Today's swing trade stock chart of the day is HD (Home Depot). In the Trade Report we have been watching residential real estate stocks for a few weeks now and of course, building material and home improvement stocks move in line with real estate.
Home Depot broke out on strong volume in mid February and has now pulled back to the 50 dma. An entry here in the $112-114 range provides great reward to risk if stop is placed under the moving average with a target at the range high $118 or even a breakout to new highs.
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MNST broke out on heavy volume a few weeks ago and has been forming a nice post breakout base ever since. This consolidation sets it up for a leg higher and a "trading the post breakout range" setup. Look to enter either 1) on pullback to bottom of the range or 2) breakout of the top of the range.
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Have no fear of perfection, you will never reach it - Salvador Dali
As swing traders we all know that a market pullback is our friend. If we go back and look at any market index chart, we will see that the best time to enter the market was on a pullback after and extended run.
Take a look at this short one minute video that illustrates the power of doing nothing more than entering pullbacks in the S&P 500. In the past year, entering on a deep pullback was profitable 7 out of 8 times. That win rate is hard to beat.
Watch this 2 minute video showing the power of entering on market pullbacks.
So intellectually we know the right thing to do. Entering on pullbacks is a slam dunk trade. So why don't we do it more often?
It all goes back to the mental game. Fear is quite possibly the most powerful emotion. Fear stifles us and leads to indecisiveness and bad decisions. To be a successful winning trader, you must overcome fear.
How do we overcome this fear?
Here are 4 methods for overcoming the fear of buying dips:
1. Trade small. Make sure you are risking an amount that won't cause you pain if you take a small loss. This way, even if you take a loss on the trade, it's no big deal.
2. Trust your methodology. You have done the research. You know that historically the way to make money in the market is buying dips.
3. Shut off social media and CNBC. Becoming a stock news junkie is a guaranteed method for increasing your fear levels.
Conquer your fear, buy on dips and become a profitable trader.
It's that simple.
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Often with explosive stocks and leveraged sector ETFs like NUGT, pullbacks off parabolic breakouts can be volatile, and difficult to enter. So just how do we figure out our entry level?
There are two ways to do it. The safe route is to wait for a confirmation move. For instance, a positive candle pattern. The riskier route is to take a stab once the stock becomes oversold.
When choosing the later, it's best to play it safe with a small position size or tight stop. Today NUGT presented both options. It pulled back down to $16.50, which got it to oversold levels, before reversing into what now looks like a positive candle pattern. This pattern is not valid until the close.
While it may seem counter-intuitive to enter near the highs of the day, this pattern is actually the safer route, assuming it holds to the close.
Remember, in swing trading you must have a game plan. Often times the strategic moves you must make go against what our emotions tell us, so that plan must be in place going into the day.
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One of my favorite swing trade setups is the breakout-pullback setup. Recent IPO Virgin America broke out over it's 5 week range and has now pulled back to the old high. This high converges with the new 20 day moving average, offering two levels of support. Entry in the $38-40 range, with a stop under that range offers a low risk, high reward setup.
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One of my favorite swing trade setups is the breakout-pullback setup. While the market has pulled back, retail jeweler $SIG has held up well, pulling back to the key 50 dma level. An entry here with a stop under the 50 dma and target near recent highs around $133 offers a nice 3:1 reward to risk ratio. This is the type of risk ratio that successful swing traders salivate over.
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Swing traders know that biotech has been the sector leading the market. My favorite biotech stock right now is CEMP.
The keys to a great momentum stock are volume and price action. Volume has been pouring into the stock early October breakout. Each new breakout has been followed by strong volume and low volume pullbacks. These pullbacks show strong price action, with each breakout forming a trading range or box followed by a new breakout.
The new breakout forms a new box. Let's watch for a new range to develop and then buy the bottom of the range.
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I entered VMW yesterday on a breakout-pullback setup. Note that stochastics are now oversold and price has moved back to the bottom of the breakout bar on declining volume.
Yesterday I entered GMCR off a breakout-pullback setup at $93.44. Stop is under support and the target is the recent high around $98. This gives me a 3:1 reward to risk ratio.
MSTR is a good example of the "Partial Profit" or "Let it Ride" exit strategy. I entered the breakout-pullback setup at $84, with a target under the old high a limit order set at $89.85 (I always set the target a little below the round number). From there I move my stop up to the $84 entry level to lock in the profit.
The stock continued higher today, and closed with a new breakout bar (though on relatively low volume). This provided me with an opportunity to move my stop up again and lock in more profit. I moved my new stop up to $87 to lock in a $3 gain on the remaining shares. $87 is a good level since a failure of the breakout bar would be a negative signal.
Remember not to randomly pick new stops when "stair-stepping" your stops. You don't want to be stopped out by a random movement/natural volatility. Always look for support/resistance areas when picking the new higher stops.
The partial profit exit strategy will sometimes decrease the potential gain when the second half of the trade gets stopped out. It's easy to think to yourself, "I could have made more by just taking the full profit at my original target". However, it keeps you in the huge moves. These huge moves are well worth the cost of not taking the full profit at the intital target.
MSTR has formed a classic breakout-pullback setup. The stock recently broke out on huge volume, and since has consolidated in an orderly fashion.
I entered this trade around $84, which I posted in the Trade Report last week. My intitial target is $90, where I would take a partial profit. At that point I would move my stop up to entry.
Back on September 9th, when I posted about entering AIG, it has pulled back post breakout and showed a great accumulation pattern.
Since then the stock has catapulted back up towards the recent highs. I entered at $37, took a partial exit and am still holding a positon near $52.
The key features of the breakout pullback setup include:
1. Price breakout over resistance 2. Breakout on strong volume 3. An orderly pullback, with small price bars and decreasing volume 4. Volume pattern should show accumulation
