Swing Trading – Top Reversal Patterns Setting Up
Since the bearish market signal we reported to customers a few weeks ago, the market has gone down a few percent – most of which occurred last week.
The Nasdaq, which has been the leading index this year, has now come back to near the top of a prior consolidation area on this pullback – setting up a potential rebound and some quality swing trading setups.
Now this could be a strong rebound off the 200 day or 150 day moving average, or it could be a weak rebound. Time will tell. So its best to look for good short-term swing trading setups at this point and keep a portion of your position after reaching a first conservative target. And then stop the remainder at your entry point.
Many top growth stocks are pulling back sharply including AMZN and PAYC. Here is a strategy to catch these rebounds once we have enough confirmation that a rebound rally is for real.
First of all I want to mention that buying a stock in a sharp downtrend is normally a recipe for losses because sharp declines in a stock are normally followed up with a secondary decline taking out the prior lows.
That being said, we can use a shorter-term swing trading strategy to profit off of the initial bounce and then keep a portion of our position for a potential huge profit.
One of the favorite strategies used by top traders is a “candle over candle” pattern. This is where a stock pulls back substantially before a daily candle closes above the high made the prior day.
You want to find this pattern on stocks in a longer-term uptrend. You can pull up a weekly chart over the past year or so and confirm that the stock is making higher lows and higher highs over the long-term and has not made a lower high on a weekly chart. A lower high would be an uptrend that lasts a few weeks that ends well below the prior high. Or, you could just focus on stocks trading above their 200 day moving average to keep it simple.
But its all about buying great stocks on a pullback. Just be sure that the pullback is not the start of the inevitable fall that occurs when a growth stock ends its growth phase.
Fortunately, a lot of great growth stocks will set up this pattern when the future outlook is still positive for the company. These are the stocks that should be on our list to watch.
To illustrate this pattern, lets take a look at IPHI over the past year and circle the candle over candle patterns that many top traders look for after a substantial pullback of 15% or more.
IPHI is a good growth stock and was featured in a prior video as an example of a great channeling stock candidate several months ago.
Now what top traders often do is buy near the close if the price is likely to close above the prior days high when using this strategy. And put a stop below the low of the prior day. It could be a mental stop or a hard stop-loss order. You could also use a 3.5% stop.
Then you could take profits after a 3% to 10% gain. A small portion if it gets off to a strong start and selling a larger portion or whole position if it gets off to a weak start. Then stop the remainder at your entry point.
The success rate on this setup is good to achieve a 4% profit before hitting a 3.5% stop-loss.
However, the success rate was significantly better when you look for other key characteristics covered in our new video training series covering our favorite short-term reversal pattern.
In our study, using key parameters yielded a success rate of around 75% over about a year and a half period that included the recent bear market in small caps late last year and early this year. Terrific results for a long-only strategy that included a period where small caps were in a bear market for about half the time.
Stay tuned for the release of this very valuable training series. This new pattern is great for swing trading on a shorter time-frame of less than a week and a half. Its also an excellent setup for day traders as well because its beating every other successful pattern I have looked at that is used by top day traders online when the entry signal is reached before 10:30am.
In my next post I will be sharing the first video in the new training series on the blog. Stay tuned.