistance of its 200-day moving average on January 2. However, the ETF may now be providing us with an even lower-risk swing trade entry point than last week.

Over the past two days, $KOL has been trading below the $26.25 – $23.35 breakout pivot (the dashed horizontal line on the chart below). It has also been doing so on lighter volume, which is a positive sign. Now, we would ideally like to see the price action retrace down to its 200-day moving average and form some sort of bullish reversal candlestick pattern. If this occurs, it would subsequently provide us with a very low-risk swing trade buy entry.

The area we are looking at for potential buy trigger is somewhere between the 20-day exponential moving average (beige line) and 200-day moving average (orange line), as annotated on the daily chart of $KOL below:

http://www.morpheustrading.com/~rick//charts/2012/130110KOL2.png

Although we would prefer to enter $KOL as a pullback buy entry, a breakout entry on the next move above the horizontal pivot may be in order if the ETF continues to hold near the highs of its recent range. Zooming out to analyze the longer-term monthly chart of $KOL, the technical pattern becomes even more clear.

After moving above resistance of a downtrend line that was in place for more than a year, $KOL developed a tight base off the lows that has been in place for the past six months. As the above daily chart confirms, the ETF now appears ready to breakout above this extended range. Again, with trend reversal setups, it is crucial to first wait for an extended base to develop at the lows, in order to ensure the ETF has actually found a significant bottom, rather than trying to catch a falling knife:

http://www.morpheustrading.com/~rick//charts/2012/130110KOL1.png

Based on the follow-up technical analysis above, we are now stalking $KOL for potential buy entry in the coming days. Although we typically focus more on breakout entries and pullback entries of ETFs and individual stocks, we are not afraid to buy when the occasional trend reversal setup with an overly positive reward-risk ratio comes along. As always, regular subscribers to our swing trading newsletter will be notified beforehand with our exact trigger, stop, and target prices for this ETF trade setup if we make an “official” buy entry.

morpheustrading
01-10-2013, 05:05 PM
Many active stock traders lack the necessary time to do proper stock scanning and technical research every night. As such, one of the fastest ways to find the strongest stocks in the market, at any given time, is to simply look at chart patterns of stocks with the highest Relative Strength (RS) ranking.

Below is a link to a 4-minute trading strategy video (on YouTube), which shows you exactly how we quickly and easily pick stocks with the highest Relative Strength ranking in the market. Hope you find it to be helpful and informative:

How To Quickly Pick Stocks With Most Relative Strength To The Market - Video (http://youtu.be/0sz9h8r5qak)

morpheustrading
01-15-2013, 03:37 PM
On December 31, 2012, we bought the iShares MSCI All Peru Capped Index ETF ($EPU) as a short to intermediate-term swing trade entry in our nightly ETF and stock trading report. Although the position is still open, the ETF is presently showing an unrealized gain of 4% since our initial buy entry on the last day of 2012. For ETFs, which are typically less volatile than leading individual stocks, that’s a solid percentage move over a two-week period. In this post, we take you on an educational walk-through of the technical trading factors that preceded our recent breakout buy entry.

For starters, take a look at the annotated daily chart of $EPU below, which highlights our exact buy entry point, as well as our current target price on the $EPU:

http://www.morpheustrading.com/~rick//charts/2012/130115EPU.png

As the chart above illustrates, we bought $EPU on December 31, as the ETF broke out above resistance of the high of its trading range ($45.62). Since then, the price has been pushing steadily higher, and our “official” upside target is now the $49.40 area. Now that you’ve seen the bullish price action subsequent to the breakout, let’s take a more important look at the technical trading criteria that preceded the breakout, which then prompted us to buy the ETF for swing trade entry.

Generally speaking, the price action preceding the late December breakout in $EPU is a good example of the technical factors we look for when stalking an ETF or stock that is trading in a bullish consolidation pattern. Once a clear base of support has formed, we then look for the formation of a “higher swing low” to develop within the base, which lets us know that bullish momentum is on our side. Approximately 90% or more of our ETF and stock breakout entries (http://www.morpheustrading.com/blog/find-top-stock-breakouts/) will have some sort of a “higher swing low” in place prior to our buy entry, and this setup was no different:

http://www.morpheustrading.com/~rick//charts/2012/130115EPU2.png

After the higher swing low was established in the first half of December, the next step was to look for a tight then look for a tighter, shorter-term price range to develop just below resistance of the highs of the base. Notice on the chart above that this tight price range developed in the last two weeks of December, as $EPU chopped around just below the $45.50 level. Such price action indicated that a momentum-based breakout above the highs of the trading range was likely to occur in the coming days, so we added $EPU to our “official” newsletter watchlist as a potential buy entry, just in time to catch the December 31 breakout.

If $EPU hits our target price at the $49.40 area, we will automatically sell into strength to lock in a sizeable gain on the swing trade. However, in the event price action suddenly starts to weaken along the way, we will simply trail our protective stop tighter to lock in gains in the event of an unexpected bearish reversal. As always, we will keep regular subscribers notified of any changes to management of this ETF trade.

hags
01-15-2013, 05:50 PM
$KOL looks low risk and ready to go...higher swing lows and all kinds of MA support...

hags

morpheustrading
01-18-2013, 09:14 AM
Yeah, that's what I like the most is that it's low-risk with decent upside...the reward-risk ratio makes it a very ideal swing trade setup, even though it's not trading near its highs as a breakout play would be.

Deron


$KOL looks low risk and ready to go...higher swing lows and all kinds of MA support...

hags

morpheustrading
01-18-2013, 09:15 AM
The Market Vectors Russia ETF ($RSX) is currently forming a tight-ranged base (similar to a cup and handle chart pattern) on its longer-term weekly chart below. After rallying 30% off its 2012 low, $RSX subsequently pulled back and successfully tested new support (prior resistance) of its multi-year downtrend line, and now is forming the right side of this bullish chart pattern. The annotated chart below illustrates this:

http://www.morpheustrading.com/~rick//charts/2012/130118RSX1.png

Drilling down to the short-term daily chart interval, the cup and handle pattern can be more easily seen. The “cup” was formed after the low of the pullback that tested the downtrend line on the weekly chart above, and the “handle” has been forming the right side of the chart pattern just below the prior highs from September of 2012:

http://www.morpheustrading.com/~rick//charts/2012/130118RSX.png

As recently explained in this January 15 post on our trading blog, there are specific technical requirements that a chart pattern must exhibit before considering the ETF or stock as a potential swing trading breakout candidate.

First, the price action absolutely must stop making “lower highs” and “lower lows,” and eventually break the downtrend line of the pullback from the prior highs. Once this happens, and the price has formed a “higher swing high” and “higher swing low,” we then have something to work with. Without the higher lows or downtrend line break in place, all we have is a chart in a downtrend and showing no signs of bullish momentum. One key rule of our trading system (view 7-minute video overview (http://youtu.be/PqNnEjnbwaI) on YouTube) is that we do NOT try to predict future price action; rather, we merely react to the trend after it becomes established. As such, we never try to catch the bottom of a rally.

The key moving averages we monitor (20-day EMA, 50-day MA, and 200-day MA) are confirming the recent strength in $RSX. On the daily chart above, notice the 20-day EMA (beige line) crossed above the 50-day MA (teal line) in early December of 2012. Also, the 50-day MA is now above the 200-day MA and trending higher.

In late December, $RSX formed a second higher low, right at near-term technical support of the 20-day EMA, which led to a failed breakout above the prior swing high. However, the pullback from the failed breakout in early January again looks to have found support at the rising 20-day EMA. If this bullish chart pattern is to continue tightening up and forming higher swing lows, then the price action should continue holding above the 20-day EMA. This could lead to a breakout to new highs within the coming days, which is why $RSX has been added to our “official” watchlist as a potential swing trade buy entry. Regular subscribers to our ETF and stock trading newsletter should note our clearly predefined trigger, stop, and target prices for this trade setup in the ETF Watchlist section of today’s report.

morpheustrading
01-22-2013, 11:12 AM
In our January 10 commentary, we said Market Vectors Coal ETF ($KOL) could pull back to find near-term support in the area of both its rising 20-day exponential moving average and 200-day moving average (around $25.50). Specifically, we said, “we would ideally like to see the price action retrace down to its 200-day moving average and form some sort of bullish reversal candlestick pattern. If this occurs, it would subsequently provide us with a very low-risk swing trade buy entry.” In the days that followed, that’s exactly what happened. This is shown on the annotated daily chart of $KOL below:

http://www.morpheustrading.com/~rick//charts/2012/130122KOL.png

The support level at convergence of the moving averages (last week’s lows) looks as though it will hold. If it does, it will create another higher “swing low” on the right side of the base of consolidation. As we have pointed out several times in recent weeks, a valid base of consolidation should consist of both “higher lows” within the base, as well as tightening of the price action. $KOL presently meets this technical criteria.

Because the price action of $KOL has been playing out exactly as anticipated, we are now stalking this ETF for potential swing trade buy entry going into today’s session. Although this is a “trend reversal” setup, rather than a potential breakout to new highs, we like the reward-risk ratio for trade entry near its current price. Regular subscribers to The Wagner Daily trading newsletter should note our exact trigger, stop, and target prices for the $KOL setup in the ETF Watchlist section of today’s newsletter above.

Another ETF poised to rally in the coming days is SPDR Dow Jones Global Real Estate ETF ($RWO), which continues to consolidate in a tight range beneath the highs of its current base. Starting from the beginning of the basing pattern in September, the price action in $RWO is a good example of what we look for when identifying bullish price action within a base:

http://www.morpheustrading.com/~rick//charts/2012/130122RWO.png

When looking at a base of consolidation, we typically see more volatility on the left hand side of the pattern, as the stock/ETF initially pulls back from its highs, enters distribution mode, and sells off for several weeks. At one point during the decline, the price action will either “undercut” a previous low and reverse higher or simply explode higher and hold. This usually occurs after the stock/ETF breaks out above the downtrend line from the high of its base, which subsequently leads to the “right side” of the pattern developing with the formation of “higher swing highs” and “higher swing lows.”

With $RWO, notice that the price action bottomed out by undercutting its prior swing low and then reversing sharply off major support of its 200-day moving average (orange line). Since then, the ETF has formed a series of higher highs and lows, with the price action tightening up just below the highs of the base. Note that this tightening of the price does not always have to form just below the highs of the base, as it could form anywhere from 5-10% off the highs and still be technically valid. Regardless, we like the recent price action in $RWO and expect the ETF to soon break out above the highs of the range.

morpheustrading
01-25-2013, 11:09 AM
Yesterday’s price and volume action in the broad market produced the first true distribution day (higher volume decline) in the Nasdaq since the big gap up of January 2. While we have seen a few weak, unconvincing instances of distribution since then (ie. price action closed well off the intraday lows), yesterday’s (January 24) price action closed near the low of the day, as shown on the daily chart of the Nasdaq Composite Index below:

http://www.morpheustrading.com/~rick//charts/2012/130125NAZ.png
Although higher volume declines within an uptrend are not positive, it’s important to realize that a single distribution day does not kill a rally. Although yesterday’s action in the Nasdaq could easily lead to a near-term pullback from the recent highs, we can not rule out the possibility of a strong recovery today, as bull markets tend to close out the week in bullish fashion.

Because of its heavy weighting in Apple ($AAPL), which has been undergoing the healthy price correction we predicted back on November 5 of last year (http://www.morpheustrading.com/blog/aapl-qqq-technical-trouble/), the Nasdaq 100 Index (large-cap sibling of the Nasdaq Composite) has been a complete laggard in 2013. Yesterday’s decline caused the PowerShares QQQ Trust ($QQQ), a popular ETF proxy that tracks the Nasdaq 100, to close right at short-term support of its 20-day exponential moving average (20-day EMA). This is shown on the daily chart of $QQQ below:

http://www.morpheustrading.com/~rick//charts/2012/130125QQQ.png

It would be a positive technical signal if $QQQ holds support of its 20-day EMA (beige line on the chart above), or just “undercuts” it and promptly recovers. But if it doesn’t hold near yesterday’s low, the next stop could be a test of the $66 area (support of the lows of its recent trading range). Ideally, we would like to see all the main stock market indexes moving in sync with one another. The Nasdaq 100 doesn’t have to lead the broad market higher, but we certainly do not want the price to break down below the 50 and 200-day moving averages (teal and orange lines, respectively, on the chart above).

The SPDR S&P 500 ($SPY), an ETF that follows the price of the benchmark S&P 500 Index, probed above the prior day’s high yesterday morning, but sold off throughout the afternoon. This caused the ETF to give back most of its morning advance and form a bearish reversal candlestick on its daily chart. Although $SPY closed in positive territory, the retreat off its intraday high that occurred on heavier volume is known as “churning,” which is stealth selling into strength by banks, mutual funds, hedge funds, and other institutions:

http://www.morpheustrading.com/~rick//charts/2012/130125SPY.png

If the broad market follows through on yesterday’s negative price action and pulls back in, we could see at least a shallow, two to five-day selloff that causes the major indices to find initial, minor technical support near their 10-day moving averages (not shown on the charts above). Such price action would be an absolutely normal and healthy correction in a healthy bull market. A deeper retracement down to the 20-day EMAs would be a less bullish scenario that could indicate the market may need more time (at least two to five weeks) to form a healthy base of price consolidation.

What do you think? Are you anticipating a near-term correction from current levels?

billyjoe
01-25-2013, 05:42 PM
Morpheus, I'm holding at least 7 of your picks for nice gains. Only a couple with small losses. I hope we can preserve most of the gains if the market corrects. Will you lower targets or just sell most if you see the market start to falter?

---------------------billy

morpheustrading
01-30-2013, 11:40 AM
Hi Billy,

Sorry it took me a while to get back to you. I haven't been able to log in here to check messages for a few days.

Anyway, since your January 25 post, we have sold several positions because we tightened their stops to lock in gains in case they started pulling back. Generally, we trail stops to protect profits after we are showing an unrealized gain that is at least double the initial risk (2 to 1 reward-risk ratio). Alternatively, we also sell stocks and ETFs as they hit our initial target prices (whichever comes first).

Not sure if you are a subscriber to The Wagner Daily newsletter or not, but we actually list our exact, predetermined stop prices for all swing trades every evening (for the next day's trading session).

Hope that helps.

Deron



Morpheus, I'm holding at least 7 of your picks for nice gains. Only a couple with small losses. I hope we can preserve most of the gains if the market corrects. Will you lower targets or just sell most if you see the market start to falter?

