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Deron Wagner is the founder and portfolio manager of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his swing trading strategy with The Wagner Daily newsletter, which provides exact entry, exit,... More
My company:
Morpheus Trading Group
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Morpheus Trading Group - swing trading blog
My book:
Advanced Technical Analysis of ETFs
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  • 3 Key Steps To Short Selling Former Leading Stocks

    In bull markets, we focus on trading leading stocks because they present the largest profit potential in the shortest period of time.

    But what you may not realize is that, when broad market conditions turn overly bearish, those same leading stocks typically become the best stocks to sell short because they eventually assume the new title of former leading stocks.

    In this article, I will show you 3 steps, based on multiple timeframe analysis, to determine whether or not a particular market leader is primed for making money on the short side.

    But first, let's take a quick look at recent market action to confirm the bears remain in control going into the new week.

    Highest Volatility In 3 Years

    Stock market volatility really picked up last week, with the Nasdaq Volatility Index ($VXN) pushing above 30 for the first time since late 2011.

    Since late 2012, $VXN levels in the 20 to 23 range have produced trade-able bottoms on the long side, but last week's spike was such an extreme move that it suggests the potential for further downside in the broad market.

    At the very least, a test of last week's lows seems probable in the coming days.

    Although the S&P 500 has already bounced 4% off its recent swing low, the benchmark index is now closing in on a major area of resistance.

    On the daily chart below, notice how the prior swing low (from mid-August), the 20 and 200-day moving averages, and short-term downtrend line all converge in the $190 to $193 area:

    SPY RESISTANCE

    It's a similar technical picture with the Nasdaq, Dow, and other major indexes, each of which now have a plethora of overhead resistance levels to contend with.

    Because market volatility was at extreme levels last week, there was no reason to enter long positions in hopes of catching a short-term bounce in the market, as such speculative trades could easily turn sour in a heartbeat.

    Sell Short Former Market Leaders That Look Like This

    3D Systems Corp ($DDD) is a great example of the qualities we look for when short selling former leading stocks.

    As always, we analyze the chart pattern on multiple time frames, beginning with the monthly chart, then zooming in to the weekly and daily chart intervals.

    Step 1

    The first step is to assess the "big picture" of the trend by checking out the monthly chart.

    Upon doing so, notice that $DDD has registered an incredible advance of more than 5,000% since the lows of 2009.

    Even since the the $10 price level in 2011, $DDD rallied about 900% before forming a top at the beginning of this year.

    A stock that scored such massive gains (and has already formed a top) is exactly the type of move we look for on the short side:

    $DDD SHORT EXAMPLE monthly

    When a strong stock eventually breaks down below its long-term uptrend line and the 10-month moving average begins to decline, the stock is in trouble and is placed on our internal watchlist for potential short entry in our momentum swing trading newsletter.

    Step 2

    Next, we drill down to the weekly chart to look for confirmation of a bearish pattern as well.

    In the case of $DDD, the stock is in a confirmed downtrend because the 10-week moving average is below the 40-week moving average, and both averages are trending lower.

    $DDD also recently broke down below a bearish, five-month long base at the lows (read more about bearish consolidation patterns).

    The $45 level that was formerly providing support has definitively been broken and will now act as resistance on any rally attempt:

    $DDD SHORT EXAMPLE weekly

    Step 3

    Now that we have identified a former market leader on the monthly chart and confirmed its downtrend on the weekly chart, we finally use the daily chart to help us determine the best short selling entry point.

    After a persistent, four-week decline, $DDD is finally bouncing back above very short-term resistance of its 10-day moving average.

    In a steady downtrend, stocks can go for weeks without closing above the 10-day moving average for more than a day or two (just as strong stocks remain above their 10-day moving averages in overly bullish conditions):

    $DDD short example daily

    Patience, Grasshopper

    As we have written about in the past, patience to wait for a proper entry point on the short side is crucial; poorly timed entries on the short side are not forgiving.

    Although the monthly, weekly, and daily charts of $DDD are clearly bearish, this former leader is presently not a low-risk short entry.

    Rather, the most ideal entry point would be a bounce into new resistance of the 50-day moving average and/or prior lows from August ($46-$48 area).

    Nevertheless, because the stock remains in a strong downtrend, price action could simply resume lower after just a one-day close above the 10-day moving average.

    In this scenario, a move below the October 17 low could be a short entry trigger, while using a tight stop above the two-day high.

    $DDD is not yet an "official" short setup for us, but we will immediately notify subscribers of our exact entry, stop, and target prices if/when we sell short $DDD (click here to start your risk-free trial subscription today).

    How Long Will This Market Correction Last?

    Despite what popular news outlets such as CNBC might have you believe, nobody is able to predict the market's next move with 100% accuracy (but imagine if you could).

    Nevertheless, astute traders paying attention to technical signals typically have the upper hand.

    Every market pullback is different, but the current correction feels much heavier (in terms of participation to the downside) than any other pullback in 2013 or 2014.

