3 Swing Trading Examples with Charts, Instructions and Definitions to Get You Started
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Daily Swing Trade from TheStreet.com 3 SWING TRADING EXAMPLES WITH CHARTS, INSTRUCTIONS AND DEFINITIONS TO GET YOU STARTED by Alan Farley 3 SWING TRADING EXAMPLES, WITH CHARTS, INSTRUCTIONS AND DEFINITIONS TO GET YOU STARTED By Alan Farley The following examples cover common areas of swing trading that will provide insight into the mechanics of this discipline. Following the three examples, you’ll find a glossary of terms that are essential to understanding swing trading basics. I hope the combination will set you on the road to success in the financial markets. Amazon.com (AMZN:Nasdaq): Using the Edges of Support and Resistance Net stock rallies have come and gone over the past decade. But even during the bear market, they were still setting up profitable swing trades. After getting pummeled for months, many of these stocks started to bounce off multiyear lows. Driven by optimism that things wouldn’t get any worse, market players returned to the volatile sector in force. But long-side traders need to be very careful after secular declines. With few exceptions, beaten- down stocks face an extraordinary burden of overhead supply. Legions of investors and institutions hold positions at considerable losses during bear markets, and this can generate selling pressure on stocks for years to come. The good news for traders as Amazon pressed back toward $10 a share was its massive liquidity and small spread. This high-float issue traded with a 1- or 2-cent spread that marked the difference between the buying and selling prices. The small transaction cost offered a major advantage: It let traders enter and exit several times to catch the best possible price for a longer- term position. Swing traders play bear-market rallies, but they keep their stops tight and take what the market gives them. Fortunately, that can be double-digit gains when stocks are trading at discount prices. Just keep in mind that overhead supply will eventually extinguish the progress of these profitable bounces, and that real uptrends require extended basing periods. Amazon.com got crushed when the bubble burst, losing over 90% of its value. But things started to change in late 2001. The company finally delivered good news and the stock rallied about 50% off its October low, reaching just under $10. It wasn’t a huge ramp for the former giant, but accumulation suggested the stock was nearing a significant bottom. Notice the big move on Nov. 14, 2001. It drove Amazon above its 50-day moving average, right into a test of the last high. While volume showed significant investor interest, swing traders remained cautious because the stock could be developing a broader basing pattern, instead of a breakout. Also notice the lines drawn across the four-month highs and lows. They take on the appearance of a partially developed symmetrical triangle pattern. A stock needs to rally quickly out of a trading range like this one, or price can easily fall back to the lower trendline at 7. The volatility zone between $9.50 and $10 raised another red flag. As you can see, sharp reversals characterize these price levels. Why does this happen? Certain chart points hide significant numbers of traders and investors sitting in losing positions because they got trapped in sudden reversals. This volatility usually needs to unwind before price can move above it. The key to this trade was the market number $10. If Amazon were able to mount it, the move would complete two bullish patterns and draw in new buyers. First, it would trigger a cup-and- handle breakout on the shorter-term chart. More importantly, it would confirm a well-formed double bottom on the daily chart. A smart strategy would have been to take a long position before the breakout. The intraday pattern offered a low-risk entry as long as the trader was prepared to exit quickly if larger forces interceded. Notice how a rally above the small-scale triangle presented a perfect entry for a larger price move. But traders needed to stand aside near the bottom of this pattern because it had the appearance of a bearish descending triangle. This suggested a break of the lower support line would trigger a substantial selloff. Good trade management was required to make this position work itself into a profit. As I mentioned above, resistance will stall most bear-market rallies at the 200-day moving average. This formidable barrier was sitting near $12 on Amazon's daily chart. That hot spot also crossed the major downtrend line for the postbubble collapse. The smart swing trader takes profits whenever price approaches the danger zone. Nvidia (NVDA:Nasdaq): Locating