Swing Trading Stocks During a Bear Market
Last week we talked about what is working in 2022 and a few good risk management tips.
Today we will go through a few examples of how to actually do this and also talk about how we are preparing for the rest of 2022.
This could be one of the most exciting times to trade in quite a while. So grab your favorite beverage as we go over some great trading opportunities and talk about what has been working in 2022.
How to Capture a Monster Long Trade
Last week we talked about the enormous move on ALT after the stock met the requirements in the high tight flag video course. Those who had the course were able to screen for these and check a list of rules if and when it broke out.
Only about 20% of these high tight flag breakouts will qualify under the rules in the course just ahead of the stock reaching the breakout point.
Less than that in this environment as the market environment rules are often violated during a bear market.
But waiting for these ideal breakouts greatly improves the win rate either way in our experience and back-testing.
Some good ones do come up during sustained bear market rallies when the market winds are at our back.
This is a good example of how to capture trades that can make the difference between a bad year and a good year trading.
When to Look for Great Long Trades
Back in July the market averages as measured by the Nasdaq and S&P 500 both were generating higher swing lows and higher swing highs. The averages were also finding support at a rising 50 day moving average. The win rate for long trades starts to increase.
Although the 200 day moving average was still sloping lower for the Nasdaq and S&P 500, the market was giving us a sustained bear market rally that is typical at this point in the overall longer-term market cycle.
These typical sustained bear market rallies often last for about 2 months ahead of a more severe economic slowdown.
So Lets take a look at the all-important exit strategies that can be used with a trade like this.
Swing Trading vs Buy and Hope in a Bear Market
Now ALT rocketed 30% higher the same day out of this pattern while holding a tight 2.5% stop-loss below the technical entry point.
In trading its absolutely key to find a set of fundamental and technical conditions and characteristics of a stock that increases the likelihood that the stock will hold a tight stop with a decent chance for a big gain from a good technical entry point.
Of course, you need to do the research and come up with a great trading plan before even thinking about trading it.
Finding great high tight flag breakouts increases our chances of success. The high tight flag breakouts that do not meet the rules in the video course at the point of entry will have a very low win rate in this environment in our experience. The better window of opportunity closed for high tight flags just ahead of the Jackson Hole speech in August.
We are watching market conditions carefully to know when the conditions will again likely support a better win rate.
Getting in and Out During a Bear Market
Once in a momentum trade, one of the more common approaches to exit is to wait until you see a bearish candlestick pattern on a daily chart. This occurred on August 18th as seen on the chart below and would have gotten you out with about a 20% profit within about 4 trading days.
Chart courtesy of StockCharts.com
In the high tight flag course, we talk about taking the rest of the position off at a certain point described in the course. This would have resulted in about a 28% profit within 1 day on the remainder of the position after taking a little off earlier in the day.
Bigger Gains Faster While Managing Risk is the Goal
When we trade in a bear market, we want to increase our average profit per day while being safely in cash more of the time when we have nothing ideal to trade.
Another more daring exit strategy for ALT often promoted online is a close below the 20 EMA. This would have resulted in only a small profit. Those buying and holding on the breakout would now be down slightly on the position after a big run.
In a long-term bear market, its often best to use a strategy to get in and out within a few days on these very bullish chart patterns. The strategy taught in the high tight flag course is a good one to use during sustained bear market rallies. Waiting for only the best opportunities is key.
In 2022 thusfar, without a good catalyst, you can pretty much forget long trades.
Trading Bear Market Downtrends
When the market starts to trend lower again, we focus more on this same strategy. Only in reverse.
We want to find stocks in long-term downtrends and then find a good technical entry point to get short or buy put options.
Here is one of the best trades so far this month in the alert service. A stock with declining estimates, missing those estimates consistently and in a long-term downtrend.
Chart courtesy of StockCharts.com
So far, the trade has moved more than 10% in our direction. As always, we want to take some profits in the 5% to 15% profit range and tighten our stop on the remainder. We wait a little longer for those that get off to a great start. More towards the 5% profit range for the ones that get off to a weaker start.
Some like to try and pick a bottom but as we have seen in 2022 this can lead to disaster. Stocks like ZM, DOCU, TDOC and others continue to make new lows below a declining 200 day moving average.
At some point they will turn but we like to focus on stocks like ENPH, FSLR, WOLF, SWAV and others when going long above a rising 200 day moving average with a very bullish technical pattern and new bullish catalyst. Especially during a very difficult market like we have not seen in decades. These stocks continue to hold up and go higher in some cases.
When trading we want to see the long-term trend working in our favor and not against us. Bullish divergences below a declining 200 day moving average in a bear market often fail.
Instead, we look for quick in-and-out shorts when the market sells off and the long-term trend is lower. If a bear market rally develops, we generally exit our shorts or just tighten the stop.
Preparing for the Next Few Weeks
Another stock we shared with customers last week in the closing commentary on Wednesday for a good short was ARNC. The stock was in a large A-B-C down pattern and had a fresh bearish catalyst.
The price reached the entry point and moved 10% in our direction from there within a couple days. These quick in-and-out shorts could be common during the next several weeks and we will be watching for these closely.
Chart courtesy of StockCharts.com
The entry point for ARNC was a move below the pre-market low after the bearish news. Again, however, we first want to see the bearish trend and pattern on a long-term chart ahead of the entry point along with the market moving lower.
How to Trade a Bullish Reversal
Now the Fed could start to pivot over the next couple months. Or, the market could start to price in a dovish pivot and significantly lower inflation in the months ahead.
We could also see a change in the China lockdown policies, an improvement in the Ukraine war, better news coming from Europe, and other more bullish news. Who knows?
Either way, we could start to see some big earnings gaps and great long trading opportunities that could run for a few days before another pullback. These opportunities will be another focus in the alert service during Q3 earnings season.
We should have both great long and short opportunities in the weeks ahead during earnings season. It could be the best opportunity to profit during the worst year for the market in decades. Technical, shorter-term long and short trades are the way to go in 2022.
As always, anyone new to our strategies should learn on a simulator first without using real money. Trading is one of the few businesses that you can practice and learn first without risking real money by using one of the best innovations over the past couple decades – trading simulators. Some good ones are free to use.
Our Top Longs and Shorts for the Weeks Ahead