Top swing trading stock & ETF picks with Morpheus Trading Group (MTG)

[morpheustrading]

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:


- Overview of our stock trading strategy
- Overview of our market timing system
- Homepage of our trading blog
- Access to our free technical ETF and 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]

5 Technical Reasons Stocks May Soon Move Lower

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:



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:



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):



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:





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:





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]

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

[morpheustrading]

SkiRacer

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]

Time To Light Up The Natural Gas ETF Again? ($UNG)

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:

[wooish]

Welcome to the site Deron and thanks for your valueable contribution.

[Deaddog]

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]

DeadDog and Wooish

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]

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:


- Overview of our stock trading strategy
- Overview of our market timing system
- Homepage of our trading blog
- Access to our free technical ETF and 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]

How To Increase Your Trading Profits While Decreasing Risk

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:



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]

Awesome thread!

[morpheustrading]

Thanks

Thanks for the kind words, Websman.

Will work hard to keep the quality content coming.

Deron

Awesome thread!

[morpheustrading]

How We Gained 11% On A 6-Day Hold In $BRLI (Trading Strategy and Education)

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):



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:



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:



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:

[morpheustrading]

Why We Are Waiting For The Nasdaq 100 To Bounce Into Resistance ($QQQ)

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:

[morpheustrading]

CurrencyShares Euro Trust ETF Setting Up For Buy Entry ($FXE)

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:



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:



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 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.