Short-Sale Entry Signals Computer gaming has traveled light years since Pong was first released in the 1970s. Fortune 500 companies now cater to a game habit measured in the billions of dollars. In fact, current industry revenue rivals worldwide movie and DVD sales. This time-wasting endeavor has moved well beyond its core teenage audience into a variety of important demographics. You can profit with trade setups in the gaming sector, but forget about direct plays on the boxmakers themselves. Microsoft (MSFT:Nasdaq) (Xbox) and Sony (SNE:NYSE ADR) (PlayStation 2) have core interests unaffected by industry sales. Japanese giant Nintendo (Game Cube) has no ADR (American Depositary Receipt) trading on the U.S. markets. So let’s focus on Nvidia, a graphics board maker for the gaming industry. The company rose from mediocrity to become one of two powerhouses in 3-D chips, boards and technology. The Nvidia chipset will power Sony’s PlayStation 3 and ensure its industry leadership for years to come. A few years back, Nvidia was pushing through a series of highs during its stormy relationship with Microsoft and the Xbox platform. But the highs never showed much follow-through. In fact, price kept falling back, and retesting lower ground over and over again. What would it have taken for Nvidia to break out of the top of that trading range, or plummet back to the lows at 48? The volume spike on Nov. 29, 2001, offered a possible clue. It concealed a false breakout that caught many longs in a bull trap. Until the stock could absorb overhead supply created by that reversal, it would be tough for a rally to generate momentum. Swing traders earn their livings by recognizing critical price pivots, like the one on this Nvidia chart. The small Island Reversal was the sell signal they needed to jump into new short sales. More importantly, they could place tight stops just above the small pattern and exit quickly if the market turned against them. Alkermes (ALKS:Nasdaq): When to Wait and Watch At a training session a while back I asked the crowd about their trading habits. Specifically, I wanted to know how often they sold short. To my amazement, less than 25% said they ever had. This was not a group of typical buy-and-hold investors. These were hard-core traders. But even with all that experience, many avoided the art of short-selling. Obscure market rules and Wall Street happy talk discouraged short-selling for years. Furthermore, the upside-down logic required to sell short was too mysterious for many retail traders. Times have changed with the advent of online trading and instant execution. Getting filled on a short sale is just as easy as buying a stock. Gone are the days when you had to plead with your broker to release shares from inventory just so you could borrow them. And the Securities and Exchange Commission is finally considering abolition of the short-sale uptick rule. Here are three quick tips to improve your odds when selling short: • First, never chase a selloff. The best short sales come at the end of weak rallies. • Second, sell short in less volatile markets. Tech stocks carry high short interest (outstanding short sales) and are vulnerable to nasty squeezes. • Finally, take a short position in a well-established downtrend, rather than trying to pick tops in strong rallies. Timing a short sale requires more precision than buying a stock for a trade. True believers, contrarian traders and old-fashioned bad luck hold up lousy stocks that should break down. Help your cause by finding bearish patterns on both the daily and 60-minute charts. Even then, keep stops tight and don't hesitate to jump ship if the trade doesn't move quickly in your favor. Swing traders should recognize this 2001 setup in Alkermes from their favorite technical analysis books. It's a classic head-and-shoulders pattern, and it fits all the rules. It has well-formed left and right shoulders at the same height. The neckline descends modestly in a straight line. And each rally shows less commitment by buyers. So the stock appears to be a prime target for short- selling. In a classic head-and-shoulders setup, we expect a stock to break the neckline and fall a distance equal to the height of the head (middle high). This targets a decline to around $20 for Alkermes. But we have no guarantee the target will be reached, so the setup works best with a trailing stop. This way we can grab a profit but reduce damage from an unexpected short squeeze. The Alkermes' chart looks bearish for other reasons as well. The November 2001 high failed at the 200-day moving average. And the selloff on the last bar failed the 50-day moving average. So when do we jump in with our short sale? Unfortunately, it’s still not the best time to sell this stock short.