---------------------billy

morpheustrading
01-30-2013, 11:42 AM
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:

http://www.morpheustrading.com/~rick//charts/2012/130130GXG.png

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:

http://www.morpheustrading.com/~rick//charts/2012/130130EEM.png

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.

morpheustrading
02-04-2013, 01:21 PM
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.

http://www.morpheustrading.com/~rick//charts/2012/130204SPY.png

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.

morpheustrading
02-06-2013, 01:02 PM
A few days ago, we added several new features and tweaks to the (free) MTG Stock Screener, an online technical stock scanner designed to quickly and easily find stocks and ETFs with the highest relative strength that are setting up for ideal swing trade entry points. New features include:

* New auto-switching between daily and weekly candlestick bars
* New export capability for individually selected stocks and ETFs
* Ability to select an individual ticker symbol while looking at the stock charts
* Improved search capabilities

For a quick visual overview of the new improvements to the functionality of our screener, check out the 5-minute video on YouTube below. For best quality, view in HD and "full screen" mode by clicking the icon on the bottom right of the video player window:

Video - New Features and Tweaks - MTG Stock Screener (http://youtu.be/euizyonWwxo)

As always, just drop me a line here in this thread if you have any questions. Enjoy.

morpheustrading
02-08-2013, 08:54 AM
After breaking out from a tight, seven-month long base of consolidation, the Guggenheim Shipping ETF ($SEA) has pulled back over the past few weeks to near-term support of its 20-day exponential moving average. The longer-term weekly chart below details the prior base of consolidation from which $SEA broke out above (around $16):

http://www.morpheustrading.com/~rick//charts/2012/130208SEA1.png

Drilling down to the daily chart interval below, we see the 50-day moving average (teal line) now trading above the 200-day moving average (orange line), and both indicators are moving higher. This is a bullish trend reversal signal. Furthermore, notice how the orderly pullback from the recent highs has enabled the price to find support at its 20-day exponential moving average (beige line):

http://www.morpheustrading.com/~rick//charts/2012/130208SEA2.png

The breakout above resistance on the weekly chart, combined with the pullback on the daily chart, provides for a positive reward-risk ratio for this ETF trade setup. As such, we are stalking $SEA for potential swing trade entry going into today’s session. Regular subscribers of The Wagner Daily newsletter should note our exact trigger, stop, and target prices for this trade in the ETF Watchlist section.

We have seen some institutional sector rotation lately, with a few strong stocks and ETFs pulling back sharply over the past few days ($EWI, $EWP, and $FXI are a few such ETFs). But overall, leadership stocks have held up well and the market has been quite resilient in fighting off distribution (higher volume selling). Although we continue to see the number of new, low-risk buy setups drying up, that is be expected at some point because many stocks and ETFs were rather extended from the January rally.

morpheustrading
02-14-2013, 07:25 AM
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:

http://www.morpheustrading.com/~rick//charts/2012/130214TANW.png

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:

http://www.morpheustrading.com/~rick//charts/2012/130214TAN.png

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
02-18-2013, 05:40 PM
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 (https://www.morpheustrading.com/services/swing-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:

http://www.morpheustrading.com/charts/2012/LNKD1.png

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:

http://www.morpheustrading.com/charts/2012/LNKD2.png

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
02-22-2013, 10:31 AM
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 (http://deronwagner.hubpages.com/hub/stock-trading-psychology) (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 (http://www.morpheustrading.com/blog/late-to-the-party-charlies-beware-of-yourselves/)). 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:

http://www.morpheustrading.com/~rick//charts/2012/130222SPX.png

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 (http://www.morpheustrading.com/blog/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
02-26-2013, 10:20 AM
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:

http://www.morpheustrading.com/~rick//charts/2012/130226QQQ.png

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):

http://www.morpheustrading.com/~rick//charts/2012/130226QQQ1.png

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:

http://www.morpheustrading.com/~rick//charts/2012/130226SPX.png

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 an actual such example (http://www.morpheustrading.com/blog/market-timing/) 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
03-01-2013, 11:34 AM
Since February 25, we have been operating on a “sell” signal that was generated by our rule-based market timing system (learn exactly what that means (http://www.morpheustrading.com/blog/market-timing-system)). We have been using that same market timing strategy internally since 2006, and it has always done a pretty good job of keeping us in line with the intermediate-term trend of the broad market, which is where we operate with our short to intermediate-term swing trading system.

Although stocks have actually moved slightly higher since our most recent sell signal was triggered, it’s important to understand the market does not always need to immediately break down in order for the timing model to have value.

Sometimes a sell signal is generated and the market immediately rolls over, but other stock market timing sell signals lead to an initial short-term bounce before the market moves substantially lower.

Obviously, we can never know in advance what will happen immediately following a new sell signal. Still, we always respect a bearish market timing signal by moving to cash and/or tightening up stops on long positions and waiting for conditions to improve before establishing new long positions. A new sell signal also allows us to selectively short sell stocks and ETFs with relative weakness.

To clearly illustrate the different ways a market can behave after receiving a sell signal from our market timing model, the charts below detail the subsequent price action of two different intermediate-term sell signals that were generated by our market timing strategy in 2012:

http://www.morpheustrading.com/~rick//charts/2012/130229SPX1.png

After a decent rally in early 2012, the distribution days began piling up in late April and early May, forcing us out of several long positions by May 3 and generating a 100% sell signal on the close of May 4 (as annotated on the chart above). In this case, the timing of the signal was perfect, as the market plunged 7% over the next 10 sessions.

Following a very short-lived rally in August/September of 2012, the number of distribution days once again began increasing within a short period of time, and leading individual stocks began falling apart as well. These are two of the main components (along with a few proprietary tweaks) that determine when our market timing model issues a new sell signal.

Given the bearish action described above, our market timing strategy generated a sell signal on the close of October 12, 2012. But although this prompted us to quickly exit our long positions, this time the stock market did not immediately come unglued.

Instead, there was a short-lived bounce that inevitably attracted some “late to the party” Charlies (http://www.morpheustrading.com/blog/late-to-the-party-charlies-beware-of-yourselves/) who were not paying attention to the bearish volume patterns in the market. Nevertheless, after one day of stalling on October 18, the market sold off sharply, erasing all of its gains from August and September:

http://www.morpheustrading.com/~rick//charts/2012/130229SPX2.png

Finally, let’s look at our most recent sell signal that was issued on February 25, 2013 (just four days ago). Much like the price action that followed the most recent sell signal from October of 2012, stocks did not sell off right away. Rather, the broad market bounced higher for a few days:

http://www.morpheustrading.com/~rick//charts/2012/130229SPX3.png

Because we are not mystical prophets, we don’t know if the market will sell off sharply over the next few weeks. Nevertheless, we have not been willing to establish new long positions over the past few days (though we entered a few new short positions) because experience has shown us exactly what can happen when the volume patterns in the market suddenly turn bearish.

Although the market pushed higher on February 26 and 27, it did so on lighter volume. This followed three out of four big declines on higher volume. Yesterday (February 28), the market stalled, which reinforced the sell signal generated by our stock market timing model on February 25.

Quite a few supposed “gurus” claim that market timing doesn’t work, but those who believe this are clearly not following the right indicators. Broad market volume patterns, combined with poor performance by leading individual stocks, always play a crucial role in identifying significant market tops and bottoms.

Many investors make the mistake of focusing purely on price patterns or percentage gains of a broad-based index, while paying little or no attention to the market’s volume patterns. To learn more about why volume is such an important indicator, check out 5 Technical Reasons Stocks May Soon Move Lower (http://www.morpheustrading.com/blog/5-reasons-stocks-will-move-lower/), an article we wrote on October 8, 2012 (just four days before our October 12 “sell” signal highlighted above).

When volatility increases, trading can become quite emotional, which can easily lead to bad decisions and a ton of regret. The best way to remove (or at least minimize) emotions from trading is to follow a well-defined and disciplined trading strategy at all times.

Our proven system for market timing allows us to operate with confidence during stressful periods in the market. Are we wrong sometimes? Of course! But successful trading isn’t about being right or wrong (ego); rather, it’s about doing the right thing. When traders consistently do the right thing in trading, the money eventually follows.

morpheustrading
03-04-2013, 02:12 PM
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:

http://www.morpheustrading.com/~rick//charts/2012/130304SPY.png

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):

http://www.morpheustrading.com/~rick//charts/2012/130304QQQ.png

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 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 momentum swing trading blog (http://www.morpheustrading.com/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
03-11-2013, 02:51 PM
With our stock and ETF swing trading strategy (details about that here (http://www.morpheustrading.com/best-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:

http://www.morpheustrading.com/~rick//charts/2012/130311TBT.png

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:

http://www.morpheustrading.com/~rick//charts/2012/130311TAN.png

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
03-14-2013, 12:12 PM
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):

http://www.morpheustrading.com/~rick//charts/2012/130314XOP2.png

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:

http://www.morpheustrading.com/~rick//charts/2012/130314XOP.png

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 this March 11 blog post (http://www.morpheustrading.com/blog/etf-trend-reversals-tbt-tan/) 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
03-18-2013, 03:09 PM
The impressive, long-term uptrend in gold (from 2005 to 2011) appears to be reaching an end. Since forming an all-time high in September 2011, SPDR Gold Trust ($GLD), a popular ETF proxy for the spot gold commodity, has merely been oscillating in a sideways range. However, it appears that a definitive move lower is on the horizon in the coming weeks.

On the weekly chart of $GLD below, notice that the ETF attempted to break out above key horizontal price resistance in October 2012, but was unable to do so. As such, $GLD formed a significant “lower high” on its long-term chart. Nevertheless, there’s still a major base of horizontal price support around the $150 level:

http://www.morpheustrading.com/charts/2013/130318GLD.png

The next near-term move in $GLD could be a bounce into resistance in the $158 to $160 range. In this area, there is new resistance of the prior lows from December 2012 and January 2013, as well as resistance of the 10-week moving average (roughly the same as the 50-day moving average) and the 40-week moving average (approximately equal to the 200-day moving average).

If $GLD bounces to this level and stalls, it will form a second significant “lower high.” This would be bearish and could easily lead to a breakdown below major support at the $150 area on the next move down.

Another possible scenario for $GLD is that it fails to bounce much higher and simply breaks below its four-week base of support (below $150) without first forming another lower high.

Regardless of how $GLD plays out, we have added this precious metal ETF to our internal watchlist as a potential short sale entry in the coming weeks. Traders with non-marginable cash accounts (meaning they can’t sell short) could simply buy an inversely correlated “short ETF” (such as $DGZ) instead.

A short sale entry into $GLD would be based on whichever of the two scenarios occur first: a bounce to the $158 to $160 area that stalls OR a breakdown below the $150 support level that subsequently bounces into resistance. As always, we will give our newsletter subscribers a heads up with our exact entry, stop, and target prices if we add this swing trade setup to our” official” watchlist. But for now, we are waiting to see how the next near-term move plays out.

As a reminder, we never sell short into strength (here (http://www.morpheustrading.com/blog/best-entry-short-selling-stocks/) is how we do it instead). So, even if $GLD bounces into resistance of the $158 to $160 level, our trading rules are such that we must subsequently wait for the first big gap down or significant down day that follows. Entering a short position while a stock or ETF is still rallying has a very high risk of getting your stop run. The much lower-risk entry point is waiting for the price to start heading back down, thereby immediately putting the odds in your favor.

morpheustrading
03-25-2013, 02:33 PM
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 (http://www.morpheustrading.com/blog/trading-the-head-and-shoulders-chart-pattern/) that has been developing on the weekly chart interval of $QQQ.

If this bearish chart pattern starts following through to the downside, it may create a low-risk entry point for short selling $QQQ (or buying a short ETF such as $PSQ or $QID). In this article, we walk you through the details of this technical trade setup for $QQQ, and present you with the most ideal scenario for actionable trade entry. For starters, check out the annotated weekly chart pattern of $QQQ below:

http://www.morpheustrading.com/charts/2013/130325QQQweekly.png

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:

http://www.morpheustrading.com/charts/2013/130325QQQdaily.png

Just as the “line in the sand” for price support of $SPY is last week’s low, the same is true of $QQQ, but even more so.

Notice how support of last week’s low in $QQQ neatly converges with both the 50-day moving average (teal line) AND the intermediate-term uptrend line from the November 2012 low (red line). The more technical indicators that converge in one area to form price support, the more substantial and pivotal that support level becomes. As such, be sure to monitor the $67.60 area very closely in the coming days, as a convincing breakdown below that level could be the impetus that sends $QQQ on its way down to testing the neckline of its head and shoulders pattern.

Despite the convincing head and shoulders pattern of $QQQ, it is important to keep the following two things in mind:

First, due in no small part to recent weakness in heavily-weighted Apple Computer ($AAPL), the Nasdaq has been a laggard throughout the multi-month rally in the broad market. Rather, the blue chip Dow Jones Industrial Average has been leading, and that index still remains very near its multi-year highs. In a fractured market with significant divergence between the major indices, clear follow-through in either direction usually does not come easily.

The second (and more important) point is that the head and shoulders pattern, like all technical chart patterns, obviously does NOT work 100% of the time. In fact, far from it. This means that blindly selling short $QQQ (or buying an inversely correlated “short ETF”) at the current price level of $QQQ is risky and not advisable.

Instead of entering this swing trade setup based purely on anticipation of the pattern working, our technical trading system mandates that we first wait for price confirmation that indicates momentum has shifted back in favor of the bears. At a minimum, we would NOT enter a short position unless/until $QQQ breaks down below last week’s low, which we now know is a key level of price support. Jumping the gun by trying to get an “early” entry point is never advisable in swing trading.

As always, we will give regular subscribers of our ETF and stock momentum trading newsletter (https://morpheustrading.com/services/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
03-26-2013, 05:15 AM
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 (http://youtu.be/j7aLZKb2WmU), 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

morpheustrading
03-27-2013, 09:52 AM
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:

http://www.morpheustrading.com/~rick//charts/2012/130327MX.png

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
04-02-2013, 10:40 AM
In uptrending markets, most of our swing trade setups are stocks and ETFs (with relative strength) that are breaking out above bases of consolidation. We also buy pullbacks of uptrending equities when they retrace to near-term support levels. However, another bullish chart formation many technical traders profit from is the “cup and handle” pattern.

In this article, we use current annotated charts of United States Natural Gas Fund ($UNG), a commodity ETF that roughly tracks the price of spot natural gas futures, to show you how to trade the cup and handle chart pattern. Let’s begin by looking at the weekly chart timeframe of $UNG below:

http://www.morpheustrading.com/~rick//charts/2012/130402UNG.png

Notice that the left side of the pattern begins in November 2012, after a 60% rally off the lows. This is positive because proper cup and handle patterns should not form at or near 52-week lows; rather, there should already be an uptrend in place for at least several months in order for a correct cup and handle to develop.

The selloff in December 2012, as well as the bottoming action in January and February of this year, combine to form the left side and bottom of the “cup.” The right side of the cup was formed when $UNG broke out above major resistance of its 200-day moving average and rallied to the $22 area.

Zooming in to the shorter-term daily chart interval, note the “handle” portion of the pattern that is currently developing:

http://www.morpheustrading.com/~rick//charts/2012/130402UNG2.png

The handle typically requires at least a few weeks to properly develop (sometimes more). While forming, price action will typically slope lower. In the case of $UNG, even an “undercut” of the March 25 low and 20-day exponential moving average would be acceptable. However, the price needs to hold above the $20 level during any pullback. Otherwise, a breakdown below that important support level could signal the pattern needs a few more months to work itself out.

