Why The Stock Market May Be Nearing A Significant Bottom
Deron Wagner | Nov 15, 2012 06:09AM ET
In the last paragraph of this post (starting with red text), we will tell you why stocks may now be nearing a significant bottom. But first, let’s take a look at another swing trade setup (on the short side) to put on your radar screen, as well as a quick recap on our existing open positions…
After rallying off the summer lows and clearing the 200-day MA in early-September, the SPDR S&P Oil & Gas Exploration ETF (XOP) stalled out after one thrust above the 200-day MA. Over the past few months, the price action has deteriorated, starting with the uptrend line break in late October, which coincided with a break of the 50 and 200-day MAs. The 20-day EMA is now below the 50-day MA, and the 50-day MA is beginning to slope lower.
We also have been seeing a series of “lower highs” and “lower lows” the past two months, signaling a reversal of the uptrend. At its current level, XOP is NOT actionable on the short side, but swing traders should add this to their watchlist for potential short entry on a bounce to resistance, in the area of the 200-day MA. This is shown on the daily chart of XOP below:
Yesterday morning, we sold our swing trade position in Direxion 20+ Year Treasury Bull 3x ETF (TMF) for a net gain of 6.8% (just over 5 points). The trade setup was initially pointed out in our October 30 blog post. Later in the day, as the market broke down, ProShares UltraShort Real Estate (SRS) hit our predetermined target price of $27.48. As such, we sold SRS into strength and closed it for a nice gain of 8% since our November 5 buy entry.
Our only disappointment yesterday was the price action in the Global X Silver Miners ETF (SIL), which hit our stop price when it fell below the prior day’s low. Nevertheless, our stop was in the right place because SIL subsequently sold off another 7% below our exit price by the closing bell.
This type of selling action after the ETF broke technical support was a great reminder of the crucial importance of always trading with and honoring your protective stop prices. Losing trades are a normal and unavoidable part of the business, but the only way to be a consistently profitable swing trader is to ensure the losses of your average losing trades are less than the gains of your average winning trades.
We now have four remaining open positions in our model trading portfolio, which consist of two inverse ETFs (SMN and SKF) and two individual stocks on the short side (COH and SBUX). With these open positions, we have once again tightened the stop prices so that we can protect at least half of the unrealized gains each position is showing (based on Wednesday’s close).
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For a weak market to form a significant bottom, there typically needs to be at least one or two days of panic selling, where investors finally give up and just want to sell at any price. This prompts institutional investors to step in and attempt to press the “reset” button. It seems as though Wednesday’s action might have been the beginning of such a panic selling move, as there isn’t much out there that is still holding up. Our nightly scans for new short selling setups have dried up this week, as most sector ETFs have already been hit hard and are now too extended to offer low-risk entry points. Because of this, we will continue to lay low with regard to new positions and just focus on managing our existing winning trades.
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