Finding Swing Trades in a Top Heavy Market

As a long time trader and investor, I have been through the ups and downs of the many market cycles we have experienced in the past decade. Market cycles are a part of life, just as inflation and deflation are mandatory components of an investors portfolio. Over the years I have learned to not fight trends, and if we have been in a bullish trend for the past few years, I will tend to be long biased until that is no longer the case. As swing traders, we look to capitalize on short term “swings” in price over a period of time anywhere from one day to a couple weeks.

Stocks that trade with any sort of liquidity will tend to drift in the direction of the broader market, unless there is a clear and identifiable fundamental catalyst in play. So much of my swing trading strategy involves hunting for those stocks with the perfect technical setup, and a recent, strong fundamental catalyst that I believe will help push those stocks to breakout levels. Knowing this helps to put me in front of trade ideas that are statistically more likely to be profitable.

If you have been following the markets at all lately, you may have noticed so many stocks making their all time highs. Week after week, everything is grinding up.

Swing Trading Chart

While this is great for returns and performance in mutual funds, it makes it a lot harder to find stocks that aren’t over priced or over valued. Among the tens of thousands of equities trading everyday, there are always opportunities, but they can be hidden like the proverbial needle in the haystack.

Fortunately, I have access to some powerful proprietary scanners that I use daily in my trading and have been able to mitigate some of the issues related to buying long stock in an inflated market. FinViz is a great free source for incorporating fundamental properties into your stock screening regimen. Having the ability to find these trade ideas and couple them with a consistent strategy that enables me to manage my risk, allows me to keep buying the RIGHT stocks.

In this market, I have been trading with and 85% average win rate and consider that to be quite acceptable. I call the strategy “breakout with a catalyst.” It is critical to find stocks that are setting up at or just under major technical levels. This can include major moving averages, historical support/resistance levels, gap entries, etc. It doesn’t really matter what your technical setup is, as long as it is sound and easily identifiable.

What we really need to have in order to see a sustained move in our favor is a strong catalyst. A catalyst can come in many forms. It can be recent and unexpected earnings numbers, CEO/company share buybacks, dividend announcements, M&A news, FDA approvals, analyst upgrades/downgrades, and activist investor stakes. There are plenty of potential catalysts out there.
Some of the most recent trades that I have taken caught an additional catalysts mid-trade, which always a nice bonus.

This past earnings season was our first real glimpse into the Q4 metrics for the major retailers. We saw some epic beats in bottom line estimates and some pretty bad misses all across the board.

Some of the recent stocks performing at the top of their sector and making some impressive gains have been pretty easy to spot.

CELG (Celgene Corp) – This thing is a pig and one of the major components in the IBB (Nasdaq BioTech) sector ETF. Just looking at the trends side by side, you can see both are ripping to new highs before periods of consolidations, and then they rip again. If you follow biotech or the markets, you should be very aware of how hot biotech stocks have been in the past few months. Small to large cap, across the board, they are outperforming almost all other stocks on a daily basis. We are seeing daily catalysts coming out for biotech stocks that nobody has ever heard of, and ones that everybody loves. There are countless opportunities in this space, but finding the catalyst and coupling it with a great technical setup is critical. For me personally, it is hard to chase stocks and buy them at all time highs, but sometimes, you just have to ride the trend. The old saying, “The trend is your friend,” is true, until it isn’t.

Swing Trader Chart 2

COH (Coach) – Coach is another Q4 earnings winner with great upside on the longer-term charts. That was the catalyst. COH was trading below a nice breakout level which made it attractive to me as a swing trader. When I traded this, I was just looking for the breakout over the $42.00 level. Oppenheimer upgraded Coach about two days into the trade and gave an unexpected, but very welcome boost to my position.

KATE (Kate Spade & Co) – Another sector peer of COH, with nearly an identical chart. While there Q4 numbers were in line, they may suffer from weaker 2015 guidance. As a result of the mixed directionality of the catalyst, KATE would be a pass for me in the short term.

Swing Trade Warrior Chart 3

The thing I like best about trading the breakout with a catalyst strategy in a strong market is that it helps me focus on strong stocks, not the junk or the weaker sympathy plays. By trading strong stocks, with solid catalysts and great price action, we put ourselves in a position of advantage to catch those random and unexpected analyst upgrades and price target increases. Strong stocks are likely to keep moving up even in down markets. This helps us buffer ourselves from systematic risk, and helps me sleep at night with exposure in a choppy, top-heavy market. Risk management is paramount to survivng in the markets for any length of time.

The beautiful thing about trading mid to large cap stocks, is that they retain just enough volatility to move favorably for you, while eliminating most of the attempts at manipulation from the small cap pump and dumpers and the general issues that arise when mass retail traders pile into a stock. They trade cleaner. As a swing trader, we want clean consistent moves. My strategy is consistent, easy to replicate, easy to implement and easy to manage risk with. Those are key factors in trading profitably, long term and over complex and variable market conditions.

Feel free to contact me for questions about stocks, trade ideas, or anything market related! [email protected]

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