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

[morpheustrading]

Top 3 ETFs To Buy As Stock Market Pulls Back ($TAN, $SMH, $EWM)

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 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):



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, 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, 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:



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 if/when we decide to buy as an “official” swing trade on our watchlist.

[LemonButt]

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]

re: MX

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]

Why The 50-Day Moving Average Is A Great Technical Indicator

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, 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:



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 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, 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:



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:



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]

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):



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]

Why Relative Strength In Small-Cap Stocks Is A Bullish Signal

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:



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:



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]

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 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

[morpheustrading]

Two Hot ETF Swing Trade Setups To Buy Now ($TAN, $SMH)

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:



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:



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]

Why Himax Is A Small-Cap Stock That Could Soon Blast Off Again ($HIMX)

After completing our weekend stock scanning research, 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, 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, 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:



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]

How To Use Short-Term Trendlines To Locate Low-Risk Buy Entry Points

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

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 to learn how we identify the strength of a trend).

[morpheustrading]

How To Profit From Oil And Silver ETFs In This Stock Market Downturn

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 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:



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:



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]

Why Yelp Is Now Poised For Low-Risk Swing Trade Buy Entry ($YELP)

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:



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]

Potential Pullback Entry in Amazon.com Stock ($AMZN)

In an uptrending market, the two main types of technical setups we buy for swing trading leading individual stocks are 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)

[morpheustrading]

Don’t Miss This Breakout In Crude Oil ETF ($USO)

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:



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]

How To Find The Best Entry Points For Short Selling Stocks

Because fear is a more powerful human emotion than greed, stocks nearly always fall much faster and more violently than they rise.

As such, there are key technical differences in our trading strategy between the way we analyze and buy stocks, compared to short selling stocks.

First, it is crucial to realize that trading in the same direction as the dominant broad market trend is the most important element of our swing trading system because approximately 80% of all stocks move in the same direction as the major indices.

This is where our objective, rule-based market timing model really shines, as it prevents us from selling short when the main stock market indexes are still trending higher (or going long when the broad market is in a confirmed downtrend).

Although it may seem counter-intuitive to new traders, we do not sell short stocks as they are breaking down below obvious levels of technical price support, as they tend to rebound and rip higher after just one to two days of weakness.

Rather, our most ideal short selling candidates are stocks and ETFs that have recently set new “swing lows” (or are testing prior lows), and have subsequently bounced into resistance over a period of three to ten days.

Yet, even though we prefer to wait for a bounce before entering a new short position, we also do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce).

Instead, we first wait for subsequent confirmation that the stock is about to stall again. This typically comes in the form of either a bearish reversal bar (such as a bearish engulfing or hanging man candlestick pattern) or sharp opening gap down, which signals the short-term bounce is losing steam.

Similarly, we always take the same approach on the long side when buying pullbacks of strong stocks; we wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback).

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



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



On October 17, $CHKP gapped down sharply, on huge volume, due to a negative reaction to its quarterly earnings report. This caused the stock to crash through a four-month level of price support at the $44 area (dashed horizontal line).

But over the week that followed, notice that $CHKP climbed its way back up to test new resistance of its breakdown level.

If $CHKP subsequently manages to probe above the intraday high of October 17, it would see some short covering, as most traders would not have expected the price action to climb back to that level.

Further, the 20-day exponential moving average is also just overhead, which lends a little more resistance.

It is at that point ($44.50 to $45 area) that we would look for the first bearish reversal candle OR opening gap down to initiate a very low-risk short selling entry with a positive reward-risk ratio.

By waiting for a significant bounce into new resistance of the breakdown before selling short, we can “be right or be right out” by keeping a relatively tight protective stop.

Finally, drill it in your head that having the patience to wait for the proper entry points is crucial when short selling stocks, as the short side of the market is less forgiving to ill-timed trade entries than the long side.