If buying $UNG, it is important for traders to be aware of possible contango issues that could result in an underperformance of the ETF, relative to the actual spot natural gas futures contracts. Nevertheless, contango is typically not a big deal if exclusively swing trading the momentum of $UNG over shorter-term holding periods (less than about 4 weeks). Conversely, the negative effects of contango become much more apparent over long-term “buy and hold” investing timeframes.

For our rule-based ETF and stock swing trading system, the technical chart pattern of $UNG is not yet actionable. Still, the annotated charts above clearly explain the specific technical criteria we seek when trading the “cup and handle” chart pattern.

As always, we will promptly alert newsletter subscribers with our preset entry, stop, and target prices for this swing trade setup when/if it provides us with an ideal, low-risk buy entry point in the coming days.

morpheustrading
04-11-2013, 02:38 AM
In this April 2 blog post (http://www.mrmarketishuge.com/showpost.php?p=116539&postcount=77), 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:

http://www.morpheustrading.com/charts/2013/130408UNG.png

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 (https://www.morpheustrading.com/services/swing-trading-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
04-11-2013, 02:48 AM
Our technical ETF and stock screens (http://www.morpheustrading.com/services/stock-screener) 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:

http://www.morpheustrading.com/~rick//charts/2013/130410EWS2.png

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:

http://www.morpheustrading.com/~rick//charts/2013/130410EWS1.png

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):

http://www.morpheustrading.com/~rick//charts/2013/130409VNM1.png

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:

http://www.morpheustrading.com/~rick//charts/2013/130409VNM.png

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.

If you want to be notified in advance of our exact entry, stop, and target prices for these Asian ETF swing trade setups, be sure to get started today (http://www.morpheustrading.com) with your 30-day risk-free trial subscription to The Wagner Daily swing trade newsletter. Your subscription also includes access to our winning market timing model, Live Trading Room, and Live Q&A Webinars (for members only).

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
04-19-2013, 01:00 PM
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:

http://www.morpheustrading.com/~rick//charts/2013/130419SPX.png

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 (http://www.morpheustrading.com/blog/market-timing-system/) 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:

http://www.morpheustrading.com/~rick//charts/2013/130419UNG.png

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 (http://www.morpheustrading.com/blog/how-to-trade-cup-handle/). 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 (http://www.morpheustrading.com/blog/semiconductors-smh-rally/), 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:

http://www.morpheustrading.com/charts/2013/130419CLDX.png

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 (http://www.morpheustrading.com/blog/how-to-trade-earnings-lnkd/) 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
04-23-2013, 09:37 AM
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:

http://www.morpheustrading.com/~rick//charts/2013/130423QQQ.png

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 (http://www.morpheustrading.com/blog/semiconductors-smh-rally/), 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:

http://www.morpheustrading.com/~rick//charts/2013/130423SMH.png

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
04-29-2013, 09:33 AM
On April 14, we wrote a blog post titled How To Profit From The Break Of 6-Year Uptrend in Gold. (http://www.morpheustrading.com/blog/part-2-how-to-sell-short-gold-gld/) 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:

http://www.morpheustrading.com/charts/2013/130428GLD.png

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 (learn more about our short selling strategy (http://www.morpheustrading.com/blog/best-entry-short-selling-stocks/)).

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 (https://www.morpheustrading.com/services/swing-trading-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
04-29-2013, 12:01 PM
Until recently, the 2013 stock market rally has clearly been led by the Dow Jones Industrial Average, while the Nasdaq Composite has lagged behind considerably.

But since the recovery off the April 18 "swing lows" in the broad market, the Nasdaq has climbed 3.6%, while the Dow has gained only 1.2% during the same period.

Is this sudden display of relative strength in the Nasdaq only a short-term aberration, or is it the start of new leadership in the stock market?

It's too early to know for sure. However, if funds have indeed begun rotating into the Nasdaq, it would be a bullish signal for the overall market.

This type of sector rotation would point to an increasing appetite for risk among banks, mutual funds, hedge funds, and other market-moving institutional players. This is because the tech-heavy Nasdaq is generally considered to be more "risky" then deploying funds in the "old school" Dow. Of course, the potential rewards for investing and trading in the Nasdaq are typically much greater than the Dow as well.

Because our momentum-based strategy for swing trading stocks focuses primarily on small to midcap stocks (many of which are traded on the Nasdaq), we would obviously welcome the next phase of the market rally being driven by the Nasdaq.

Many leading stocks in our swing trading portfolio, such as LinkedIn ($LNKD), have begun rallying to new 52-week or all-time highs ahead of the Nasdaq. This is a bullish indication of relative strength in the stock market that enables astute traders to outperform the main stock market indexes through trading in these market leaders.

It's not only stocks that benefit from a strengthening Nasdaq. The right industry sector ETFs can show leadership and relative strength too.

It's not only stocks that benefit from a strengthening Nasdaq. The right industry sector ETFs can show leadership and relative strength too.

Market Vectors Semiconductor ETF ($SMH), which is currently showing an unrealized gain of 3.8% since buy entry in our nightly ETF and stock picking report, nicely fits the bill.

Last week, the PowerShares Nasdaq 100 ETF ($QQQ) scored a solid 2.2% gain. However, $SMH jumped 3.9% last week (nearly double the advance of $QQQ). More importantly, $SMH broke out above a 3-month base of consolidation and rallied to a fresh 52-week high last week. It's a clear sign of relative strength in the semiconductor sector that $SMH has jumped to a new high ahead of the Nasdaq, which tells us we are holding on to the right positions.

The April 24 breakout to a new 52-week high in $SMH is shown on the daily chart below:

http://www.morpheustrading.com/charts/2013/130425SMH.png

In case you missed it, we initially made a bullish call on $SMH (and the semiconductor sector) in this blog post (http://www.morpheustrading.com/blog/semiconductors-smh-rally/) about a month ago.

At that time, we liked that $SMH was breaking out above resistance of a nine-year downtrend line, which was only apparent by looking at the long-term monthly chart interval of the ETF.

Below is the same monthly chart of $SMH we pointed out on March 28, back when $SMH was still in consolidation mode (trading below its 52-week high):

http://www.morpheustrading.com/charts/2013/130328SMH.png

Now that $SMH has finally broken out to a new 52-week high, the breakout above the nine-year downtrend line shown above is becoming confirmed.

Because this trend reversal is of such a long-term nature, it may provide swing traders with many stock and ETF buying opportunities in the semiconductor sector; not only in the near-term, but in the intermediate-term as well.

In case you are new to momentum swing trading, it's important to understand that stocks and ETFs breaking out to new 52-week high usually provide us with our largest gains because these equities have a complete lack of overhead price resistance (which would otherwise be created by sellers who bought a higher price).

If you are new to our overall swing trading system, including the concept of buying stocks and ETFs at new highs, click here (http://www.morpheustrading.com/best-swing-trading-strategy) for a basic overview of how our selection process works.

morpheustrading
05-02-2013, 08:24 AM
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:

http://www.morpheustrading.com/charts/2013/130502FDNweekly.png

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:

http://www.morpheustrading.com/charts/2013/130502FDNdaily.png

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 (http://finance.yahoo.com/q/hl?s=FDN+Holdings) 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 (http://www.morpheustrading.com/blog/how-to-trade-earnings-lnkd/) for a total gain of 22%.

morpheustrading
05-07-2013, 04:07 PM
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:

http://www.morpheustrading.com/~rick//charts/2013/130506cup.png

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:

http://www.morpheustrading.com/~rick//charts/2013/130506KORS.png

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):

http://www.morpheustrading.com/~rick//charts/2013/130506YRCW.png

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:

http://www.morpheustrading.com/charts/2013/130506YRCW2.png

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 (https://www.morpheustrading.com/services/swing-trading-newsletter) subscribers of our exact entry, stop, and target prices).

As previously mentioned, we will soon be posting on our stock trading blog (http://www.morpheustrading.com/blog) an educational review of last month’s winning swing trade in $CLDX, which will be an example of our “Price Momentum” setup.

morpheustrading
05-07-2013, 04:18 PM
Over the weekend, I stumbled across a new social networking site that is just for "finance fanatics."

Apparently, it is a brand new site, but I like the format and think it has potential. There are sections for traders and investors of stocks, options, forex, futures, etfs, etc.

In case anyone interested in checking it out, here's the link (http://www.financepins.com).

morpheustrading
05-09-2013, 03:36 PM
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 (http://youtu.be/fSWfyhmrDnA) to the video on YouTube.

morpheustrading
05-13-2013, 03:28 PM
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 (http://deronwagner.hubpages.com/hub/stock-trading-psychology).

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 (http://www.morpheustrading.com/blog/semiconductors-smh-rally/). 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:

http://www.morpheustrading.com/charts/2013/130513SMH.png

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
05-17-2013, 09:44 AM
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 March 18 blog post (http://www.morpheustrading.com/blog/short-selling-gold-gld-trend-reversal/), and then again on April 29 (http://www.morpheustrading.com/blog/short-selling-gold-gld-momentum/).

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:

http://www.morpheustrading.com/charts/2013/130517DZZ.png

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).

morpheustrading
05-21-2013, 09:04 PM
When buying breakouts of growth stocks, one of the three main techniques of our momentum swing trading system (http://www.morpheustrading.com/best-swing-trading-strategy), there are certain technical criteria we look for because all the best stock breakouts share the same traits.

Last week (May 17), we sold a breakout swing trade in Pandora Media ($P) for a net gain of 14% with a holding period of less than three weeks. Prior to buy entry on May 1, the stock possessed the top 5 technical traits for breakout buying, which we have listed below (see the first chart below for a visual reference):

High volume gap - On March 8, the stock gapped sharply higher to close the day with an 18% gain. Most importantly, volume spiked to approximately 700% its 50-day average level. When stocks score such a massive one-day gain that is accompanied by a monster surge in volume, it is undeniably the footprint of institutional buying (which we always want to see on the long side).

20-day MA > 50-day MA - During the formation of the base of consolidation that followed the March 8 gap, the 20-day exponential moving average remained above the 50-day moving average the entire team. This is a sign that the uptrend technically remains solid.

Tight base above 50-day MA - As $P was forming its base, the 50-day moving average was rising up to meet the price. When that occurred, the stock touched and held key support of its 50-day MA several times. Simultaneously, the base began tightening up, which is typically a precursor to a breakout.

First base after reversal off lows - This was the first real base that $P formed since its big reversal off the late 2012 lows (around 8 dollars). The first stage bases often have the highest odds of a successful breakout because the momentum of the new uptrend is just ramping up.

IPO - Although not a requirement of breakout setups, one bonus is that $P recently launched as an IPO in 2011. If strong earnings growth and momentum exists, IPOs have a tendency to make explosive moves because of the lack of overhead supply (resistance).

Below is the daily chart of $P, as it looked at the time of our breakout buy entry:

http://www.morpheustrading.com/charts/2013/130521Pfirst.png

After we determined that a valid base of consolidation had formed, we then focused on determining exactly when to buy. The technical factors that helped us drill down to a precision entry point were:

A “higher low” formed within the base (second touch of the 50-day MA)
Price broke out above the 6-week downtrend line started by the May 8 high
A tight range formed immediately upon breaking out above the downtrend line
The technical signals above told us it was the proper time to stalk $P for potential swing trade buy entry. In the May 1 issue of The Wagner Daily (https://www.morpheustrading.com/services/swing-trading-newsletter), we told subscribing members we would be buying $P if it traded above $14.18 (just above the April 30 high).

As anticipated, the stock triggered our buy entry that day, and we were long at an entry price of $14.20. The chart below shows our entry point, the subsequent price action, and our eventual exit point a few weeks later:

http://www.morpheustrading.com/charts/2013/130521P.png

As $P began climbing higher, our plan was to hold the swing trade as long as the price held above the steep uptrend line that formed on the hourly chart (similar to the way we recently trailed a stop to maximize gains on our swing trade of $SMH (http://www.morpheustrading.com/blog/trail-stops-swing-trades/)).

On the close of May 16, we raised the stop to just below that day’s low because we observed “stalling” action over the preceding two days and wanted to protect our profits. An analyst downgrade caused $P to gap down and hit our tightened stop on the open of May 17, but our sale at $16.17 still allowed us to lock in a nice 14% gain on the trade. This was just a bit less than the usual 20 to 25% gains we typically seek to achieve with breakout momentum trades.

morpheustrading
05-28-2013, 04:51 PM
On the morning of May 23, one day after the first significant broad market decline in more than a month, we targeted both Guggenheim Solar ETF ($TAN) and Market Vectors Semiconductor ($SMH) for potential pullback buy entry in our newsletter (these two ETFs were actually pointed out as potential pullback entries in our May 22 blog post (http://www.morpheustrading.com/blog/buy-the-pullback/) one day earlier).

Because bearish follow-through momentum from the May 22 sell-off carried through into the May 23 open (as anticipated), both ETF swing trade setups triggered for “official” pullback buy entry, and have been acting well since then.

As of this moment, the rather volatile $TAN is already showing an unrealized gain of 8.9% since our May 23 buy entry of $23.45 (where we grabbed some shares on a pullback to the 10-day MA). From here, we would ideally like to see the ETF build a base of consolidation near the highs, then breakout to a new high within the next several weeks.

The other trade we entered on the May 23 open was $SMH, which we swiped at $37.68 as it pulled back to test substantial near-term support of its 20-day exponential moving average (for the first time since its breakout).

The following day, $SMH formed a bullish “hammer” candlestick and closed above its 20-day EMA for the second straight day. The daily chart below illustrates this (based on most recent closing price of May 24):

http://www.morpheustrading.com/charts/2013/130528SMH.png

Based on the healthy pullback of $SMH that is holding the 20-day EMA, the ETF should be well positioned to climb back to the highs as long as the broad market holds steady.

If we get a little bit of help from the market, in the form of a bounce this week, $SMH should be among the first industry sector ETFs to outperform due to the relative strength $SMH was exhibiting on the way up. An added bonus is that we are now back into this ETF at a much lower price than our most recent exit at $38.44 (http://www.morpheustrading.com/blog/trail-stops-swing-trades/), when we sold $SMH for a 9% gain on May 13.

On May 6, iShares Malaysia Index Fund ($EWM) gapped up 6% to a fresh all-time high. Since this was a confirmed breakaway gap (http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:gaps_and_g ap_analysi#breakaway_gaps), we have been stalking this ETF for the past several weeks, waiting for a base of consolidation to form and the moving averages to rise up and provide support.

Last Friday (May 24), $EWM gapped down to “undercut” support of its 20-day exponential moving average:

http://www.morpheustrading.com/charts/2013/130528EWM.png

From here, we will be watching to see if $EWM forms some sort of bullish reversal bar and closes back above the 20-day EMA. If it does, it could present a possible buying opportunity the following day (above the prior day’s high). For now, it is not actionable on today’s watchlist, but we will be sure to notify subscribers of our nightly swing trade newsletter (http://MorpheusTrading.com) if/when we decide to buy as an “official” swing trade on our watchlist.

