Swing Trading: Edges and the Trading Near the End of the Month
I would guess that there are fewer traders interested in the prospect of trading overbought markets at the end of the month now than there were a few days ago.
Pulling back to close in oversold territory ahead of trading on Wednesday are the S&P 500, the Russell 2000, and the Dow Industrials. Of the major equity indexes, only the Nasdaq 100 remains beyond oversold territory. In fact, basis the ^QQQ^, the Nasdaq 100 has closed in overbought territory for four trading days in a row.
That said, what clues does the data provide traders about whether the upward bias in stocks shown at the end of the month applies equally to overbought stocks as it does to oversold stocks?
As Larry Connors writes in Chapter 11 of his book, Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs.
The average gain for all days … when it was above its 200-day MA from January 1995-December 2007 was 0.25% … Look at what happens as we start approaching month’s end. The average gains rise significantly. On the 23rd day of the month, the average gain for these stocks nearly doubles. On the 24th, it more than triples. On the 25th, it nearly quintuples! And this type of behavior holds through for an additional 5 days.
You can read the rest in Chapter 11 of Short Term Trading Strategies That Work (get your copy for free here if you don’t already have one).
Based on the data, it suggests that the End of the Month effect is a very real phenomena for any stock trading above its 200-day moving average. The difference that adding a filter such as oversold conditions is that it turns this basic phenomena into a tradable edge.
This, by the way, is how trading strategies are built.: by adding and combining complimentary edges until the trader has a testable strategy that is balanced between having a sufficient number of trading opportunities and a high probability of success.
Here are 7 Stocks You Need to Know for Wednesday.
^BA^ is scheduled to report quarterly earnings on Wednesday. The stock has closed lower for three days in a row and has followed through below its 200-day moving average after losing more than 1% on Tuesday.
Pulling back for a third day in a row ahead of its scheduled quarterly earnings report on Wednesday was ^R^. R has not closed in oversold territory above the 200-day in more than a month.
The best performing stock in the S&P 500 is ^LXK^, which gained more than 17% to finish in overbought territory below the 200-day. The stock has spent most of the year trading below the 200-day.
Among the Nasdaq 100, shares of ^BRCM^ were also rallying big to finish overbought below the 200-day on Tuesday. BRCM gained more than 9% to close at its highest level since closing beneath the 200-day back in late April.
Also scheduled to report earnings on Wednesday, ^V^ has been rangebound for most of July.
Noted in yesterday’s 7 Stocks You Need to Know, shares of Whole Foods Market ^WFM^ remain at their highest levels of the year and overbought above the 200-day ahead of the company’s scheduled earnings report on Wednesday.
Down three in a row ahead of its scheuled earnings announcement on Wednesday are shares of ^WLP^. Wellpoint finished just outside of oversold territory in Tuesday’s trading.
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David Penn is Editor in Chief of TradingMarkets.com