    Throughout most of the past two years, pullbacks were fairly quick because traders were waiting to buy the dip.

    Sure, there were plenty of ugly distribution days in 2013, but it was more a case of sector rotation out of extended groups and into new bullish patterns (rather than flat-out selling across the board).

    This time around, there have been plenty of distribution days over the past six weeks, but there has been little to no rotation of money into new leaders.

    Trade What You See, Not What You Think

    Regardless of your view on recent broad market action (whether it's better to buy or sell), there now are very few stocks with bullish chart patterns; this objective fact cannot be ignored.

    Eventually, stocks will manage to find some traction and establish higher swing lows.

    But for now, its best to avoid the long side.

    With our market timing model in "sell" mode, odds of a profitable trade favor the short side of the market.

    Depending on how much the market bounces from here, we may look to establish one or two new short positions into resistance (remember we prefer to short stocks on a bounce).

    If you are prohibited from selling short (such as with an IRA account), or are simply not comfortable selling short, no problem!

    Inversely correlated "short ETFs" are an excellent, alternative way to gain short-term bearish exposure without actually selling short.

    We will be highlighting the best-looking short ETF setups in a future article, so be sure to follow us.

    Follow Us: Follow us on Google+ Follow us on Twitter Join us on Facebook Our trading blog - RSS feed

    Original Source

    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

    Oct 21 10:47 AM | Link | Comment!
  • How To Profit From Trading In A Weakening Stock Market

    After languishing in "neutral" mode since late September, our proprietary market timing system triggered a fresh "sell" signal to equity swing traders on October 10.

    Accordingly, we immediately closed out existing long positions and are no longer to stalking the buy side of the stock market for new trade entries.

    Moreover, last week's rule-based shift to "sell" mode, the first in more than six months, means we are now free to begin looking for potential short selling opportunities as well (here is a basic primer on short selling).

    While the long-term "buy and hold" investors thrive on strong uptrends in the market, a huge benefit of momentum trend trading when the going gets rough is the ability to profit on both sides of the market (long and short).

    Keep on reading to understand why the long side of the market has now become quite risky, as well as to learn a specific chart pattern that will help you find the best stocks to sell short in a weak market (I will even show you a stock that may be actionable for short entry in the coming weeks).

    No Support In Times Of Need

    In our daily live trading room (included with The Wagner Daily service), we have recently been explaining to subscribers how quickly key technical support levels can become useless when broad market conditions turn ugly.

    When a clear market uptrend is in place and market volatility is smooth and steady, a pullback to the 50-day or 200-day moving averages typically presents a low-risk buy entry point in a strong stock.

    However, that play goes out the window when the market cracks and volatility picks up.

    A great example of just how ineffective major moving averages when the bulls rush to the exit door can be seen on the daily chart of Charles Schwab ($SCHW) below.

    Notice how the price crashed through the 200-day moving average, which is typically a "line in the sand" as a long-term indicator of trend:

    $SCHW NO SUPPORT

    Since roughly 80% of stocks follow the dominant trend of the main stock market indexes, it is a foolish move to search for a diamond in the rough (that's why our timing model exists).

    Now that the market has convincingly cracked, US equities could be in trouble for quite some time (but remember that anything can happen in a free market environment).

    Consolidation - Why It Can Be Bullish OR Bearish

    In uptrending markets, the Morpheus trading system focuses on buying stocks as they break out above bases of consolidation near the highs.

    The longer and tighter the price action of a bullish base, the more powerful the upside breakout tends to be.

    But even on the short side of the market, we also seek chart patterns that exhibit tight periods of consolidation, albeit only those that form near the lows of a recent decline.

    One such bearish pattern forms when a stock suffers a nasty plunge from all-time highs, such as a quick drop of 30%-50% on heavy volume, then consolidates near those lows for 4 to 6 weeks.

    When a stock undergoes this type of price action in a weak market, particularly if the stock was a former leader, it often presents a rather profitable opportunity for our subscribers who are prepared to bring home the dosh in both uptrending and downtrending markets.

    A great example of the type of breakdown we look for is shown on the weekly chart below:

    $CROX breakdown

    On the chart above, notice the pattern we are looking for is an ugly selloff, followed by at least a few weeks of price consolidation that stalls at or just above the 40-week moving average (similar to the 200-day moving average on the daily chart).

    Not every short selling setup will be as explosive to the downside as $CROX was on the initial drop, but the idea is that the stock should have clearly and convincingly sliced through both its 10-week and 40-week moving averages before finding support.

    In the process of doing so, the 40-week moving average subsequently transforms from a paramount support level to a major area of overhead resistance that is tough to push through (especially when the 10-week moving average begins to roll over as well).

    Drive This Short Home

    Avis Budget Group ($CAR) is an excellent, current example of a stock that has recently suffered a massive breakdown on high volume, and may be in play for potential short entry sometime next month:

    $CAR breakdown

    After enjoying a 600% run-up since the lows of 2012, $CAR has recently nosedived more than 30% off its highs, while slicing through its 10-week and 40-week moving averages as well.