LemonButt
06-08-2013, 11:00 AM
http://www.morpheustrading.com/~rick//charts/2012/130327MX.png


I'm curious what your updated thoughts are on MX (and if you're still holding it). I bought in the $15s and cash out a few thousand and bought calls on Friday--20 December $20 calls for $1.86. The median price target on this is $23 and I really like the fundamentals, but we've been "breaking out" on no volume.

morpheustrading
06-17-2013, 08:20 AM
I'm curious what your updated thoughts are on MX (and if you're still holding it). I bought in the $15s and cash out a few thousand and bought calls on Friday--20 December $20 calls for $1.86. The median price target on this is $23 and I really like the fundamentals, but we've been "breaking out" on no volume.

Hi LemonButt,

Apologies for the delay answering your question. I have been traveling for the past week or so and haven't logged onto the board in quite a while.

Anyway, MX looks even better now than it did a few weeks ago because it has demonstrated to clearly have relative strength to the broad market during the recent correction.

Based purely on a technical point of view, I love how it is holing near the highs as market bumped and grinded. My personal opinion is that it probably breaks out to a new high within the next few days to a week, especially with broad market conditions improving...but that's just my 2 cents.

Hope that helps.

morpheustrading
06-17-2013, 08:23 AM
Since mid-April, one of the strongest industry sector ETFs in the market has been Market Vectors Semiconductor ($SMH). We initially bought this ETF when it broke out back in April, sold into strength for a 9% gain several weeks later (http://www.morpheustrading.com/blog/trail-stops-swing-trades/), then re-entered with partial share size after it began pulling back (May 23).

As the broad market has been consolidating and digesting its recent gains over the past month, $SMH has been holding up well and we remain long our partial position from the May 23 entry. However, now that the 50-day moving average has finally risen to meet the price of $SMH, we are also prepared to add to the swing trade position, in anticipation of a pending resumption of its new uptrend and a breakout to a new 52-week high.

Below is the daily chart pattern of $SMH:

http://www.morpheustrading.com/charts/2013/130614SMH.png

As you can see, the June 13 intraday low in $SMH nearly coincided with a kiss of its rising 50-day MA (teal line). When an ETF or stock with relative strength breaks out of a base, the first subsequent pullback to the 50-day MA typically presents a low-risk buying opportunity because it is this level where institutions often step back in to buy.

Rarely will the first retracement to a 50-day MA that follows a substantial breakout fail to hold up on the first test (although “undercuts” of one or two days are common). As such, subscribing members of our swing trader newsletter (https://www.morpheustrading.com/services/swing-trading-newsletter) should note we have listed $SMH as a potential buy entry. Please see the “Watchlist” section of today’s report for our exact trigger, stop, and target prices for this setup.

In our June 6 blog post (http://www.morpheustrading.com/blog/triple-convergence-support-sp500/), we pointed out the “triple convergence of support” that was forming in the S&P 500. Specifically, we highlighted how key intermediate-term support of the 50-day moving average, dominant uptrend line, and horizontal price support from the prior highs were all merging together. In case you missed it, here is the exact chart of the S&P 500 SPDR ($SPY) we showed that day:

http://www.morpheustrading.com/charts/2013/130606SPY.png

The very next day, the S&P 500 “undercut” that area of support on an intraday basis, but formed a bullish reversal candle to close above it. Such a bounce was not surprising, as the more technical indicators that converge to form support, the more significant that support becomes.

After the formation of that triple convergence of support on the S&P 500, we indeed expected a bounce, but also still expected the broad market to consolidate a bit longer before resuming its uptrend. Now that stocks have been trading in a range for the past few weeks, the 50-day moving average has again risen up to provide support for $SPY (just like the $SMH chart). Here is the current snapshot of $SPY:

http://www.morpheustrading.com/charts/2013/130614SPY.png

The charts of both $SMH and $SPY above are great examples of the significance of the 50-day moving average as an intermediate-term indicator of support. However, it’s important to realize that stocks and ETFs are more likely to bounce off the 50-day MA if it is only the first touch of the 50-day MA that follows a convincing breakout from a valid base of support.

Each subsequent test of the 50-day MA that occurs before the index or stock breaks out to another high technically weakens support of the 50-day MA and thereby increases the odds of a breakdown below it. As such, it would be a negative sign for the market if $SPY and/or $SMH break down below the June 13 lows (which would correspond to a break of the 50-day MAs).

As long as the major indices and leading sectors hold their 50-day MAs while continuing to consolidate, stocks still technically look good for another move higher, which would pick up where the April to May rally left off.

morpheustrading
06-28-2013, 09:42 AM
Although stocks managed their third straight round of gains yesterday (June 27), it is risky and probably a bit too early to establish new long positions right now. This is because several of the major indices are now running into new overhead resistance of their 20 and 50-day moving averages (remember that a prior level of support technically becomes the new level of resistance after the support is broken).

One such example of this moving average resistance can easily be seen in the ETF proxy for the benchmark S&P 500 Index ($SPY):

http://www.morpheustrading.com/charts/2013/130628SPY.png

Notice that yesterday’s (June 27) intraday high in $SPY perfectly coincided with near-term resistance of the 20-day exponential moving average (beige line). After testing that resistance level, $SPY subsequently closed at its intraday low. Furthermore, the 20-day EMA has recently crossed below the 50-day MA (teal line), which can be a signal that an intermediate-term uptrend may be reversing.

Because of the overhead supply and technical resistance levels currently confronting stocks, the market may be subject to a pullback over the next few days. At the least, it would be reasonable to expect stocks to chop around and consolidate a bit before moving higher.

In many cases, the first bounce into resistance that follows a sharp selloff (like we saw last week) provides low-risk entry points for new short positions, in anticipation of another leg down in the market. However, this time we are NOT convinced that selling short right now is the right thing to do. Why? Simply because leading stocks have been holding up pretty well throughout the market correction.

When leading stocks are not breaking down en masse, stock market corrections are typically short-lived. Paying attention only to the price action of the main stock market indexes, while ignoring the price action of leading stocks, is a big mistake that new traders frequently make. They fail to realize that the major indices usually lag behind leading stocks, and not the other way around (major indices setting the pace of leading stocks).

So, if it’s too early to start buying stocks right now, but conditions are also not ideal for initiating new short positions, what is the best plan of action right now? Having a bit of patience and sitting mostly or fully in cash for at least the next few days is probably the best bet. Dipping a toe in the water through buying one or two positions showing relative strength AND with reduced share size would not be too risky; however, this is definitely NOT the time to be aggressive on the long side.

morpheustrading
07-08-2013, 05:15 PM
Last Friday’s (July 5) rally pushed each of the main stock market indexes back above their respective 50-day moving averages. The reclamation of this key, intermediate-term trend indicator is significant because it points to the bulls regaining the upper hand in the stock market. Big-money players such as banks, mutual funds, hedge funds, and other institutions are also more confident buying stocks when the S&P, Dow, and NASDAQ are all above their 50-day moving averages.

On the following daily chart of the benchmark S&P 500 Index SPDR ($SPY), a popular ETF proxy for the broad-based S&P 500 Index, we have highlighted the reclamation of its 50-day moving average:

http://www.morpheustrading.com/charts/2013/130708SPY.png

One of the most positive aspects of recent stock market action has been the relative strength in small-cap stocks.

Although all the major indices are back above pivotal resistance of their 50-day moving averages (which should now act as new support), most of the main stock market indexes are still trading well below resistance of their prior highs from May 2013. But one exception is the small-cap Russell 2000 Index, which has already rallied all the way back to its prior highs AND set a fresh all-time closing high last Friday. This is shown on the daily chart of iShares Russell 2000 index ETF ($IWM) below:

http://www.morpheustrading.com/charts/2013/130708IWM.png

Keeping an eye on the performance of small-cap stocks during and after market corrections is crucial because institutional money flow into the small-cap arena indicates an increasing demand and appetite for risk among “smart money” investors.

When the stock market is being led by small-cap stocks, new leadership develops in the top stocks. This, in turn, pulls the entire broad market along with it. This is much better than market environments where leadership is among blue-chip stocks instead.

If funds are flowing primarily into Dow-type stocks, it can indicate a “flight to safety” among institutional players, which is not very confidence-inspiring for traders and investors. Moreover, such market conditions limit the number of potential trading opportunities for small and mid-cap swing traders like ourselves.

On the other hand, clear relative strength and leadership in small to mid-cap growth stocks (like we are seeing now) provides many more opportunities to profit from increasing momentum of leading stocks and ETFs.

For now, we continue “dipping our toes in the water” on the long side of the market. But as we continue to see improving price action in the broad market, as well as new breakouts among leading stocks, we will more aggressively start jumping back into the long side of the market.

morpheustrading
07-11-2013, 03:20 PM
There are many technical indicators that help increase the odds of picking the right stock that will move higher after buying it. Our disciplined, rule-based stock trading strategy incorporates the most effective, yet simple of these technical indicators.

However, one frequently overlooked element of profitable stock trading is knowing how to pick the stocks with the highest volatility, and therefore the best odds of a larger gain when the stock rallies.

In order to do so, it is necessary to understand and use a technical indicator known as ATR (Average True Range), which basically indicates the level of day-to-day volatility for a stock (click here (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:aver age_true_range_atr) for a detailed definition and explanation of ATR).

If two stocks both have similarly bullish chart patterns, but you don’t know which one to buy, comparing the ATR of each stock will help make your decision easier because simply choosing the stock with the higher ATR may increase your percentage gain when the stock breaks out.

So, if you’re ready to learn how to maximize your stock trading profits through finding and trading high ATR stocks, check out the 5-minute trader education video on YouTube by clicking on the following link:

How High ATR Stocks Help Maximize Your Stock Trading Profits (http://youtu.be/Po0kElfgwSQ)

morpheustrading
07-22-2013, 10:32 AM
We have been holding Guggenheim Solar ETF ($TAN) as an intermediate-term swing trade since July 2, when we bought in anticipation of another breakout to new highs. This momentum trade has been working out well so far, as this ETF swing trade is presently showing an unrealized share price gain of 13.8% (based on our July 2 entry price of $24.20 in The Wagner Daily newsletter).

Over the past four days, $TAN has been consolidating a tight, sideways range near its all-time high. This is healthy price action and has led to the formation of a “bull flag” type pattern on its daily chart. This is shown on the chart of $TAN below:

http://www.morpheustrading.com/charts/2013/130722TAN.png

Because of the bullish pattern that has formed, odds now favor another breakout to new highs for $TAN in the coming days. Since we presently have only 50% of our maximum share size in this trade, we will be adding an additional 25% exposure if the ETF rallies above the July 19 high. Subscribing members of our nightly ETF and stock trading newsletter should note our preset and exact entry and stop prices for this setup in the “watchlist” section of today’s report.

Additionally, traders who missed our original entry point for any reason may now also consider establishing a new position in $TAN, based on our same entry and stop price criteria. However, in this case, no more than 25% to 50% of maximum position size would be recommended because the average entry price on this trade would be more than 13% above our original July 2 entry price.

Another ETF we are already holding is Market Vectors Semiconductor ETF ($SMH), which we bought one week ago when it broke out above resistance of its prior highs. Since then, the ETF has pulled back and is trading slightly below our entry price, but the current retracement from the highs now provides a low-risk buy entry point for traders who missed our initial entry point. The pullback is also an ideal level to add additional shares for traders who are looking to increase their position size:

http://www.morpheustrading.com/charts/2013/130722SMH.png

Notice that $SMH gapped down last Friday (July 19), but found support at its 50-day moving average, which neatly coincided with the intraday low of the session. Furthermore, the ETF formed a bullish “hammer” candlestick after bouncing off key support of its 50-day MA.

Because of the hammer candlestick that coincided with a pullback to the 50-day MA, the actual entry point to establish a new position in $SMH (or to add to existing shares) is just above the July 19 high of $38.58. A protective stop could be placed just below major support of the June 24 swing low of $36.08. Alternatively, momentum traders with a shorter-term trading timeframe could place a tight stop just below the July 19 low, which would put $SMH back below its 50-day MA if the stop is triggered.

We are already at 75% maximum position size with $SMH, so we are NOT looking to add additional shares at this time. Nevertheless, we wanted to give you a heads-up to this low-risk buying opportunity in case you missed our original entry or are too light in share size.

morpheustrading
08-05-2013, 09:15 AM
After completing our weekend stock scanning research (http://screener.morpheustrading.com/), Himax Technologies ($HIMX) has entered our radar screen as a potential swing trade buy entry in the coming days.

This small-cap tech company, which manufactures the liquid-crystal on silicon chips that power the displays of Google Glass (http://www.engadget.com/2013/07/22/google-investment-himax-display-glass/), is presently forming the “handle” portion of a cup and handle chart pattern.

As explained in our recent blog post, How To Find Chart Patterns That Precede The Best Breakouts (http://www.morpheustrading.com/blog/best-basing-breakouts/), one of the best and most reliable technical chart patterns that precede the strongest stock breakouts is the cup and handle.

Looking at the daily chart of $HIMX below, notice the depth from the high of the left side of the cup (mid-May), down to the low of the cup (late June), equates to a price retracement of over 40%.

Although this is a bit wider than we like to see, bear in mind that $HIMX is only a $7 stock that is forming a base of consolidation after a gain of more than 100%. As such, a little extra volatility is to be expected.

The same could be said for the handle, which should not retrace more than 15% from the highs in a normal cup and handle pattern. With $HIMX, the pullback was 19%.

Again, this is fine because it is a volatile small-cap stock. Conversely, if the handle dipped 20% in a stock like Google ($GOOG), it would be ugly.

On the annotated daily chart below, we have detailed the technical setup for this potential momentum-based swing trade:

1038

With this momentum trade setup, please be aware that $HIMX is scheduled to report its quarterly earnings results on August 15. Since that is only ten days away, our initial share size will be very small if the trade triggers for buy entry because we are only seeking a quick pop ahead of earnings. If, however, the stock blasts off in the coming days and we have a large enough profit buffer, we would hold the position through the earnings report.

Our exact entry, exit, and target prices for this trade setup are restricted to subscribing members of our stock picking newsletter. However, we will point out that our initial stop price on $HIMX is tight because this is a G.O.N.G (“go or no go”) trade setup. We want to be right or be right out, as we are not willing to hold this stock for long if it doesn’t quickly take off.

Finally, it is noteworthy to point out that $HIMX is not an “A-rated” stock for us. This means if your portfolio is full (buying power is maxed out), there is no reason to cut existing positions to move into this stock. Nevertheless, a stock is still quite capable of outperforming even if it is not “A-rated.”

For us, an “A-rated” stock is one with top earnings growth (usually small to mid-cap), solid volume, and overly positive price action. If a stock is slightly lacking in any of those areas, it is not “A-rated.” Two current examples of “A-rated” stocks are LinkedIn Corporation ($LNKD) and Michael Kors Holding Limited ($KORS).

morpheustrading
08-12-2013, 09:32 AM
On July 11, we bought Workday, Inc. ($WDAY) at $66.16. Now, less than a month later, the stock is trading above the $74 level (an unrealized share price gain of approx. 12% as of August 9).

