Ok all you guys … now that I have your attention we can talk about Swing Trading!!!
So 6 down days in a row and we finally get some relief … I was long some SSO and COST over night so this morning's pop was welcomed. I have sold those positions and traded AAPL and POT on a day trade basis so far today. I am waiting for better chart set-ups before I get long on any swing trade ideas.
The market has to prove to me that we are indeed starting a Swing Trade higher before I allocate swing capital here. So how do you know a market/stock can be swung long for 3-8 days??
The best/most reliable way of doing that for me is to look at the 15min charts and their 20EMA 50EMA positions. Let's look at the current 15-min chart and compare it to the swing move made off of the Japan-induced lows from mid-March. Is that a good comparison? Probably the best in recent days since investor sentiment was very bearish at both extremes …
First Bounce off of March 16th Lows:
To me the possible start to a Swing Trend higher is signaled when price moves above the 20EMA and the 50EMA and then eventually the 20EMA crosses above the 50EMA.
The next step in a Swing Trend set-up is price getting above the prior swing high (show in the chart above as a black dash line) and holding that for at least a couple of days. If that is confirmed I will usually try and get balls to the wall long while trading around a core position.
The above chart shows March 17th in yellow and March 18th in blue. As you can see price moved above the EMA's off the March 16th low and the EMA's crossed over right at the end of the 17th/beg of the 18th.
For me once those EMA's have crossed I look to invest swing capital on all pull backs. Note that pull-backs can actually dip back below the EMA's. That is ok as long as the EMA's don't cross over again and price pops back above the EMA's relatively quickly.
While price is fighting it out in determining whether the buyers or sellers are going to wrestle control of the price, the best indicator to use in picking your spots to try and go long is the Stochastics indicator. Once confirmation of a Swing Trade is in use your Directional Movement Indicator and the moving averages themselves as your signal when to start reducing your core Swing Trade.
Next Couple of Days in the Buyer/Seller Battle:
The above chart show the March 21st-23rd break of the prior swing high … note the price action during the first four days of the move off of the March 16th lows. The first two days saw price push higher on the opens which was driven in large part by underweight investors and shorts scrambling to cover their positions. After the early enthusiasim, unsure/weak investors sold and unconvinced shorts reloaded. Price then drifted into the close of those days. These first two trading days also occurred on a Thursday/Friday … investors and traders were not willing to get to committed to longs going into a weekend so a fade into Friday's close was understandable. By the way today and tomorrow are also Thursday/Friday.
Notice what happened on March 21st … investors and traders made a large gap higher as nothing bad happened over the weekend and capital flooded back into the market. Notice anything else … firstly, price gapped above that prior swing high price, an important price that signals to traders the possibility of higher prices to come.
Secondly, price consolidated in a much tighter pattern, in almost a straight sideways direction. This shows you that buyers and sellers are changing their behavior … buyers are being more aggressive and not waiting for any real big pull-backs. Sellers are also changing their behavior and were reluctant to push price down hard.
As is often the case, the market is not going to make things easy, and in this case, it created a nice vicious Bear Trap on March 23rd with an opening Gap Lower that actually caused the 20EMA to cross back below the 50EMA.
Again, this is quickly negated when price moves off of a 10:30am ish LOD and proceeded to trend higher back above the prior Swing High.
On the 24th the market again tried to shake out weak hands with a Gap Higher on the open which then pulled back putting in a low in that 10;15am-10:30am time period before finally taking off to the races and truly starting the Swing Trade higher.
The Sweet Spot of the Swing Trade:
Once the Swing Trade gets into its Sweet Spot, it will be cruel to under invested traders. Price will be so well bid it will often not even trade back to the 20EMA. Traders should try and not guess when the Trend will end and maintain a large core position. Intra-Day buying and selling can be carried out with smaller time frame charts like a 3-minute or 5-minute chart (see 5min chart below) … buy pull backs using your RSI (2) indicator (yellow is the buy zone and blue is the sell zone). I like to draw trend lines for these bull flags and buy when they are broken to the upside. You take profits on these trading position when price makes a new HOD and the RSI (2) gets into the blue zone (ideally above 90).
Note how the Trend weakened going into Friday afternoon March 25th … again many traders wanted to take profits after this nice bounce and reduce exposure going into the weekend. This was the first time price touched the 20EMA on the 15min chart all week.
On Monday, the smart money was going to wait to see how the morning traded to see if the trend was going to reassert itself. Divergences were starting to show themselves on the Friday and Monday causing the sophisticated trader some caution.
On Tuesday price again tested investors' metal by putting in a nasty bear trap during that pivotal 1st hour before trending higher into the close right at the swing high of this move. Wednesday Gapped higher and away we went again.
Trend Getting Tired … i.e., the Beginning of the End:
The above chart shows price action in the subsequent 5 days … notice the changing nature in the price action. Price pushes higher in the morning session and then chops sideways during the afternoons. Your Spidey senses should be tingling when you see the changing nature. I begin reducing my core holdings and intra-day trading allocations. The easy part of the trade is over and risk should be reduced.
Notice how the 20EMA and the 50EMA are coming closer together and are beginning to flatten out.
Time to Flatten your Swing Account:
All good things come to an end and this Swing Trade is not different …
Today's trading is almost over and the 15min SPY chart looks a little different than the March example …
Today's price action is different in that we didn't Gap higher and then grind lower through-out the day. We are pulling back going into the close though and tomorrow I wouldn't be surprised on a Gap higher … I am going to buy a small position at the end of the day for the opening tomorrow. I will likely be flat by 10:30am with a plan to add a position into the close again if all goes as expected.
I hope this helps some people when it comes to looking for good spots to invest their swing capital.
Cheers … Leaf_West