Understanding How Stocks Set Up To Give Us Good Swing Trades
In this article I am going to cover the various ways that individual stocks can set up to
provide us with good swing trading entries. Upon completion of reading
this article you will have a good idea of how and why stocks behave the way they
do and will understand and recognize the various Swing Trading Setups you will come across on a regular basis in trading.
What's more, you will know exactly how to take a Swing Trade off the different trade setups.
The Three Basic Trade Setup Scenarios.
A trending stock will give us one of three different swing trading setups to play. The setup types are determined
by the degree and extent to which the stock pulls back after making a new move to higher prices. These are
Super Deep Pullbacks
The 75 Day SMA Is The Key To Understanding Swing Trading Pullbacks.
Before we examine each of the different types of Pullbacks one by one it is important to understand how
they relate to the 75 day SMA. In my research I have found the 75 Day Simple Moving Average to be the best
moving average for not only trend verification, but also to provide as a visual reference point for the Swing
Trading Cycle for the stock you are trading. A shallow pullback will typically occur in a stock that is in
a very strong trend and after the stock makes a new move higher, the stock will only pullback 2-3 days remaining
high above the 75 period. A Deep pullback on the other hand is characterized by 5-8 lower days after a new
pivot high is made and many times the pullback extends all the way back down to the upward sloping 75-Day SMA.
Finally, a Super Deep Pullback is where a stock suffers an extensive sell-off of 10-14 days and drops well below
the 75-day SMA.
2-3 Day Pullback High Above 75-Day SMA
5-8 Day Pullback Down To 75-Day SMA
10-15 Day Pullback Well Below 75-Day SMA
Investopedia defines a Pullback as "A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing
upward trend, signaling a slight pause in upward momentum." Investopedia explains that, "Often pullbacks are seen as buying opportunities."
Good Source For Trending Stocks www.investors.com
Swing Trading Scenario #1 - The Shallow Pullback Setup.
We will take a look at each of the Swing Trading setup scenarios one by one. In our first example of the Shallow Pullback, (See Chart Below) you will
notice that the Stock Pivot Trade Analyzer software triggered a Shallow Pullback entry on PWR at $27.45 after the stock pulled back after only 3 days. The software
detected that this stock was in a super strong, high-octane up trend and so was on high alert for the Shallow pullback alert. If you would plot various
moving averages on a stock like this you would notice that it is probably trading above an upward sloping 15 day SMA - 20 day EMA because of its strength.
A LONG trade is entered in PWR the following day as the price trades up through the PRICE TO WATCH - TRADE TRIGGER LINE at $27.45 and the stock experiences an
8.3% trend continuation move to the upside within 10 days.
Swing Trading Scenario #2 - The Deep Pullback Setup.
In our second example, we will look at a Deep Pullback. (See Chart Below) you will notice that after making a PIVOT HIGH the stock goes in to a longer pullback
of 10 days all the way back down to the upward sloping 75-Day SMA. The Stock Pivot Trade Analyzer software triggers a Deep Pullback Swing Trading Setup on AMGN at $116.90
just above the 75-Day SMA.
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A LONG trade is entered in AMGN the following day as the price trades up through the PRICE TO WATCH - TRADE TRIGGER LINE at $116.90 and the stock experiences a 7%
bounce in roughly a week.
Swing Trading Scenario #3 - The Super Deep Pullback Setup.
In our third example, we look at a Super Deep Pullback. (See Chart Below)
You will observe that a Super Deep Pullback actually breaks down well below the 75-Day SMA (takes a major winger!) as part of the setup. We can see up to
10-14 days of heavy selloff as the stock price plunges. The Super Deep Pullback attempts to catch a stock that has become extremely oversold after it comes off a
major high and takes advantage of the fact that there will be a ton of Bargain Hunting Long Traders coming out of the woodwork to buy the stock while at the same
time all of the SHORT players will begin to BUY and COVER to exit out of their winning short positions. The two actions occurring at the same time creates a major
oversold bounce and the stock typically retraces all the way back up to the 75-Day SMA. The Stock Pivot Trade Analyzer software triggers a Deep Pullback Swing
Trading Setup on FCX at $31.65 well below the 75-Day SMA.
A LONG trade is entered in FCX the following day as the price trades up through the PRICE TO WATCH - TRADE TRIGGER LINE at $31.65 and the stock begins a 10%
retrace back to below the 75-Day SMA within the timeframe of a week.
Additional Swing Trading Setup Patterns
A Fourth Kind Of Swing Trading Setup - The Convergence Breakout
A Convergence Breakout Setup is a special hybrid type of Swing Trading Pattern that can occur during both a shallow pullback or during a deep pullback.
(But not during a Super Deep Pullback) It is best characterized by the stock getting stuck in a small
temporary range that puts pressure on and squeezes the stock price. Eventually the price is able to break free
of this short term range and potentially make a very large move in your favor. Let's take a look at an example below. The Stock Pivot Trade Analyzer software triggers a Convergene Breakout
Signal on ADBE at $59.85 after being squeezed into a tight range for 6 days during a shallow pullback.
A LONG trade is entered in ADBE the following day as the price trades up through the PRICE TO WATCH - TRADE TRIGGER LINE at $59.85 and the stock makes a rapid
18.5% push higher, another winning Swing Trade within roughly 2 weeks.
A Variation Of The Convergence Breakout Setup
One variation of the Convergence Breakout Setup occurs when the stock attempts to break out of the squeeze pattern in a LONG RANGE DAY. Instead of issuing
an overhead PRICE TO WATCH - TRADE TRIGGER LINE the Stock Pivot Trade Analyzer Software will issue a LIMIT PRICE to watch below the close of the break-out day.
In the example below the Stock Pivot Trade Analyzer software detects a Convergence Breakout Signal on MHFI and issues a signals to buy LOWER with a LIMIT order
the following day.
A LONG trade is entered in MHFI the following day as the price temporarily trades lower down into the PRICE TO WATCH - LIMIT ORDER at $76.28.
The stock experiences an 14% trend continuation move to the upside within 8 days with more potential room to go much higher.
The Stock Pivot Trade Analzyer Software Also Issues Short Signals
One questions that often arises is, "Does the Stock Pivot Trade Analzyer also issue SHORTING SIGNALS?" The answer is yes! The Pivot Trade software is to also generate
the identical types of trade setups, i.e. Shallow Pullback, Deep Pullback, Convergence Breakout to the Short side. (See Chart Below) You will see that
the Stock Pivot Trade Analyzer software triggered a Shallow Pullback SHORT entry on FXA at $90.90 a stock in a steep downtrend, after the stock retraced to the upside for 3 days. The software
detected that this stock was in a super strong, high-octane downtrend and so was on high alert for the Shallow pullback alert. If you would plot various
moving averages on a stock like this you would notice that this stock it is probably trading above an BELOW a downward sloping 15 day SMA - 20 day EMA because of it's
strong momentum to the downside.
The Follow Through The following day FXA trades lower through the PRICE TO WATCH - TRIGGER LINE and experiences a 5% drop over the coming week.
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