Articles from Apr 2008

The art of swing trading

In 100/200, Double Trouble, Modified Double Trouble, and Top 20 Sector methods the concept is same. We want to capture a slice of a pre existing trend. Understanding that concept thoroughly is the key. If you understand that then the questions about stops will have context.


The concept of swing trading is to trade an upward swing in a stock experiencing a strong uptrend as defined by relative strength or sector stregth. Relative strength is a measure of price trend that indicates how a stock is performing relative to other stocks in the market.

The best points of entry in such stocks are not in the middle of an upward trend, but instead on fresh breakouts after a period of weakness or consolidation. The following figure illustrates this concept:

where 10%w represents periods of weakness where the gains in price were less than 10%, while the thick line shows period of more than 10% price gain.The idea of swing trading is to try to trade only the trending periods and avoid the non-trending periods.


A % breakout after 10% or less weakness indicates a probable start of a new upward swing. If your entry is successful, you will have a profitable trade.The problem with entering mid-trend  is that your entry might be too late in a swing, and it may turn in to a non trending period. Also, if you study relative strength, you will find that long-term relative strength (1 year or more) is good. However, short-term relative strength (4-6 weeks) often leads to reversal.
In short, we want to enter a trading vehicle moving 100 miles per hour, but we want to enter it when it slows down a bit before accelerating again.

So where should we put stop. we put it somewhere closer to start of the thick line swing. Two day low is one option. It might be at low of % breakout day. Now how do we exit. Our objective is to capture part of the swing represented by the thick line. We should exit before the swing becomes another consolidation or weakness.

Now when selecting the vehicles, we have selected vehicles with high probability of making 20% plus moves after breakout from such consolidation. We are not buying a breakout on any random stock with % breakout. We are buying on stocks which have in the past exhibited a propensity to behave in certain manner.

So 20% is guideline, it also depends on your entries. So one operates with a target zone of 16 to 20% profit. You have to exit in that zone, while the swing is still going on. Exiting on strength is better. Because swings end with final strength.

Now how many days should it take to get to 20% is next question. Nature of swings are such that consolidation periods are longer and trend periods are shorter (ideal situation). So approximately the stock should make the move of 20% in around two weeks as we are selecting consolidation period of 4 weeks prior to entry. This is based on my experience and study of past trades. But market circumstances affect this. That is why if a trade does not move at intended speed, even if the stock has not hit the target, you should close and replace it.

Bottom line in these methods you should take profit at around 16 to 20% on strength. If you do not take it, in a day or two the stock can pullback or reverse and that profit vanishes. Trying to capture lots of 20% moves as against one big move is what these methods are all about.  These are high frequency methods. These are for traders. not for investors. If you do not enter immediately on signal day, or hesitate to take profit, you should not trade these things.

To trade these things, you also need to keep focused on next breakout and not worry so much about missed opportunities or what might have happened if you have not exited. By using a combination of method, there is a constant flow of new breakouts and everyday, you have to come prepared to look for next 20% opportunity. You might often be wrong, miss good breakouts sometime, sometime judgement might prove wrong, that is all part of the game. All you have to think of is the next breakout.

Market Monitor

  • Rally is running in to some trouble. It might be time to close non performing positions and tighten stops in general.
  • 300 plus down day is 3rd in last 10 days or so.
  • The stocks up 50% in a month readings had been elevated for some time and looks like lot of stocks which ran up fast in last few weeks are now due for reversal or correction.
  • Stuck in a range is the theme of this market for months.
  • At the same time new sectors are breaking out, but as yet there are few signs of wide scale new leadership emerging.

Top 20 Sector breakouts

ABP ACI ALY ARD BBL BQI CIR ENT FCL FDG GSI HAS ICO JRCC KOG KUB MCZ MDTL MMR NGA NOA SGY SOL SUTR TNH UEC USEG WGOV WSCI YZC 

You can look for opportunities in these.

Two possibilities to shortlist candidates:

