Swing Trading Strategies in Strong-Get-Stronger Markets
Stocks were down big again on Wednesday, with the Nasdaq and the S&P 500 both losing more than 5%. The Dow industrials were down more than 400 points.
The test of the October lows that many traders have been waiting for looks to be soon in arriving. And the momentum market — the strong-get-stronger market — continues to dominate the trading environment.
I’ve referred to the difference between a momentum market and the sort of swing trading market environment when our Short Term PowerRatings are most effective. In a momentum market, stocks that are strong tend to get stronger and stocks that are weak tend to get weaker.
But swing trading is about capitalizing on those opportunities that develop when the strong are temporarily weak, such as when stocks that are trading above their 200-day moving averages pull back. We look to buy that temporary weakness, weakness that is signaled with a high Short Term PowerRatings of 8, 9 or 10, and sell into strength as the stock recovers.
Similarly, the markets we have been experiencing over the past few days are markets in which the weak is getting weaker as well. This is not an optimal swing trading environment. Instead, we are looking for those instances when the weak are experiencing atypical — and often fleeting — strength. These are the stocks and exchange-traded funds that are trading below the 200-day moving average and have earned low Short Term PowerRatings of 1 or 2.
The selling on Wednesday was such that, for a second consecutive day, we have no 1-rated stocks. Stocks with Short Term PowerRatings of 1 are the most overbought, “consider avoiding†stocks we analyze. The fact that there are none of these stocks is a testament to the utter absence of aggressive buying anywhere in stocks.
We’ll sit out another day, as the number of stocks above their 200-day moving averages – that are also pulling back — remains very, very low. Again, I would defer to the “5 PowerRatings Stocks for the Next 5 Days†column from a few days ago for the few opportunities currently available.
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