In this educational trading strategy video, we clearly show you how we used short-term trend lines to help us locate the most ideal, low-risk entry point for that actual momentum swing trade buy entry into $WDAY. Learn how you can apply the same techniques to your trading analysis as well.

Link below is to view the video on YouTube:

How To Use Short-Term Trendlines To Locate Low-Risk Buy Entry Points (http://youtu.be/VhYtXHGqfeU)

Although we used an actual swing trade in $WDAY as our example in the video, our simple technique for using short-term trend lines to identify low-risk buy points can be used for any stock or ETF in a valid uptrend (click here (http://www.morpheustrading.com/blog/identify-strong-market-trend/) to learn how we identify the strength of a trend).

morpheustrading
08-19-2013, 11:50 AM
One of the main reasons we trade both individual stocks and ETFs in this swing trading newsletter is that trading the right combination of the two equity types increases our odds of being able to outperform the stock market at any given time, regardless of the dominant market trend.

In strongly uptrending markets, we primarily focus on buying leading individual stocks (mostly small to mid-cap) because they have the greatest chance of outperforming the gains of the main stock market indexes. However, when the overall broad market begins to weaken, or enters into an extended period of range-bound trading, we reduce our exposure in leading stocks when they begin failing their breakouts and running out of momentum.

Thereafter, we have several choices: 1.) Sit primarily in cash 2.) Begin initiating short positions in the weakest stocks 3.) Seek to trade ETFs with a low correlation to the direction of the overall stock market.

Most the time, we do a combination of these three things in weak or weakening markets, the proportion of which is dependent on overall market conditions. Since our rule-based market timing model (http://www.morpheustrading.com/blog/market-timing-system) shifted from “buy” to “neutral” mode last week, we have immediately begun easing up on long exposure of individual stocks.

With the NASDAQ Composite just below near-term support of its 20-day exponential moving average, and the S&P 500 right at key, intermediate-term support of its 50-day moving average, it is fair to say the broad market has NOT yet entered into a new downtrend. As such, we are not yet aggressively looking to enter new short positions at this time.

However, when our timing model is in “neutral” mode, one thing we find works very well is trading ETFs with a low correlation to the direction of the overall stock market (commodity, currency, fixed-income, and possibly international ETFs).

One such example of profiting from an ETF with low correlation to the stock market has been the recent performance of the US Oil Fund ($USO). Even though both the S&P 500 and Dow Jones Industrial Average fell more than 2% last week, $USO actually gained more than 2% during the same period.

Because $USO is a commodity ETF that tracks the price of crude oil, the ETF has a very low correlation to the direction of the overall stock market. As banks, hedge funds, mutual funds, and other institutions were rotating funds out of equities last week, it is quite apparent these funds were rotating into select commodity ETFs such as $USO:

http://www.morpheustrading.com/charts/2013/130819USO.png

As you can see on the weekly chart of $USO above, the ETF is now poised to breakout to a fresh 52-week high (from a five-week base of consolidation). If it does, bullish momentum should carry the price substantially higher in the near to intermediate-term.

We are already long $USO from our buy entry last month, and the ETF is presently showing an unrealized share price gain of 6.5% since our original entry. However, if you missed our initial buy entry because you are not a newsletter subscriber, you may still consider starting a new position in $USO if it breaks out above the range (existing subscribers should note our exact buy trigger, stop, and target prices for adding shares of $USO in the “watchlist” section of today’s report).

Two other commodity ETFs that definitely saw the inflow of institutional funds last week were SPDR Gold Trust ($GLD) and iShares Silver Trust ($SLV), which track the prices of spot gold and silver respectively.

Of these two precious metals, silver is showing the greater relative strength. Check out the weekly chart of $SLV below:

http://www.morpheustrading.com/charts/2013/130819SLV.png

Notice that $SLV has convincingly broken out above resistance of a downtrend line (dotted black line) that had been in place throughout all of 2013. That breakout above the downtrend line also coincided with a sharp move back above its 10-week moving average (roughly equivalent to the 50-day moving average on the daily chart). Furthermore, last week’s rally in $SLV was confirmed by a sharp increase in volume. This, of course, indicates institutional money flow into the ETF.

Like $SLV, $GLD has also moved back above its 10-week moving average (and 50-day moving average), but $SLV showed substantially more momentum and relative strength than $GLD last week. Moreover, last week’s volume in $GLD was only on par with its 50-week average level ($SLV traded nearly double its average weekly volume).

Between $GLD and $SLV, the latter is definitely more appealing to us on a technical level. Now that $SLV has confirmed its trend reversal on the weekly chart, and has also formed two “higher highs,” we will be stalking $SLV for a low-risk buy entry in the coming days.

Ideally, we would like to see $SLV retrace back down to near the prior downtrend line (which has now become the new support level). However, even if $SLV does not pull back that much, we will be looking for either the formation of a bull flag type pattern on its daily chart, OR a pullback that forms a bullish reversal candle (at which time we would look to buy above that day’s high in the following session).

To reiterate, $SLV is NOT actionable at the moment because we do not chase stocks and ETFs that have already broken out too much above resistance. Nevertheless, most breakouts are followed by a pullback shortly thereafter, or at the very least, a short-term period of consolidation (such as a bull flag).

As always, will be sure to give subscribing members of our swing trading service a heads up if/when we add $SLV to our watchlist as an “official” swing trade setup. In the meantime, don’t forget we are looking to add to $USO if it breaks out above the high of its recent consolidation. We are definitely seeing the rotation of institutional funds back into the commodities markets, which we plan to take advantage of and profit from.

morpheustrading
08-21-2013, 12:23 PM
With the market in substantial pullback mode, the number of leading stocks showing relative strength and still presenting low-risk swing trade buy entries has dwindled. However, there are a few lone holdouts, each of which could quickly jump back to new highs if the market suddenly recovers (as it has been prone to do many times this year).

One such stock with relative strength that is currently set up for ideal buy entry is Yelp, Inc ($YELP).

Since printing a bullish reversal candle on August 16 (the big green candlestick three days ago), $YELP has been trading in a very tight range over the past two days. Most importantly, volume has dropped off to extremely light levels during these two days as well.

When a stock demonstrates bullish reversal action after bouncing off a level of support (the 20-day exponential moving average in this case), it will often enter into one or two days of tight price consolidation. When that sideways price action occurs on substantially decreasing volume it is usually a sign that the current pullback may be over and that the uptrend is ready to resume.

If $YELP can rally above its three-day high on increasing volume, we would then look for the price action to consolidate for another week or two, while simultaneously forming higher “swing lows” within the base.

If that scenario plays out, the August 16 low (which coincides with near-term support of the 20-day EMA) should end up being the low of the current pullback. Assuming the broad market at least holds up, we would subsequently anticipate a rally to new highs thereafter:

http://www.morpheustrading.com//~rick//charts/2013/130821YELP5.png

The next two weeks will be quite interesting for large-cap NASDAQ stocks like $AMZN, $GOOG, and $PCLN, as they attempt to hold or reclaim important support levels. With $AMZN breaking below its 50-day moving average last week, for example, we would like to see the price action hold above $280 (just below the highs of the last base).

If these key large-cap stocks begin to break down, along with leaders like $LNKD, $TSLA, and $KORS, our market timing system will signal it is time to move into cash and/or begin establishing new short positions. However, as followers of our swing trading methodology already know, we prefer to shy away from predictions and take it one day at a time instead.

Always remember to trade what you see, not what you think!

morpheustrading
08-26-2013, 02:41 PM
In an uptrending market, the two main types of technical setups we buy for swing trading leading individual stocks are Breakouts (http://www.morpheustrading.com/blog/top-5-qualities-stock-breakouts/) and Pullbacks.

Over the past four weeks, Internet giant Amazon.com ($AMZN) has been in pullback mode and may soon provide a low-risk buy entry with a positive reward-risk ratio.

Because $AMZN has retraced just 9% from its July 2013 peak down to its August low, the daily chart still looks healthy. Furthermore, $AMZN continues to look great on its longer-term weekly and monthly charts.

In the 3-minute trading strategy video below, we briefly analyze the daily, weekly, and monthly charts of $AMZN. We conclude the video by showing you the ideal price level where a swing trader might consider buying $AMZN on this pullback.

Below is the link to view the video on YouTube. For best quality, click the icon on bottom right side of video player window to watch the video in full screen HD mode:

Potential Pullback Entry in Amazon.com Stock ($AMZN) (http://youtu.be/9oVjwSTTitQ)

morpheustrading
08-27-2013, 03:30 PM
As you may recall from my August 18 blog post (How To Profit From Oil And Silver ETFs In This Stock Market Downturn), I have been bullish on both Oil and Silver ETFs (and, to a lesser degree, Gold) for the past week.

Today, my patience is paying off because crude oil ($USO is the main ETF) has convincingly broken out above key resistance of an 8-week base of consolidation. Take a look:

http://www.morpheustrading.com/charts/2013/130827USO2.png

When the main stock market indexes are down sharply (as they are so far today), the benefits of ETF trading really become clear.

Unlike stocks, most of which are correlated to the direction of the broad market, ETFs enables traders and investors to still profit in a down market because many types of ETFs have low to zero correlation to the overall stock market direction.

Commodity ETFs such as $USO and $AGQ are two great examples of the above.

Our current position in $USO is now showing an unrealized price gain of 7.7% since the swing trade buy entry in our nightly newsletter. Also, the position in our leveraged Silver ETF ($AGQ) is now up more 10% since our August 21 buy entry.

If you have not yet added $USO to your portfolio, a secondary buy entry point into $USO would be a slight pullback to new support of the breakout level (consider a buy limit order around the $38.50 to $38.75 area).

morpheustrading
09-04-2013, 11:27 AM
Because fear is a more powerful human emotion than greed (http://deronwagner.hubpages.com/hub/stock-trading-psychology), 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:

http://www.morpheustrading.com/~rick/charts/2012/121024ORLY.png

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):

http://www.morpheustrading.com/~rick/charts/2012/121025CHKP.png

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 (http://www.morpheustrading.com/blog/patience-short-selling-stocks/), as the short side of the market is less forgiving to ill-timed trade entries than the long side.

morpheustrading
09-09-2013, 10:54 AM
For the past six weeks, the NASDAQ Composite Index ($COMP) has been uneventfully oscillating in a sideways trading range (a 3% range from the upper channel resistance down to lower channel support).

However, we have identified three highly reliable technical indicators that point to a strong likelihood of the NASDAQ soon breaking out to a fresh, multi-year high (despite continued weakness in the S&P 500 and Dow Jones).

1.) The Most Reliable Indicator You Probably Never Use

We prefer to keep our technical analysis of stocks pretty simple. Although there are literally hundreds of technical indicators at our disposal, we rely primarily on price, volume, support/resistance levels (such as trendlines and moving averages), and the relative strength line.

The relative strength line is a simple leading indicator that allows us to easily see how a stock or ETF is performing against the benchmark S&P 500 Index ($SPX). This is not to be confused with the RSI indicator (relative strength index).

When the relative strength line is outperforming the price action of the stock (or the Nasdaq Composite in this case), it is a reliable bullish signal that often precedes further gains in price.

On the chart below, notice how the relative strength line has already broken out to new highs twice, even though the NASDAQ has been trending sideways to slightly lower. This is a clear sign that institutional funds have been rotating out of the S&P 500 and into the NASDAQ:

http://www.morpheustrading.com//~rick//charts/2013/130906RS.png

2.) Salute The Bull Flag

While the relative strength line is one of the most reliable technical indicators to predict future price action, the bull flag is definitely one of our favorite bullish chart patterns to identify and profit from.

On the longer-term weekly chart, we clearly see the Nasdaq has been forming a bull flag chart pattern. This is annotated by the black lines we have drawn on the chart below:

http://www.morpheustrading.com//~rick//charts/2013/130906COMP.png

Notice that the rally off the lows in July created the flag pole part of the bull flag pattern, while the current sideways price action forms the flag.

The tight consolidation of the past six weeks has retraced less than one-third of the last wave up. This is what we like to see, as the best-formed bull flag patterns should not pull back to more than a 38.2% Fibonacci retracement of last move up.

Finally, since the flag pole and the flag are frequently symmetrical in time, we need to compare how long it took for the pole to form with the length of the flag.

Since the pole was created over the span of six weeks, the anticipated breakout from the bull flag pattern should occur after the flag has formed for 5-7 weeks (we are currently on week 5).

3.) Already Leading The Market Higher

When I began trading and studying technical analysis many years ago, I assumed that the main stock market indexes (such as the NASDAQ) led the way for the top-performing stocks to move higher.

I was definitely wrong.

The reality is the opposite situation; leading individual stocks set the pace for the broad market to follow.

When the strongest stocks in the market (typically small to mid-cap growth stocks) are convincingly breaking out to new highs ahead of the broad-based indexes, it is a very bullish sign and the main stock market indexes usually follow suit.

Conversely, it is a bearish signal when the major indices are trending higher, but without clear leadership among individual stocks.

Right now, there is a plethora of stocks that are breaking out to new highs ahead of the NASDAQ.

In no particular order, here are the ticker symbols of a handful of stocks breaking out right now, or have already broken out, to new highs: $QIHU, $LNKD, $TSLA, $NFLX, $KORS, $LOCK, and $YELP.

We are presently long four of the above stocks in our Wagner Daily newsletter, and with the following unrealized gains since our original buy entries (based on Sept. 6 closing prices): YELP +23.2%, LNKD +10.0%, LOCK +9.1%, and KORS +7.1%.

In case you missed it, you may want to check out our original August 21 analysis of Yelp ($YELP) (http://www.morpheustrading.com/blog/yelp-swing-trade-entry/) (before it broke out and zoomed higher over the past few days).

Death And Taxes – The Only Sure Things

As my grandmother loved to tell me, “the only sure things in life are death and taxes.” I agree, especially when it comes to the stock market.

Obviously, the Nasdaq has not yet broken out, and there is no guarantee that it will.

Nevertheless, the combination of the three reliable technical indicators above suggest a strong likelihood that the tech-heavy index will soon break out of its range and cruise to a new, multi-year high (though the S&P and Dow are another story).

If the Nasdaq suddenly rallies to new highs as anticipated, are you prepared to take advantage of the move? Do you know which stocks will offer the best odds for high profits? Be prepared.

morpheustrading
09-11-2013, 11:15 AM
On August 21, 2013, we bought Yelp, Inc. ($YELP) (http://www.morpheustrading.com/blog/yelp-swing-trade-entry/) in The Wagner Daily newsletter, as it pulled back to near-term support after a massive breakout.

Since then, shares of $YELP have zoomed to an unrealized share price gain of 24.8% (from our entry point through the close of September 10), and we continue to hold the stock in anticipation of further gains.

