Swing Trading a Market Uptrend & Riding a TSLA Rocketship
Swing Trading Strategy Update
As we have been saying to clients, fourth of July week is often good for the stock market and our strategies.
So it wasn’t a surprise that last week and Monday was one of the best weeks of the year for our own trading accounts.
The Beast that is TSLA
TSLA reached the entry point the next day, met all the rules in the high tight flag strategy, and soared over 30% higher within five trading days. We already locked in over 30% profits on a large part of our position in the accounts focused on the tradetobefree.com and investtobefree.com strategies in less than a week.
TSLA was one of our top 3 stocks in the more passive 3 Stocks to Wealth strategy on investtobefree.com which had another great week where it gained another 13%. This 15 minute per week strategy continues its terrific 8 year run.
We also had 2 stocks over the past five trading days that met the requirements in the earnings eruptions strategy. As with TSLA, both BIG and NUS made clean breakouts and easily cruised 5% to 10% higher within a few hours for great day trades.
All 3 stocks pulled back less than 1% below the technical entry point before making a big move higher which, again, is key to both swing trading and day trading success. We want optimized, very precise strategies that have a high win rate while using a tight stop-loss with big upside potential.
And, unlike other more expensive strategies promoted online, a high priced broker, platform, hot keys, artificially manipulating penny stocks, and lightning quick reflexes are completely unnecessary. These trades could have been easily executed by a a first grader on a smart phone.
2 years of expensive training, sketchy off-shore brokers and risky low-priced stocks are just not necessary to build a trading account quickly.
Swing Trading a Market Uptrend
This brings me to the topic of this latest blog post – strategies we use when a market uptrend has gained traction and the indices are nearing the all-time highs after a large correction or bear market.
Over the past week we have seen volatility drop again as it gradually comes down over the months. This is common after a bear market where the problem that caused the recession is slowly being resolved.
In this case, the problem is the pandemic and the solution is a Fed backstop, government stimulus going to work, better mitigation strategies, improved therapies and getting closer to an approved vaccine.
This usually takes a long time to “get back to where we were” but is showing signs of accelerating back to normal this time around. Ahead and during this time, the market trends higher in anticipation of better economic times in the not-too-distant future.
Bouts of higher volatility are common during this time which usually serve as a buying opportunity for traders and investors. As a bonus, traders start to see breakout points and support levels hold better after entering trades.
During a bottoming process and shortly after the market starts to trend higher you still often see technical entry points not hold on a re-test. This poses a problem because you generally need a wider stop-loss and a smaller position size.
One solution to this problem is to focus on just the best growth stocks in the market that are poised to do well on their next earnings reports and outlooks. So, for instance, Microsoft, Livongo, Amazon and Dexcom all held a fairly tight stop after they reached good technical entry points after the bear market earlier this year.
Later, as the market gains traction and approaches the high, a lot of the low hanging fruit has already been picked. Now we need to focus on just the best opportunities on companies that stand to gain market share and are poised to do extremely well in the years following the pandemic.
These stocks will tend to already be near or above prior 52-week highs, form more narrow consolidations and soar after reaching good technical entry points while holding a tighter stop. They can also run ahead of earnings which we are already seeing ahead of Q2 earnings season later this month.
Our favorite strategies right now are the high tight flag breakout, the biggest earnings gaps, cup with handle breakouts, and rebounds starting around the 50 day moving average after the pullback following a massive breakout into new highs on top stocks in strong, multi-year uptrends.
Another strategy that tends to work well at this point is our classic swing trading setup on great stocks in upward sloping, large channels. The pattern taught in our book.
Here’s a look at a couple of our favorite strategies that we are using right now. 2 of the strategies that we rely on to make money once the market has gained traction and is near or above 52-week highs.
The Biggest Earnings Gaps
Most “gap and go” strategies are not so great after experimenting with them for several years. The only ones that work for us consistently are the largest gaps on the best stocks and long-term trends.
Most “gap and go” setups will work for maybe a few days to a few weeks. Once newer traders see them working so well, they will start to trade them and they start to turn over right away after breaking out early in the trading day.
This is because the long-term win rate is just not that good. After trading them for several years, only the largest gaps on the best stocks that meet certain technical and fundamental criteria have withstood the test of time.
Last quarter we saw TWLO meet the requirements in our earnings eruptions strategy and quickly make a 25% move higher within a few days. As is often the case, these stocks often form a good earnings flag soon after as well.
TWLO ran another 6% higher after the first earnings flag breakout. Its now run more than 10% out of the latest flag pattern. A big move out of the earnings eruptions pattern often leads to a much larger move over the following weeks and months on top growth stocks – especially if they are trending into new highs.
NUS and BIG were below the highs and therefore had overhead resistance. Because other traders and investors have been sitting on a loss for so long, some will come out of the woodwork to sell at near breakeven.
This selling pressure usually turns the trade into a day trade instead of a swing trade. The earnings eruptions strategy explains how we know when to get in and get out depending on how the trade evolves.
The Mother of All Flag Patterns
Right now we are seeing a plethora of high tight flag patterns setting up in the market. Normally, we do not see this many break out outside of earnings season. However, after the market has gained traction and is near or above the 52-week highs, we see more that meet the rules in our strategy that reach the entry point and do not pull back hardly at all.
Today we saw VSLR reach the entry point in the strategy and then barely pull back below the precise entry point we teach before it surged much higher very quickly. TSLA reached the entry point last Tuesday and pulled back less than 1% below that point before going on a rampage for 5 trading days.
A 30% to 50% move higher within a week seems extreme but its really not that uncommon with high tight flag breakouts that meet our course rules. Only about 20% of high tight flag breakouts will meet the course rules. Right now there are so many of them setting up that we only have time to focus on the ones that are breaking into new 52-week highs.
Usually, breakouts are hit or miss. Its only when all the technical factors are met in the strategy that we become interested.
After the major market indices have confirmed a new uptrend and are nearing or above the highs, the trading environment actually gets better. Although we have to look for just the best trends, consolidations and stocks, they often have cleaner breakouts as market volatility comes down.
During earnings season is often the best time to find these trades and take advantage of them. Ideally, we would like a big beat and raise quarter and then the price to reach a quality technical entry point within a great consolidation pattern within a day or two.
From there, its often off to the races. The most bullish pattern for us is the high tight flag. Although we are are seeing great earnings (or pre-announcements) gaps that are working well even before earnings season starts.
We are also seeing some great symmetrical triangle patterns within strong, long-term upwardly sloping channels. LITE, for instance, had a real nice start out of this pattern after being featured to clients.
The best stocks, in the strongest long-term trends, will set up bullish consolidation patterns multiple times so its important to have the best ones on your watch list and be ready when the price reaches a great technical entry point. This is often the best time during the overall market cycle to trade.
In the next blog post we will be talking about how to spot the classic signs that we are heading into the next large correction or bear market. Also, we will be covering long strategies that actually work well during this more challenging time to trade.