This was brought to my attention during the week when somebody asked me how I swing trade. Then, I realized that not many people are familiar with this concept, so I decided to give you an overview of the swing trade this week.
Swing Trade Basics
With the swing trade, you place a bet right above/below the previous swing point with an expectation of making 100% extension from the most recent swing low.
For those who have never seen the swing chart, here is an example of QQQQ daily swing chart.
Volume Confirmation
If the previous swing is being taken out with much higher volume (typically, more than 10%), then, that's considered to be the volume confirmation and the probability of success is as high as 75~85%. Here is the MA chart.
SPY & QQQQ Price Projections
As many of you may know, I used to make a weekly post at a different blog site, and as of June 6, 2009, I made the price projection as follows:
SPY Weekly Chart (as of June 6, 2009)
QQQQ Weekly Chart (as of June 6, 2009)
These projections were made when the April swing highs were being taken out.
In a retrospect, my projections were not that much off, but many people thought that I was totally out of my mind coming up with such price projections (remember, those were the times (and still are) that many were expecting "one more drop" to the downside).
This was the comment added by the blog host on the face of my weekly post:
"Although there is technically nothing wrong with Fujisan’s channels there are various sentiment indicators that have currently reached extreme readings and which therefore cast doubt on the notion that we’ll push all the way into 1100 on the SPX or 1640 on the NDX. However, it’s not impossible and if we rally higher from here (a very distinct possibility)"
(Note: My intension is not to ding him. I just wanted to point out the sentiments shared by many traders back then. After 9 months, this sentiment has not changed. Many traders still think that various sentiment indicators have reached "extreme" readings and there is a very distinct possibility that we'll push higher from here – although I admit that it's short term overbought).
SPY Weekly Chart 2010 Price Projection
Now, as the most recent swing highs were being taken out this week, I am making the new price projections with an expectation of 100% price extension from the most recent swing low.
I have already expressed my long term bullishness at my last week's post, but here is my intermediate market view based on the swing points.
As long as I can tell, SPY did not close above the previous high with the volume, therefore, a=c price structure is not confirmed. However, there is a very good chance that it could go to the next swing point, and that's what happened in the previous leg up (it did not close with the volume but it went through many swings and sideway movements, and eventually made it through 100% extension).
QQQQ Weekly Chart 2010 Price Projection
Just like SPY, QQQQ did not close the weekly candle with the volume, therefore, a=c structure is not confirmed. However, once it closes above the previous swing high, it could go to the next swing. Please note that 200 SMA and 50 SMA are about to cross.
IWM Weekly Chart 2010 Price Projection
Just like SPY and QQQQ, no confirmation on the volume, but the next swing point is almost as good as a=c price target, so, in a way, IWM will most likely complete a=c structure. Please note that IWM closed above 200 SMA for the first time in 20 months.
If you think that my intermediate price projections are totally out of the question, just look at my June 09 price projections and see what happened. If you just keep shorting this rally expecting a big drop, you are falling for the same traps.
How can we trade?
This tape will be very difficult to trade for both bulls and bears. Unless you went long 1 month ago, it would be difficult to go long at this point and we may see many sideway price movements just like the past year. Ok, so how can we trade?
1. Avoid the indices, especially SPX and INDU. If you like to trade the indices, you would be better off by trading IWM and/or QQQQ. Much better momentum.
2. Find the individual stocks that are moving. There are many stocks that are breaking out of the current trading range.
3. Keep adding long positions on a dip and don't pay attention to the small price fluctuation. You will eventually get there (believe it or not, this was the most effective trading strategy last year).
For those who are interested in accumulating the long positions over time, here is QQQQ Sep 45/50 bull call spread. Just keep addding on the dip. This is a theta positive position so you don't need to worry about theta burn.
SPY Daily Chart Update
I was hoping to see some kind of pullback after SPY hitting my price target. However, SPY did not sell off into the close on Friday and still closed above the previous swing high, so, I have to remain bullish until the price rejection. With OPX and FOCM coming up next week, together with the quadruple witching, my bias is still to the upside. It almost seems to me that all the major indices are waiting for INDU to make the new recovery high before a pullback.
EUR/USD
Last but not least, here is my EUR/USD update. You might like to pay a close attention to this pair, as it is right around "make or break" point. Once it goes above Friday's high, this could be the break out of the current downside channel, which is positive to the equity market, and vice versa.