In the educational 5-minute swing trading strategy video below, we walk you step-by-step through the objective technical analysis that prompted us to buy $YELP, currently one of the strongest stocks in the NASDAQ.

Specifically, you will learn a low-risk way to buy a stock that forms a bullish reversal pattern after pulling back to near-term support of its 20-day exponential moving average.

For best viewing quality, play the video below in full-screen HD mode. After playback begins, just click the icon on bottom right side of the video player window:


http://youtu.be/Rwi0noiJIQY

morpheustrading
09-18-2013, 01:08 PM
On August 13, we bought shares of LifeLock ($LOCK) with a $12.37 entry price. Since then, $LOCK has climbed to an unrealized price gain of approximately 15% since our buy entry (over a 4-week holding period).

In today's stock trading strategy video, we show you the exact technical signals that alerted us to buy $LOCK on a pullback, just a few days after the stock broke out from a bullish cup and handle chart pattern.

As you will learn in the video, the key point in buying the pullback of a stock that has already broken out is to look for a retracement to the 10-day moving average, then buy the first move above that that day's high.

Sometimes, especially when the broad market is taking a rest, a stock will pull back further than the 10-day moving average (to the 20-day moving average), but the swing trade setup is still valid if the stock quickly snaps back.

Click the link below to view the 3-minute video:


http://youtu.be/4W5WNjouZxU

morpheustrading
09-25-2013, 12:04 PM
The stock market remains in pullback mode after a strong surge off the lows, but leading individual stocks continue to hold up and show clear relative strength.

Yesterday, for example, 4 of the 11 stocks in our swing trade newsletter gained at least 1.5%, even though the NASDAQ Composite was flat.

Yelp ($YELP), which is presently showing an unrealized price gain of 33% since our August 21 buy entry (http://www.morpheustrading.com/blog/yelp-swing-trade-entry/), jumped 2.4% yesterday. LinkedIn ($LNKD), another leading stock we are currently holding, climbed 2.6%.

As long as the broad market avoids heavy distribution and leadership stocks continue holding above key support levels, we expect the current correction to be short lived.

As such, our market timing system (http://www.morpheustrading.com/blog/market-timing-system) remains in “Buy” mode and we continue to establish new long positions in leading stocks and ETFs.

A 3-D Printing Stock And Biotech Stock – What Could They Have In Common?

Going into today, there are two new swing trade buy setups on our Wagner Daily watchlist: Ambarella ($AMBA) and Organova Holdings ($ONVO).

Although $AMBA is a biotech stock and $ONVO is in the exciting industry of 3-D printing, the common factor both stocks share is a very high IBD Relative Strength (RS) rating (http://education.investors.com/investors-corner/595789-altera-showed-relative-strength-line-confirming-strength.htm).

$AMBA has an RS rating of 94, while the RS rating of $ONVO is 98 (99 is the absolute best).

Since high RS is one of the top technical criteria in the individual stocks we look to trade, both stocks pass that test with flying colors.

Ambarella ($AMBA)

In addition to having high relative strength, $AMBA has a 5-year growth rate of a whopping 53%. Combined with high RS, the high EPS rate makes $AMBA an ideal buy candidate.

Let’s take a look at the daily chart of $AMBA below:

http://www.morpheustrading.com//~rick//charts/2013/130925AMBA.png

After rallying more than 300% since its IPO just over a year ago, $AMBA entered into a correction throughout July and August that caused the biotech stock to slip below intermediate-term support of its 50-day moving average.

However, notice that $AMBA reclaimed its 50-day moving average earlier this month, and did so on a big jump in volume. This is a very bullish sign that indicates $AMBA is setting up for another rally higher.

Organova Holdings ($ONVO)

In July of this year, $ONVO surged to the $8 level and volume correspondingly spiked higher as well.

After peaking near $8 this past summer, $ONVO pulled back to the $5 area, which caused a “higher low” to form (above the August low near $4.50). Since then, the stock has been in consolidation mode.

On September 19, $ONVO recaptured its 10-week moving average (similar to 50-day moving average) on heavier than average volume, then consolidated on lighter volume for two days.

Now, we are looking for the price action to tighten up around the 10-week moving average, which could soon lead to a breakout above the range:

http://www.morpheustrading.com//~rick//charts/2013/130925ONVO3.png

Because of their relative strength, combined with their bullish consolidation patterns, both $AMBA and $ONVO have entered our radar screen for potential buy entry in the coming days.

Regular subscribers of our swing trading newsletter (https://www.morpheustrading.com/services/swing-trading-newsletter) should note the “Watchlist” section of today’s report for our exact entry, stop, and target prices for each of these two new swing trade setups.

morpheustrading
10-09-2013, 05:33 PM
Yesterday’s (October 8th) selloff was broad-based and ugly, with just about every industry sector getting hit hard (utilities were an exception).

The NASDAQ Composite ($COMP) and small-cap Russell 2000 Index ($RUT), the leading market averages in recent months, were hit the hardest with losses of -2.0% and -1.7% respectively.

The NASDAQ is now the only index still trading above the 50-day moving average (but not by much).

Individual leadership stocks, typically small to mid-cap stocks with a strong history and outlook of earnings growth, were hit hard as well.

Whenever the major indices undergo a price correction, one of the most important factors we analyze is how well leading stocks hold up and show relative strength to the broad market.

So, where does this leave us as we enter the new week?

How To Know When The Tide Is Turning

If leading stocks show relative strength by mostly ignoring weakness in the S&P, Dow, and NASDAQ during broad-based price corrections, it’s a positive sign that tells us it’s safe to carry on entering new trades of these leading growth stocks, the best stocks to buy in a healthy market.

However, when top stocks begin succumbing to the weight of the broad market’s downward pressure, it quickly grabs our attention and tells us it’s time to lay off the gas pedal and take a more proactive stance with regard to managing existing positions for maximum profits and minimal losses.

So, Is The Tide Turning?

Yesterday, market leader LinkedIn Corporation ($LNKD) sliced through key support of its 50-day moving average on volume that surged to roughly 300% its average daily level. This volume spike tells us banks, hedge funds, mutual funds, and other institutions were driving the selling. Not a good sign for bulls.

Other leading stocks that sold off on heavy volume yesterday included: Qihoo 360 Technology ($QIHU), Vipshop Holdings ($VIPS), Soufun Holdings ($SFUN), Pandora Media ($P), Mercadolibre ($MELI), Priceline.com ($PCLN), and Amazon.com ($AMZN).

Although $PCLN and $AMZN had a rough day, both stocks are still trading above their respective 50-day moving averages (an intermediate-term “line in the sand” for many retail and institutional traders/investors).

Balancing On The Cliff

The broad market rally is just barely hanging on. If leading stocks begin cracking below their 50-day moving averages en masse, our proprietary Market Timing Model will be forced to shift from “buy” to “sell” mode.

If you’re new to the role that market timing rules play into our overall ETF and stock picking selection, please click here (http://www.morpheustrading.com/blog/market-timing) to learn the general concept of our system for market timing, then check out this article (http://www.morpheustrading.com/blog/market-timing-system) that explains the five, rule-based modes of our model for timing the stock market.

Keeping On Our Toes

Yesterday was a busy day for subscribers of The Wagner Daily, our nightly swing trading newsletter (which includes access to our market timing methodology).

On the individual stock side, we sold Bitauto ($BITA) and LifeLock ($LOCK) for decent share price gains of 36.7% and 13.8% respectively. LinkedIn ($LNKD) hit our stop and we sold for an average loss of just 2.7%.

As for the ETF side, we sold two existing ETF trades yesterday to minimize losses. On SPDR Biotech ($XBI) and Direxion Small-Cap Bull 3x ($TNA), we lost 3.6% and 6.3% respectively. However, these losses were much smaller than the 44% gain we secured in Guggenheim Solar ETF ($TAN) last week (check back on this blog for an educational technical review of this $TAN trade by the end of this week.

How To Be Profitable In A Reversing Market? Simple Math

Many traders, particularly newbies, are obsessed with the accuracy of win rates (percentage of winning trades vs. losing trades) when analyzing how well a trading system is likely to perform over the long-term.

However, the reality is that a trader’s long-term profitability depends largely on other factors, such as the dollar amount of the average winning trade compared to the dollar amount of the average losing trade.

If, for example, a trader has a win rate of 70%, but allows their average losing trade to be 300% larger than their average winning trade, he/she will be net negative over the long-term.

Conversely, if a trader has a win rate of just 50%, but allows the average winning trades to ride to being just double (200%) the size of an average losing trade, the trader will become net profitable over the long-term.

Lately, we’ve been closing our swing trades with about a 50% win rate (maybe even slightly lower), but our average gain has been MUCH larger than the average loser.

With the three stock trades we closed yesterday ($BITA, $LOCK, and $LNKD), our average winner was a share price gain of 25.3%, while the sole losing trade was just 2.7%.

That makes for a whopping reward-risk ratio of more than 9 to 1 (anything ratio above 3 to 1 is generally considered to be quite good).

morpheustrading
10-10-2013, 03:07 PM
A great example of why PATIENCE PAYS when holding winning stocks...

1041

Always hold your winners until the price action gives you a reason not to (but ditch those losers quickly when they hit your stop).

morpheustrading
10-16-2013, 01:49 PM
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 (http://deronwagner.hubpages.com/hub/stock-trading-psychology).

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:

1042

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:

1043

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!

morpheustrading
10-16-2013, 02:04 PM
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:

1044

4 Big Tips For ETF Traders

1.) Sector Relative Strength - As detailed in my first ETF book (http://www.amazon.com/dp/1118109139?tag=morptradgrou-20&camp=14573&creative=327641&linkCode=as1&creativeASIN=1118109139&adid=00HPD75G7SPM18CG0N4Y&&ref-refURL=http%3A%2F%2Flocalhost%3A2876%2Fabout-us), 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:

1045

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).

1046

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!

morpheustrading
10-27-2013, 03:28 AM
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:

http://www.morpheustrading.com//~rick//charts/2013/131018SPX.png

The tech-heavy NASDAQ continues to extend above its prior swing high, and has now gained approximately 6% since our September 6 market commentary (http://www.morpheustrading.com/blog/top-3-reasons-nasdaq-breakout/) that suggested another breakout to new highs in the NASDAQ was coming soon:

http://www.morpheustrading.com//~rick//charts/2013/131018COMP.png

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, of course, the same stocks we cherry pick for subscribers of our swing trade newsletter (https://www.morpheustrading.com/services/swing-trading-newsletter).

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 (http://www.morpheustrading.com/blog/4-tips-etf-trading/).

On the individual stock side, the model portfolio of our swing trading newsletter is currently showing an unrealized price gain of more than 55% in Silica ($SLCA) since our July 8 buy entry (https://plus.google.com/109937235573651040884/posts/ZUythYZ7MkD), 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 (http://www.morpheustrading.com/blog/best-stock-breakouts/).

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:

http://www.morpheustrading.com//~rick//charts/2013/131018IYR.png

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.

morpheustrading
10-28-2013, 12:54 PM
Have you ever prepared to buy a momentum-driven breakout on a stock that formed a great chart pattern (such as a cup and handle (http://www.morpheustrading.com/blog/best-stock-breakouts/)), but for whatever reason you missed the entry point on the day the stock breaks out?

If you are like most swing traders (including ourselves), that has probably happened to you on numerous occasions.

Indeed, it can be frustrating to watch a stock on your watchlist rally sharply higher on the day of the breakout, without you in it.

But since breakout stocks usually pullback just a few days later, there is no need to panic.

Instead, patient and astute traders can profit from trading these breakouts by simply buying the first pullback.

Read on to learn an easy, yet highly effective way of buying pullbacks of strong stocks.

3 Breakout Stocks We Profited From On A Pullback

In September of 2013, we posted two videos that clearly explained our winning strategy for buying pullbacks of the best stock breakouts.

1.) On September 10, we walked you through our recent pullback entry into Yelp ($YELP) (http://www.morpheustrading.com/blog/how-to-buy-breakout-stocks-pullback/), which we are still long in the model portfolio of our Wagner Daily newsletter.

Presently, the $YELP trade is showing an unrealized gain of 35.3% since our original buy entry point.

2.) Then, in this September 18 blog post (http://www.morpheustrading.com/blog/buy-pullback-lifelock-lock/), we detailed how we used the same trading strategy to buy LifeLock ($LOCK) on a pullback.

That momentum swing trade has since been closed for an average gain of approximately 17% (trade was closed with two separate exit points).

3.) Now, we bring you a third video that explains how we recently bought Mercadolibre ($MELI) on a pullback, a few days after the stock broke out from a chart pattern that was similar to a bullish cup and handle.

We’re still holding $MELI from our original buy entry and the trade is up just over 10% as of the October 25 close.

How We Bought $MELI On A Pullback

Below is the link for the YouTube video. For best viewing quality, click the square icon on bottom right side of the video player window to view in full-screen mode:


http://youtu.be/EzOtn5EbSsE

Compared to other breakout stocks we’ve recently bought (such as Silica – $SLCA), the price momentum in $MELI has not been overly impressive (so far), but we believe the video has high educational value regardless.

What do you think?

By the way, just to eliminate any possible confusion, the video above was actually uploaded to our YouTube channel (http://www.youtube.com/user/morpheustrading) back on September 30 (which is why the current price of $MELI is higher than shown in the video).

morpheustrading
11-05-2013, 04:37 PM
In July 2013, we bought a breakout in US Silica Holdings ($SLCA). Three months later, we sold the stock for an average share price gain of 43%.

In this educational trading strategy article, we use six annotated stock charts to walk you through the entire trade from beginning to end.

Upon finishing the article, you will see that a winning breakout trading system does NOT need to be complicated.

You may even be surprised by how simple our breakout trading technique really is.

Nevermind The Pullbacks, Here’s The Breakout

In a bull market, our momentum swing trading technique primarily focuses on trading both breakouts and pullbacks of leading small to mid-cap stocks.

Depending on market conditions, these trade setups are then entered with a short to intermediate-term time horizon (one week to several months).

Since our last several trade review articles detailed our strategy for buying pullbacks (http://www.morpheustrading.com/blog/how-to-buy-breakouts-pulling-back/), it is now time to recap an actual breakout trade.

Below is a weekly chart of $SLCA that shows the pattern that had developed just before our initial buy entry:

http://www.morpheustrading.com/~rick/charts/2013/131104SLCA6.png

After launching as an IPO in February 2012, $SLCA rose to the $22 area a month later, then sold off sharply.

As you can see on the chart above, the stock hit bottom in July 2012, then reversed and rallied back to test its prior high in February 2013.

When the price subsequently broke out to a new all-time high in the first week of March (as labeled on the chart), volume immediately spiked higher.

The volume surge was bullish, and confirmed the breakout was backed by the presence of institutional accumulation.

Furthermore, the institutional buying was supported by the fact that $SLCA was also exhibiting strong earnings growth.

