Swing Trading

Selecting candidates for Swing Trading positions is difficult. I have found that finding moat-type businesses make the best initial candidates. Good financial underpinnings are essential. Joseph Belmonte of Buffett and Beyond has developed a screening tool based on Clean Surplus ROE(Return on Equity). His conclusion is that “portfolios made of stocks with high Clean Surplus ROE’s outperform all other portfolios”. An example is portrayed below. Salesforce (CRM) first qualified with a higher than average Clean Surplus ROE during 2016 when the shares were trading between $70 and $80.                                                                                                                                                                                                                                                                                                                                                                                                                                                         Closing prices are as of the close on Friday, November 5, 2021.                                                                                                                                                First, find the candidates and then use weekly technicals to find the overall trend.  Use the daily as a trend decision trigger. The weekly signaled a buy decision at the end of June 2021. That is, only trade LONG from that date. The daily concurred with a long position on October 13, 2021.

Another PerfectStorm example COST

The following is another example of waiting for the long-term signal, in this case weekly. When that signal is LONG, then if and when the shorter-term time frame is also LONG, jump aboard.

The signal in COST from April 9, 2021, has been LONG only. A corresponding LONG signal was signaled on June 23 and the next day COST opened at 393. A close signal was signaled on September 20, and the opening the next day was 456. Approximately a 16% return in about 3 months.

Please refer to my previous post on REGN for more detail.

 

Back to the Beginning

In 2010 when I started this post, I recommended that one of the better methods of selecting equities was to find those sectors that were showing high relative strength with positive momentum. Selecting the highest relative strength sector with positive momentum should outperform.

I chose four sectors as illustrations.

XLE: Energy (Green)

XLY: Consumer Discretionary (Red)

XLU: Utilities (Cyan)

XTN: Transportation (Yellow)

The following chart as of the close of Friday, July 9, 2021, shows the current relative strength of these four sectors.

AMC, one of the “meme” stocks in the news.

There has a lot of news recently regarding so-called “meme’ stocks.

Last Thursday, The Wall Street Journal on B1 stated “Meme Stock Rally Resumes”. The article mentioned GameStop, AMC Entertainment Holdings, and Express Inc.

Meme stocks are those securities that have been discovered by a group of individual investors. The stocks have unusually large short positions, are usually overpriced, and share spikes of rapid growth in a short time period. Actual valuations are not important. The fear of missing out (FOMO) is a large reason to purchase, Volatility increases during times of panic-selling.

One of the most recent mentioned is AMC which recently completed a $230 million capital raise.

The following graphs show the recent price activity of AMC. The last price is as of 12:15 PM on Monday, June 1, 2021.

15 Minutes followed by daily.

Green lines represent times of purchase. Blue lines represent times of closing out positions.

 

Basic Swing Trading Strategy

I have been asked by many viewers of this blog for more information on the basic swing trading strategy.

As is true in day trading, a multiple time frame analysis will lead to better success than just looking at an individual time frame.

The longer-term, in this case, weekly, is the signal that determines which way the security is going, i.e. the long term direction.

The shorter time frame, in this case daily, is the signal to follow in the same direction as the longer time frame, weekly.

I am using FedEx (FDX) for this example. The up arrows indicate long, down arrows indicate short. Blue vertical lines indicate neutrality.

We can see by the above chart, that FDX was in an uptrend starting on July 10, 2020.

Swing trading decisions from that date until January 1, 2021, should only be on the buy-side.

 

The chart below is the daily chart of FedEx, the shorter time frame that should be used to make the actual decision.

On July 11, 2020, the opening price of FedEx was $160.00 and a buy decision could have been made based on the weekly signal.

The initial long position could have been closed, October 28, the day after the neutral signal, at a price of $262.73, the opening price.

As in any trading decision, proper trade management should be used, such as stops.

This is only an example of what could have been done, not any kind of recommendation on FedEx or any security mentioned in any of this blog. Illustrations ONLY.