  • Sort by Efficiency Ratio

(C - C60) / (ABS(C - C1) + ABS(C1 - C2) + ABS(C2 - C3) + ABS(C3 - C4) + ABS(C4 - C5) + ABS(C5 - C6) + ABS(C6 - C7) + ABS(C7 - C8) + ABS(C8 - C9) + ABS(C9 - C10) + ABS(C10 - C11) + ABS(C11 - C12) + ABS(C12 - C13) + ABS(C13 - C14) + ABS(C14 - C15) + ABS(C15 - C16) + ABS(C16 - C17) + ABS(C17 - C18) + ABS(C18 - C19) + ABS(C19 - C20) + ABS(C20 - C21) + ABS(C21 - C22) + ABS(C22 - C23) + ABS(C23 - C24) + ABS(C24 - C25) + ABS(C25 - C26) + ABS(C26 - C27) + ABS(C27 - C28) + ABS(C28 - C29) + ABS(C29 - C30) + ABS(C30 - C31) + ABS(C31 - C32) + ABS(C32 - C33) + ABS(C33 - C34) + ABS(C34 - C35) + ABS(C35 - C36) + ABS(C36 - C37) + ABS(C37 - C38) + ABS(C38 - C39) + ABS(C39 - C40) + ABS(C40 - C41) + ABS(C41 - C42) + ABS(C42 - C43) + ABS(C43 - C44) + ABS(C44 - C45) + ABS(C45 - C46) + ABS(C46 - C47) + ABS(C47 - C48) + ABS(C48 - C49) + ABS(C49 - C50) + ABS(C50 - C51) + ABS(C51 - C52) + ABS(C52 - C53) + ABS(C53 - C54) + ABS(C54 - C55) + ABS(C55 - C56) + ABS(C56 - C57) + ABS(C57 - C58) + ABS(C58 - C59) + ABS(C59 - C60) + 0.001)

  • Sort by 10 day growth offset by one day

100 * (C1 - C11) / C11

and look at stock with below 10% growth in last 10 days.

Sorted by 10 day growth

To further reduce look at distance from 52 week high and volume surge.

Possible candidates to consider using above:

HAS

ARD

NOA

CIR

FDG

You can research them further at Moneycentral to see earnings trends, margin, ROE, news, insider buying, fund holding etc.

Low volume

Market Monitor: Bullish

  • Yet another negative day based on breakout ratio. Rallies are characterised by occasional negative days, but a  string of negative days is not a good sign.
  • There has been steady deterioration of the numbers on 65 days ratio in last few days. While it is still positive it is showing erosion in breadth.
  • All this is accompanied by low volume. Many are reporting yesterday was lowest volume day in this year. Which indicates lack of conviction.
  • As I have said many times before since January, we have been stuck in a range. The worst breadth figures were in January (look at 5 days ratio 1/22/2008) and since then then have fluctuated up and down but never approached those extremes.
  • The range bound action and lack of broad based momentum has reduced the number of profit opportunities in the three basic methods traded.  The average swing length is lower than normal and hence 20% profit in many cases is a problem.

Market Roundup

Market Monitor: Bullish

  • Another  300 plus down day in last 5 days is not a good sign.
  • This market has had tough time breaking out of range since January.
  • The GE news and other world market reaction (Japan, Hongkong, India down big) will test the market. If the market can rebound from these repeated selling bouts , it will show resiliency.
  • The earnings season will continue to be volatile and lighter commitment and more watchful approach.

Economist cover indicator

MTL up 347% in 52 weeks



The steel sector has been leading sector for last 5 years. Many steel stocks were stuck at single digit levels when the 2003 market rally started. Doe 5 years the sector has maintained its leadership.MTL the Russian steel maker is one of the start performer in the sector with a 347% move in last one year.

The top 20 sector stocks continue to attract buyers. Some of the stocks witnessing higher buying pressure from this sector are:

ACGY,Acergy S.A. Ads (Google Yahoo Earnings Chart)
AEZ,American Oil & Gas Inc (Google Yahoo Earnings Chart)
BEXP,Brigham Exploration Co (Google Yahoo Earnings Chart)
CXG,CNX Gas Corp (Google Yahoo Earnings Chart)
CXZ,Crosshair Exploration (Google Yahoo Earnings Chart)
KOG,Kodiak Oil & Gas Corp (Google Yahoo Earnings Chart)
LNG,Cheniere Energy Inc (Google Yahoo Earnings Chart)
MTL,Mechel Steel Group OAO ADS (Google Yahoo Earnings Chart)
NOG,Northern Oil and Gas (Google Yahoo Earnings Chart)
PKD,Parker Drilling Co (Google Yahoo Earnings Chart)
PLLL,Parallel Petroleum Corp (Google Yahoo Earnings Chart)
PRC,Petro Resources Corporation (Google Yahoo Earnings Chart)
RIC,Richmont Mines Inc (Google Yahoo Earnings Chart)
SD,SandRidge Energy (Google Yahoo Earnings Chart)
TMR,Meridian Resource Corp (Google Yahoo Earnings Chart)

Energy sector continues to power forward


Worldwide shortage of coal is leading to dramatic increase in coal prices. The strength in coal sector stocks are reflecting that.
JRCC, James River Coal Company is the price leader in sector. It is up 440% in last one year from its 52 week low.