$SLCA – Locked And Loaded

After the big breakout in March, the price pulled back for several months, then began building a constructive base of consolidation during that time (click here (http://www.morpheustrading.com/blog/best-stock-breakouts/) to see exactly what represents proper basing action).

As the price action began tightening up within the base, it created a downtrend line off the March high.

At this point, the weekly chart was showing a chart pattern similar to a bullish “cup and handle.”

It was at this point that we added $SLCA to our Wagner Daily watchlist and began stalking it for potential buy entry on a base breakout.

Drilling down to the shorter-term daily chart interval, here is our initial buy entry on July 8:

http://www.morpheustrading.com/~rick/charts/2013/131104SLCA1.png

$SLCA established a higher swing low in June, and the next pullback held support of that low. Higher lows within a base is a bullish sign.

Our initial buy entry came after the price broke out above the downtrend line, then confirmed that move by pushing back above its 50 day moving average.

The next chart (same time interval) shows we added shares to the initial position on August 14.

We commonly scale in to stock trades whenever the holding period is expected to be intermediate-term:

http://www.morpheustrading.com/~rick/charts/2013/131104SLCA2.png

A few weeks prior to adding shares on August 14, $SLCA underwent a false breakout that was triggered by a negative, knee-jerk reaction to an earnings report.

However, after selling off from the false breakout, the price definitively found key support at the 50-day moving average.

Since banks, mutual funds, hedge funds, and other institutions commonly buy pullbacks to the 50-day moving averages in leading stocks, it’s not surprising that the price decline was limited.

As the stock came into support of its 50-day moving average, one could have added to the position at that level with relatively low risk (though we did not).

Once $SLCA began climbing away from its 50-day MA again, it paused for a few days and we added to our position when the price rallied above the two-day high of August 12 & 13.

For the added shares only, we set a protective stop below convergence of the 50-day moving average and prior swing low (stop on original shares remained lower).

Show Me The Money

Fast forwarding about two months, let’s take a look at where and how we scaled out of the trade for a large profit:

http://www.morpheustrading.com/~rick/charts/2013/131104SLCA3.png

On October, $SLCA really began heating up, as the price broke out to another fresh, all-time high and volume surged again.

Owing to a complete lack of overhead price resistance, momentum kicked into high gear and shoved $SLCA more than 30% higher in the first two weeks of the month.

After the stock rallied to an unrealized price gain of more than 30% from our most recent entry, we trailed a tight stop on 1/4 of the position size, in order to protect gains in case of a sudden pullback.

On October 17, that tightened stop got triggered when the price fell below the prior day’s low (quite a volatile intraday session).

We sold the first 1/4 of our total shares for a gain of 37% (from the most recent entry).

Five days later, we sold another 1/4 of the position, as shown on the daily chart below:

http://www.morpheustrading.com/~rick/charts/2013/131104SLCA4.png

We continued trailing a tight stop on another 1/4 of the position, rather than selling those shares, just in case the pullback turned out to be very short-lived and the stock broke out to new highs again.

But the stock decided it was time for a breather instead.

$SLCA hit our stop for the second 1/4 of the position on the open of October 24, after stalling at the $35 area for the second time.

This enabled us to score a 33% gain on the second quarter position we sold.

Finally, we sold the remaining half of the position four days later:

http://www.morpheustrading.com/~rick/charts/2013/131104SLCA5.png

Although we liked the late October bounce off near-term support of the 20-day exponential moving average (beige line), the price began rolling over on October 30.

Since $SLCA was scheduled to report its next quarterly earnings that evening, we made the decision to take the profits off the table that day.

We locked in a very amiable gain of 50% (from the original entry point) on the remaining half position, rather than hold the stock through earnings.

Averaging together the two different entry points and three scaled exit points, this intermediate-term momentum swing trade in $SLCA added up to an average gain of 43%, with a total holding period of just over 3 months.

morpheustrading
12-19-2013, 06:04 AM
As we approach Christmas Day, many traders and investors are anticipating a "Santa Claus rally" in the stock market...and with good reason.

According to a recent Forbes article, the S&P 500 has scored a December gain in 17 of the past 20 years.

The Dow Jones has done so in 65 of the past 100 years.

Although it obviously does not happen every year, the stock market undeniably has a history of positive returns in (the latter half of) December.

As technical momentum traders, we never place much weight purely in seasonal market trends because we focus on the performance of leading stocks and broad market volume patterns instead.

Nevertheless, be sure to check out this new stock pick video that uses our online stock screener to show you a few potential breakout stocks to buy in the coming days ($DDD, $QTWW, $THRM, and $IQNT).

View the 3-minute video below by pressing the “play” button. For best quality, view in HD full-screen mode by clicking the icon on the bottom right of the video player window.


http://youtu.be/nEuseNLgkAA

To recap the video, our preset breakout scan is designed to find stocks trading within 20% of a 52-week high, trading sideways above their 50-day moving averages.

Further, we are looking for "cup and handle" or flat base consolidation patterns (http://www.morpheustrading.com/blog/best-stock-breakouts/) of stocks that have not yet broken out.

morpheustrading
01-06-2014, 03:41 PM
On December 31, 2013, we sold our position in Kandi Tech Corp ($KNDI) for a price gain of 60% over a 3-week holding period.

Scoring a gain of more than 50% on a stock trade of only a few weeks duration may seem unusual, but it actually is not.

These trading opportunities happen on a regular basis, but the key is knowing how to identify the technical criteria that typically precedes such moves. This is where the "Blast Off" breakout setup comes into play.

One of three different types of breakout stock trades we target, the Blast Off setup seeks to identify one-day price gains of 4% or greater, backed by massive volume spikes.

Typically, these are low-priced, small-cap NASDAQ stocks in the $5 to $10 range, but never penny stocks (which are easily manipulated and a playground for scammers).

Whenever a stock meets our initial criteria for a potential Blast Off trade setup, we add the stock to our internal breakout watchlist, then patiently wait for a proper, low-risk entry point to catch the next momentum wave higher.

In the 4-minute video below, we walk you step-by-step through the exact technical criteria that helped us identify $KNDI as a Blast Off candidate in early December, which subsequently led to a 60% winner in our swing trading newsletter less than one month later.

For best quality, view the video in full-screen by clicking the rectangle in bottom right of video player window:


http://youtu.be/v0JQJy8tn_g

Our rule-based swing trading system is designed to profit from three different types of technical trade setups: Breakouts (Combo, Relative Strength, and Blast Off), Pullbacks, and Trend Reversals. For an overview of each of these different types of stock trade setups, check out (http://www.morpheustrading.com/best-swing-trading-strategy) our main Stock Trading Strategy page.

morpheustrading
01-13-2014, 01:10 PM
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 (http://www.morpheustrading.com/blog/etf-trading-volume-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 (https://www.morpheustrading.com/services/swing-trading-newsletter) newsletter on December 19 (still long as of January 10, with an unrealized price gain of 26%):

1063

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.).

morpheustrading
01-23-2014, 04:07 PM
In the formative years of my trading career (late '90s), I frequently found myself scratching my head over an interesting problem.

Despite analyzing the hell out of stock chart patterns, ensuring the technicals looked quite favorable before buying, I still found my trades completely going in the wrong direction way too often.

Thanks to the help of a trusted trading mentor, I eventually discovered the problem; hyperfocusing primarily on the daily time frame.

Although the daily chart has always been pivotal for locating low-risk buy setups, my extreme focus on that single time frame was causing me to ignore the power of confirmation from longer time frames (such as weekly and monthly charts).

Put simply, I was missing the "big picture" and it was destroying my trading profits.

Are you...

Missing The Big Picture Too?

Every technical trader has his own specific approach to scanning chart patterns and locating potential buy setups.

Although I have my own, rule-based swing trading strategy, which has been thoroughly explained on my blog and nightly newsletter over the years, my trading system is just one of many types of successful trading methodologies out there.

Nevertheless, there is one trading technique you (and every trader) should always use, regardless of your individual trading style:

Multiple Time Frame Analysis

Multiple Time Frame Analysis (let's call it "MTF" hereafter) is an extremely simple, yet incredibly powerful concept, that can be applied to analysis of stocks, ETFs, forex, futures, bitcoin, and any other financial instrument that can be charted.

If you too have been making the same mistake of hyperfocusing only on the daily charts, read on to find out why you're missing the big picture of what's really happening with the stocks and ETFs you trade.

Exploring For Oil On Multiple Time Frames

One of the ETFs currently on my watchlist for potential buy entry is SPDR S&P Oil & Gas Exploration ETF ($XOP). Using MTF analysis, I will show you how this ETF actually landed on my swing trading watchlist.

Starting with a long-term monthly chart showing at least 10 years of data or more (if possible), we see that $XOP stalled at resistance of its all-time high a few months ago.

If you were buying $XOP based strictly on a daily chart with three to five years of data at that time, you probably would not have even seen the highs from 2008:

http://www.morpheustrading.com//~rick//charts/2014/140121XOP1.png

Although $XOP pulled back after bumping into resistance of its 2008 high, the ETF firmly remains in an uptrend, above support of its rising 10-month moving average. Furthermore, the current base of consolidation is holding above the prior highs of 2011.

The next step in my MTF analysis is to zoom in to the shorter-term weekly chart interval, where each bar represents a full week of price action:

http://www.morpheustrading.com//~rick//charts/2014/140121XOP2.png

On the weekly chart, notice the 10-week moving average is trending lower, but the price is still holding above the 40-week moving average. The 10 and 40-week moving averages are similar to the popular 50 and 200-day moving averages on the daily chart.

The current base of consolidation will take some time to develop, but as it chops around the 10-week moving average, the price should eventually flatten out and begin to tick higher.

Finally, let's use MTF analysis to drill down to the benchmark daily chart time frame:

http://www.morpheustrading.com//~rick//charts/2014/140121XOP3.png

The $XOP daily chart shows last week's price action holding above the prior swing low. If this low holds, the price action can begin to set "higher lows" with the base and form the right side of the pattern (learn more about base building patterns here (http://www.morpheustrading.com/blog/best-stock-breakouts/)).

The next breakout in $XOP will likely be the one that launches the ETF to new highs on multiple time frames, which would be a very powerful buy signal.

Still, if you were to only glance at the daily chart of $XOP, without taking into account the weekly and monthly chart patterns, you might understandably make the mistake of assuming this ETF is not in a steady uptrend.

On the contrary, the "big picture" provided to you by MTF analysis definitely shows a dominant, long-term uptrend in place. Pullbacks and consolidations along the way, such as shown on this daily time frame, are completely normal.

Why Longer Is Better

Now that you understand the easy, yet crucial concept of MTF analysis, you may be wondering which individual time frame holds the most weighting, especially in the case of conflicting chart patterns.

Remember, in the beginning of this article, when I told you about that problem I had when I first started trading?

As I found out the hard way, a longer time frame always holds more weight over a shorter time frame.

In the best, most promising stock trading setups, all three chart time frames (daily, weekly, monthly) will confirm the patterns of one another.

But if that is not the case, just remember that a weekly trend is more powerful than a daily trend, while a monthly chart holds more sway than a weekly trend.

Of course, you must also keep in mind that longer time frames also take a longer period of time to work themselves out.

For example, daytrading based on a weekly chart pattern does not work. However, that same weekly chart is of paramount importance if you are looking to buy a stock as a core/position trade.

There's no doubt in my mind that utilization of Multiple Time Frame Analysis will substantially increase your trading profits...but only if you make the decision right now to start applying this underrated technique to all your stock chart analysis.

Duniyo
01-24-2014, 12:54 PM
Looks the sky is falling to day.

morpheustrading
01-30-2014, 03:48 PM
On January 27, I said it was not yet time to sell stocks (http://www.morpheustrading.com/blog/not-time-sell-stocks/), but the technical situation has deteriorated quite rapidly since then.

Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another “distribution day” (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite.

In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand.

However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner.

The 3-Part Test

There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up.

1.) Volume Pattern Of Broad Market

In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model (http://www.morpheustrading.com/blog/market-timing) is now flashing a clear “sell” signal.

2.) Broad Market Trend

In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case.

With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a “sell” signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back).

3.) Performance Of Leadership Stocks

The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current “neutral” mode from officially shifting to “sell” mode (click here (http://www.morpheustrading.com/blog/market-timing-system) to see the five modes). Still, even this portion is barely holding on.

NASDAQ 4000 – Coming Soon?

Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support).

If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day’s high could lead to a short-term bounce:

http://www.morpheustrading.com//~rick//charts/2014/140130NAZ.png

Although my swing trading newsletter (https://www.morpheustrading.com/services/swing-trading-newsletter) is not yet in full “sell” mode, I have been laying low (in “neutral” mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry.

The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile.

Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence.

Trade What You See, Not What You Think!

Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go.

Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow.

If my timing model shifts into full “sell” signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness.

Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment.

Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break.

With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side (http://www.morpheustrading.com/blog/best-entry-short-selling-stocks/). Upon doing so, you will surely see the importance of maintaining discipline and patience right now.

morpheustrading
03-04-2014, 11:04 AM
With our market timing model remaining in “buy” mode, our current focus primarily remains on leading individual stocks.

Tesla ($TSLA), for example, is now showing an unrealized gain of 68% since our December 31 buy entry in The Wagner Daily newsletter. SolarCity ($SCTY) is similarly up 56% since our December 19 buy entry.

However, despite strength in leadership stocks, we have also been noticing a stealth sector rotation of institutional funds flowing into various commodity ETFs.

One such ETF we are stalking for potential buy entry in the coming days is Global X Uranium ETF ($URA), which is shown on the weekly chart below:

http://www.morpheustrading.com//~rick//charts/2014/140304URA1.png

$URA blasted through the high of its prior trading range and 40-week moving average, on volume that was about 400% greater than average. High volume on a breakout is important because it confirms the presence of institutional accumulation.

Additionally, $URA closed near its high of the most recent week. The 10-week moving average crossed above the 40-week moving average as well, which signals a bullish reversal of trend is under way.

Since breaking out above its recent highs on heavy volume last week, the price has been consolidating for a few days on declining volume. Lighter volume during bullish consolidations is positive because it indicates the sellers are not stepping in while the bulls take a rest. This can be seen on the daily chart pattern:

http://www.morpheustrading.com//~rick//charts/2014/140304URA.png

From here, we now expect about five to ten days of sideways action before $URA resumes its uptrend. Zooming into the shorter-term hourly chart interval, we see the price action is holding above the 20-period exponential moving average:

http://www.morpheustrading.com//~rick//charts/2014/140304URA2.png

As detailed in my book, Trading ETFs: Gaining An Edge With Technical Analysis (http://www.amazon.com/dp/1118109139?tag=morptradgrou-20&camp=14573&creative=327641&linkCode=as1&creativeASIN=1118109139&adid=00HPD75G7SPM18CG0N4Y&&ref-refURL=http%3A%2F%2Flocalhost%3A2876%2Fabout-us), the 20-period exponential moving average on the hourly chart is usually the first legitimate support level on a pullback after a strong breakout.

