The One Question for Swing Traders in this Market
Stocks moved strongly higher on Election Day, with both the Dow and the Nasdaq Composite higher by 3% and the S&P 500 up more than 4%.
A case of buying the rumor and selling the fact? The majority of stocks are trading below their 200-day moving averages. These same stocks are also increasingly overbought — as seen both through the continued high level of low Short Term PowerRatings stocks as well as by way of the 2-period RSI. A number of other signals that we rely on also suggest that stocks — especially small cap stocks — have come too far too fast.
So load up on the inverse ETFs and don’t look back?
I have made the point repeatedly in previous columns. But it is a crucial one, so I don’t hesitate to repeat it here. Sooner or later, the markets will rally, continue to rally, and breakout above their 200-day moving averages. Shortly afterward, the markets will pull back toward those 200-day moving averages but fail to close below them significantly or consistently. Following this — what classical technical analysts call a “test of support” — stocks will advance in what will probably be a strong advance that will retrace some non-insignificant amount of the markets’ most recent declines.
The question is whether or not this rally is THAT rally.
Fortunately, swing traders who follow our methodology really don’t have to answer that question. By sticking to our discipline of buying quality pullbacks — in stocks or exchange-traded funds — and by keeping our position sizes modest (i.e., not wagering too much on any one trade), swing traders can both take advantage of the likelihood that an overbought market will reverse to the downside, as well as prepare themselves — based on sound money management — for the possibility that today’s overbought extremes are the harbingers of a new bull market — or bear market rally — tomorrow.
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