Stocks from top 20 sectors witnessing buy interest

ACI,Arch Coal Inc (Google Yahoo Earnings Chart)
APWR,A-Power Energy Generation Sys (Google Yahoo Earnings Chart)
BBL,BHP Billiton Plc Ads (Google Yahoo Earnings Chart)
BHP,BHP Billiton Limited ADS (Google Yahoo Earnings Chart)
LAYN,Layne Christensen Co (Google Yahoo Earnings Chart)
MCF,Contango Oil & Gas (Google Yahoo Earnings Chart)
NOG,Northern Oil and Gas (Google Yahoo Earnings Chart)
QMM,Quaterra Resources Inc (Google Yahoo Earnings Chart)

Frothy sectors witness profit taking

  • In recent days market had become a bit frothy with some sector stocks like solar and energy having back to back 4-5 days rallies. So a correction in some of those sector was a possibility as profit taking kicks in.
  • When a move gets going for few days like we witnessed in last 5-6 days, those who did not participate in it, or were positioned for it, at some stage feel the desperate urge to participate. which often tends to be the point of short term reversal.
  • A small period of rally also leads to couple of trades working for a trader and that often leads to overconfidence. Mr. Market then quickly throws in a punch or two to remind who is the boss.
  • From a trade mechanic's point of view, when faced with a unexpected strength like we witnessed yesterday morning, your first instinct should be to lighten up in strength. Stops work poorly in fast markets.
  • As a general observation fast trends tend to climax, slow orderly trends tend to persist.

Stocks from top 20 sector showing buy interest
BCON,Beacon Power Corp (Google Yahoo Earnings Chart)
DVR,Cal Dive Intl Inc (Google Yahoo Earnings Chart)
FDG,Fording Canadian Coal Trust (Google Yahoo Earnings Chart)
GHM,Graham Corp (Google Yahoo Earnings Chart)
GRA,W.R. Grace & Co (Google Yahoo Earnings Chart)
JRCC,James River Coal Company (Google Yahoo Earnings Chart)
NOG,Northern Oil and Gas (Google Yahoo Earnings Chart)
NRP,Natural Resource Partners (Google Yahoo Earnings Chart)
PBT,Permian Basin Royalty Tr (Google Yahoo Earnings Chart)
PCX,Patriot Coal Corp (Google Yahoo Earnings Chart)
QTWW,Quantum Fuel Sys Techworldwide (Google Yahoo Earnings Chart)
REXX,Rex Energy Corp (Google Yahoo Earnings Chart)
SLT,Sterlite Industries (Google Yahoo Earnings Chart)
SPIR,Spire Corp (Google Yahoo Earnings Chart)
STLD,Steel Dynamics Inc (Google Yahoo Earnings Chart)
SUTR,Sutor Technology Group (Google Yahoo Earnings Chart)
WEL,Boots & Coots Intl Well (Google Yahoo Earnings Chart)
WLK,Westlake Chemical Corp (Google Yahoo Earnings Chart)

Top Sector Stocks

Top 20 sectors have had nice run in last few weeks. If rally continues other sectors will join in soon.

CMP,Compass Minerals International (Google Yahoo Earnings Chart)
DESC,Distributed Energy Systems (Google Yahoo Earnings Chart)
ESLR,Evergreen Solar Inc (Google Yahoo Earnings Chart)
FSLR,First Solar Inc (Google Yahoo Earnings Chart)
FSYS,Fuel Systems Solutions Inc (Google Yahoo Earnings Chart)
HYGS,Hydrogenics Corporation (Google Yahoo Earnings Chart)
JASO,Ja Solar Hldgs Co Ads (Google Yahoo Earnings Chart)
KEG,Key Energy Services Inc (Google Yahoo Earnings Chart)
LDK,LDK Solar Co Ltd (Google Yahoo Earnings Chart)
MEE,Massey Energy Company (Google Yahoo Earnings Chart)
MMR,Mcmoran Exploration Co (Google Yahoo Earnings Chart)
MOS,Mosaic Company (Google Yahoo Earnings Chart)
PDE,Pride Internat Inc (Google Yahoo Earnings Chart)
PLUG,Plug Power Inc (Google Yahoo Earnings Chart)
QTWW,Quantum Fuel Sys Techworldwide (Google Yahoo Earnings Chart)
RTK,Rentech Inc (Google Yahoo Earnings Chart)
SIM,Grupo Simec S.A.B De C.V (Google Yahoo Earnings Chart)
SOL,ReneSola Ltd. (Google Yahoo Earnings Chart)
SQM,Sociedad Quimica Chile (Google Yahoo Earnings Chart)
WLK,Westlake Chemical Corp (Google Yahoo Earnings Chart)
XCO,EXCO Resources Inc (Google Yahoo Earnings Chart)

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