The strongest breakouts will hold support at the 20-period exponential moving average and then push higher. But if that moving average fails to hold as support, then a touch of the 10-day moving average is the next logical support level.

Because of the confirmation through multiple timeframe analysis (http://www.morpheustrading.com/blog/multiple-time-frames/), we are now stalking $URA for potential swing trade buy entry.

Regular subscribers of our swing trading newsletter (https://www.morpheustrading.com/services/swing-trading-newsletter) should note our exact entry, stop, and target prices in the “Watchlist” section of today’s report.

morpheustrading
03-26-2014, 02:19 PM
At the close of trading on March 21, our rule-based market timing model (http://www.morpheustrading.com/blog/market-timing-system) shifted from “neutral” to “sell” mode, after previously slipping from “buy” to “neutral” mode on March 12.

When the timing system first enters into a new “sell” mode, it primarily acts as a “no nonsense,” objective way to keep us out of trouble by reminding that new buy entries do not carry positive odds of working in our favor.

In such a newly-triggered “sell” mode, we seek to increase our cash position, while also selectively shifting our focus towards trading ETFs with a low correlation to the direction of the broad market (commodity, currency, fixed-income, etc).

As a “sell” signal matures and becomes more confirmed by time and price, short selling of weak stocks also becomes part of the trading plan, but for now it is still too early to enter new short positions for momentum swing trading.

Static Cling Of The 50-Day Moving Average

Despite weakening performance in leading stocks and recent broad market distribution (higher volume selling) that sparked the new “sell” signal, it’s important to note that both the S&P 500 and Dow Jones Industrial Average are still trading firmly above key, intermediate-term support of their 50-day moving averages.

On the other hand, the NASDAQ Composite has clearly begun showing relative weakness to the S&P and Dow, but has yet to breakdown below support of its 50-day moving average:

1072

On both March 24 and 25 (circled in pink), the NASDAQ “undercut” support of its 50-day moving average on an intraday basis, but still managed to close each trading session above it.

It’s a similar technical picture in the NASDAQ 100 Index (the large-cap brother of the NASDAQ Composite).

Below is the chart of PowerShares QQQ Trust ($QQQ), a popular ETF proxy for the NASDAQ 100 Index:

1073

Since banks, mutual funds, hedge funds, and other institutions frequently utilize program trading to buy pullbacks to the 50-day moving averages, it was not surprising to see buyers stepping in each time the NASDAQ brothers neared that pivotal price level in recent days.

Biotech Blues

One of the biggest anchors holding the NASDAQ down over the past week has been heavy selling pressure in the market-leading biotechnology index.

Between just two recent trading days (March 21 and 24), iShares NASDAQ Biotech Index Fund ($IBB) plunged 10%.

More concerning is that $IBB sliced through its 50-day moving average with ease, as volume surged higher as well:

1074

Because biotech has been one of the strongest industry sectors for many months of the current bull run, it will be important to see how $IBB reacts in the coming weeks.

While $IBB may be able to manage a short-term bounce from its current level, the technical damage has already been done and $IBB will need at least a few weeks (possibly months) to clean itself up.

Sector Rotation Keeping The Fire Burning

While leading stocks in the NASDAQ have broken down, energy and financial related stocks have held ground, allowing the S&P 500 to outperform the NASDAQ lately.

Large-cap (blue chip) stocks have recently begun leading the stock market, as evidenced by recent breakout action in energy and financial stocks.

Energy stock Haliburton ($HAL) set a new all-time high within the past two weeks, while Schlumberger ($SLB) is attacking its highs of 2011.

Even the $IBM dinosaur woke up a few days ago by ripping through major price resistance at $190 on big volume.

Base On Base Ain’t Bad

A base on base chart pattern occurs when the price action of a recent breakout is unable to extend much beyond the highs of the prior base (former resistance), but also doesn’t give up much ground.

The lows of the new base that forms should hold at or above the highs of the prior base, giving that “base on top of a base” look.

One example of a possible base on base in the works can be found in the following chart of Bank of America ($BAC).

At the beginning of the month, $BAC was close to breaking down below its 50-day MA, but has since broken out to a fresh 52-week high.

Although the breakout hasn’t been explosive in terms of extending much beyond the highs of the prior base, $BAC may simply chop around for several weeks, forming a base on base type pattern while the broad market consolidates:

http://www.morpheustrading.com//~rick//charts/2014/140325BAC.png

Like $BAC, the Financial SPDR ETF ($XLF) also broke out to new highs and stalled out:

http://www.morpheustrading.com//~rick//charts/2014/140325XLF.png

With $XLF, last Friday’s false breakout above the prior swing high suggests the price could be headed for several weeks of chop, which could potentially form another base on base pattern if the ETF holds above its 50-day moving average.

While it is encouraging that select blue chips are valiantly fighting to push higher with base on base patterns, you still must not forget that the recent pullback in the NASDAQ has forced the top leadership stocks to pull back to support of their 50-day moving averages.

Leading stocks like $TSLA (we are still holding with an unrealized gain of 48%), $FB (we recently sold for a 49% gain (http://www.morpheustrading.com/blog/maximum-profits-swing-position-trading-fb/#FB)), and $KORS must hold on to their rising 50-day moving averages/10-week moving averages to keep the dominant stock market rally alive.

Most tech leadership stocks of the NASDAQ have been hit hard over the past several sessions, and will need at least a few weeks of basing action in order to produce low-risk, reliable buy entry points.

Here’s The Plan, Man!

With our market timing system (click here (http://www.morpheustrading.com/blog/market-timing) for an overview) in “sell” mode, our near-term trading plan is to lay low and see how the market responds to recent selling in the coming days.

If new buy setups develop down the road, we can certainly add some long exposure to our stock and ETF portfolios.

If, for example, the NASDAQ continues holding above its 50-day moving average over the next one to two weeks, our timing model could easily return to “buy” mode (especially if leading NASDAQ stocks rip higher after testing their 50-day moving averages).

But for now, there still isn’t much to do on the long side without pushing it.

Conversely, if market conditions continue deteriorating, we will eventually visit the short side of the market.

Yet, there is no need to rush into short selling right now.

Patience and discipline is the key to preserving profits in markets that are indecisive and/or in transition.

Without much effort, anyone can be a rock star in a parabolic bull market!

But what separates the professionals from amateurs is knowing when to take your foot off the gas pedal.

Clearly, right now is one of those moments.

mimo_100
03-26-2014, 03:14 PM
Nice analysis of what is going on. Thanks for your comments!

morpheustrading
05-07-2014, 02:55 PM
Thanks, glad you liked it.

morpheustrading
05-07-2014, 02:55 PM
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.

morpheustrading
05-21-2014, 12:26 PM
For the past five weeks, the S&P 500 and NASDAQ Composite have been stuck in choppy, sideways ranges.

This lack of direction has caused the number of low-risk trade setups to dwindle, which is why I said in my most recent blog post (http://www.morpheustrading.com/blog/how-to-handle-choppy-stock-market/) that SOH mode (sitting on hands) is the best plan of action until the stock market eventually makes a clear move in one direction or the other.

Are You Ready For Action?

The good news is my top leading technical indicator (explained below) is strongly hinting that stocks may finally be ready to make a significant, definitive move in the coming days…to the downside.

But if stocks are ready to move lower, you may be wondering why that would be considered “good news.”

It would be positive news because, as a technical swing trader, you have the fortunate ability to also profit in weak markets by short selling stocks and ETFs (and any trend is better than no trend).

For traditional “buy and hold” (buy and pray?) investors, on the other hand, a resumption of the selling pressure that began a few months ago would definitely not be good news.

In this blog post, I explain why stocks appear ready to move lower, then follow-up with a brief video analysis of a few stocks and ETFs that are setting up for potential short entry in my daily stock picking newsletter (https://www.morpheustrading.com/services/swing-trading-newsletter).

The Most Reliable Technical Indicator In Any Market

One of the best technical indicators in a swing trader’s arsenal is volume, which is arguably the most reliable indicator as well.

Yet, volume ironically seems to be one of the least discussed indicators whenever I stumble across other traders’ technical analysis of stocks around the web.

Analysis of volume patterns in the market is crucial because well over half of the stock market’s average daily volume is the result of trading among banks, mutual funds, hedge funds, and other institutions.

As such, the major indices typically follow the money flow of institutional trading.

This means volume is a leading indicator, rather than a lagging indicator (such as moving averages).

If the “big boys” are accumulating stocks (represented by higher volume gains), the market will be forced to move higher.

On the other hand, stocks will move lower when faced with enough institutional distribution (higher volume losses).

With this knowledge, take a look at the following daily chart of the NASDAQ Composite, which shows the bearish volume pattern of recent weeks (light volume up days, followed by heavier volume down days):

1079

The combination of the bearish volume patterns in the NASDAQ and an abundance of overhead resistance (such as the 50-day moving average), leads me to believe the next move in the stock market will be lower.

To help you make money on the short side of the market if the anticipated breakdown occurs, below is a 3-minute video that highlights a few of the best ETFs and stocks on my radar screen for potential short selling entry in the near-term.

For best viewing quality, select full-screen HD mode by clicking the rectangular icon on the bottom right of video player window:


http://www.youtube.com/watch?v=Y16F6cZXJ7U

One of the greatest benefits of momentum trend trading is the ability to profit in both uptrending and downtrending markets.

Although the model portfolio of my nightly swing trading letter has been mostly cash over the past month, I am fully prepared to profit from selling short stocks and ETFs that are rolling over and/or breaking down (assuming the NASDAQ and S&P 500 break down as well).

morpheustrading
08-19-2014, 09:14 AM
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 (learn why (http://www.morpheustrading.com/blog/does-account-size-share-price-matter/#start) 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 (http://www.morpheustrading.com/blog/etf-trading-volume-liquidity/).

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 (http://www.morpheustrading.com/best-swing-trading-strategy) 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:

http://www.morpheustrading.com//~rick//charts/2014/140818TSLA.png

Another solid stock to trade is SolarCity Corp. ($SCTY), which is nicely volatile with a Price/ATR Ratio of just 23:

http://www.morpheustrading.com//~rick//charts/2014/140818SCTY.png

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:

http://www.morpheustrading.com//~rick//charts/2014/140818CSCO.png

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:

http://www.morpheustrading.com//~rick//charts/2014/140818TLT.png

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.

morpheustrading
09-15-2014, 01:41 PM
In a recent blog post (http://www.morpheustrading.com/blog/improve-stock-pick-win-rate/), I explained and illustrated how intraday moving averages can be used to improve your stock picking accuracy.

Since I received a lot of positive feedback on that post, I penned this follow-up article to build on that mini-lesson by drilling down to focus on just one intraday moving average in particular.

This incredible intraday indicator helps you quickly and easily do three things well:

1.) Measure the true momentum of a rally in any stock, ETF, or index
2.) Remain confident when holding stocks pulling back from their highs (to reap greater trading profits)
3.) Assists you in knowing exactly where to set protective stop prices with your trending swing trades.

Want to know more?

Just read on to discover the power of the 20-period exponential moving average on the hourly chart (hereinafter 20-EMA).

Amazingly Quick and Effective Check

Over the years, I have found the 20-EMA to be an excellent tool for assessing just how bullish any rally really is (the 10-day MA also works in a similar fashion).

Simply put, it is tough to question the strength of a rally when the price of a stock/ETF/index is steadily trending higher and above a rising 20-EMA.

It works so well that I am confident (but never backtested) that you have at least a 50% chance of a winning trade if you buy a stock exclusively because it is trending higher while holding above its 20-EMA on the 60-minute chart.

Such price action shows the bulls are clearly in control.

Conversely, a slip below the 20-EMA within a rally is frequently a warning signal of a possible correction by time or price.

Shakeout Or Breakdown?

If the move below the 20-EMA was just a minor shakeout, then the price action should reclaim the 20-period EMA within a few hours to a few days, or at the very least set a higher swing low below the 20-EMA.

Smaller shakeouts will usually recover back above the 20-EMA within a few hours, which causes the 20-EMA to flatten its trend, but avoiding rolling over.

However, when volatility picks up and there is a severe breakdown below the 20-EMA (1% or more for an index, 2% or more for a stock), the 20-EMA will usually break its uptrend and roll over.

Accordingly, price action frequently becomes quite volatile, with multiple crosses above and below the 20-EMA over the next few days.

Show Me, Don’t Tell Me

Rather than rambling on about the specifics of the relationship between price action and the 20-EMA, it is better to show you a few annotated charts that do all the talking.

Below are three hourly charts of the NASDAQ Composite, spanning from mid-May of this year to the start of September.

On each chart that shows several weeks of trading within an uptrend, pay close attention to how the price action reacts as it comes into contact with the 20-EMA:

http://www.morpheustrading.com//~rick//charts/2014/140908COMPX1.png

http://www.morpheustrading.com//~rick//charts/2014/140908COMPX2.png

http://www.morpheustrading.com//~rick//charts/2014/140908COMPX3.png

A Closer Look

When you learn how to interpret subsequent price action that follows the touch of a 20-EMA, this stellar indicator can be used by swing traders as the proverbial “line in the sand” for knowing whether or not a trend is maintaining very bullish momentum.

For example, a break below the 20-EMA, followed by sideways price action, and then a return back above the 20-EMA (while it trends sideways) is merely a shakeout that should not bother a trader who is seeking bigger gains with a longer holding period.

This type of shakeout price action is shown as point “A” on the hourly chart of Tesla Motors ($TSLA) below:

http://www.morpheustrading.com/blog/wp-content/uploads/2014/09/140909TSLABLOG.png

At point “B”, there is a much clearer violation of the 20-EMA, which causes the moving average to roll over as well.

Yet, if you are a swing trader looking to maximize profits, holding onto a winning position through a break of the 20-EMA is a necessity; otherwise you will continuously cut your profits short.

Even at point “C,” $TSLA is once again under pressure with a nasty break of the 20-EMA.

However, after the initial sell-off finds traction, the price quickly reclaims the 20-EMA the next day and pushes higher (which is exactly what I like to see).

Short-term Shakeouts

Whenever a stock or index breaks down below the 20-EMA and quickly finds support, the price action should snap back above the 20-EMA the next day (points “A” and “C”) OR at least form a “higher low” on the hourly chart the next day (point “B”).

Short-term shakeouts, such as those shown at points “A” and “B,” tend to last an average of just 1 to 3 days.

But if a stock or index trades below the prior day’s low (on the next day following a break of the 20-EMA) and continues lower after the first opening hour, the price action may be headed for a deeper correction that could lead to a longer consolidation period.

Another Tool In Your Arsenal

Despite my previous implication that a trader may even be able to be profitable using the 20-EMA along, you should not look at the 20-EMA on the hourly chart as some kind of magic indicator that will instantly cause you to become the greatest trader in the world.

Rather, the 20-EMA is a very helpful tool, just like several other reliable technical indicators used in the stock and ETF trades of my nightly swing trading newsletter.

Any indicator that helps remove human emotion from a swing trade ultimately increases your trading profits, and the 20-EMA on the hourly chart certainly fits the bill.