    This stock may be a slower mover than $CROX, but the spirit of the chart pattern is still there.

    Although it is still very early in the pattern, $CAR will be in a major jam if it can't get back above 40-week moving average after several weeks of chop.

    If that scenario plays out, we will be looking at a possible short sale entry into $CAR, with the expectation of an eventual move back down to the $30-$34 area.

    Cash - Still King

    If you are nervous about the short side of the market because you are new to trading, that's completely understandable.

    If that is the case, I suggest taking some time to learn more about how to short sell stocks, as well as the best patterns to look for when selling short.

    But even if you avoid the short side of the market for whatever reason right now, don't forget that cash is always a valid position that enables you to cling to your hard-earned profits when conditions deteriorate.

    Now that leading stocks have begun breaking down en masse and our timing model has officially shifted to a "sell" signal, there is simply no reason to be long right now; the risk of being long clearly outweighs any potential reward.

    To receive our best stock picks on the short side of the market, including our exact entry, stop, and target prices, subscribe now for your risk-free trial subscription to our nightly swing trading newsletter.

    Follow Us: Follow us on Google+ Follow us on Twitter Join us on Facebook Our trading blog - RSS feed

    Original Source

    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

    Oct 15 1:30 PM | Link | Comment!
  • How To Know When Is The Right Time To Start Buying Stocks Again

    Since September 25, our market timing model has been in "neutral" mode (immediately after the S&P 500 sliced through its 50-day moving average).

    However, with stocks now attempting to find a bit of traction over the past few days, when is the best time to start buying again?

    In this blog post, I seek to answer that question by showing you a simple, yet quite reliable way to know when to step back on the gas pedal.

    The Tried-And-True Follow-Through

    Subscribing members of my nightly stock picking newsletter already know the Morpheus trading methodology is partially based on William O'Neil's dependable CAN SLIM trading system.

    With CAN SLIM and Morpheus, both proven to be profitable trading systems over the years, one of the most reliable indicators to re-enter the market after a price correction is the occurrence of a follow-through day.

    A follow-through day occurs when one of the main stock market indexes gains at least 1.3%, on higher volume, on or after the fourth day of a bullish reversal attempt off the lows.

    Below is a daily chart of Nasdaq Composite that shows the follow-through day that kicked off the dominant, long-term rally the broad market remains engaged in.

    Since the December 17, 2012 follow-through day annotated below, the Nasdaq has cruised approximately 50% higher:

    Notice that the follow-through day did not happen until Day 21 after the reversal off the low.

    Again, in order to be valid, the follow-through day must occur on Day 4 or later (not necessarily right on the fourth day).

    On Alert

    Since yesterday (October 6) was officially Day 3 of the reversal off the lows, we are now on the lookout for a potential follow-through day in the S&P 500 or Nasdaq

    A follow-through day signals the likelihood of a sustainable rally, and would put our timing model back into "buy" mode.

    Nevertheless, I want to be sure you understand it is NOT a requirement to wait for a follow-through day before buying quality stocks that are emerging from solid basing patterns; just don't go crazy with your overall risk exposure (stay off margin).

    Further, since our "buy" signal is mechanical, it needs to be confirmed by strong price and volume action in leading stocks anyway.

    As always, the big question to ask yourself is whether or not bullish chart patterns can still be found right now. If so, are those stocks at or near low-risk entry points?

    Although aspects of our trading system, such as the timing model, are mechanical and rule-based in nature, discretion still plays a major role in our overall trading strategy.

    Why Size Matters (Especially Now)

    Particularly if you are new to active trading, it is extremely important for you to understand how to properly determine the the size of every stock you buy.

    As a general rule, newer traders should limit the maximum dollar loss of any single swing trade to 0.5%-1% of account equity.

    For example, maximum risk of loss for a new trader with a $50,000 account should be limited to $250 (0.5%) to $500 (1%).

    Newer traders should stick with this position sizing parameter until they are comfortable executing the system.

    But once a certain comfort level is reached through experience, risk can then be bumped up to 1%-2% of account equity per trade.

    However, the above risk guidelines for both new and experienced traders are only for perfect trade setups in an unquestionably bullish market.

    When the stock market is in correction mode (or even in transition), an excellent way to reduce your overall risk is to simply reduce your average position size until the market generates a fresh new buy signal.

    With our market timing system presently in "neutral" mode, for example, average share size for any new trade entered in our newsletter is presently reduced to 25%-50% of full position size.

    By understanding exactly how much money you should be risking on each trade in ideal market conditions, you can easily trim your risk in a shaky market by reducing your share size to just 1/4 to 1/2 of your normal position size.

    Decreasing your capital risk exposure during market corrections, while conversely maxing out your maximum dollar risk in overly bullish markets, is the key to consistent risk management that will keep you in the trading business for the long-term.

    If you're a subscriber to The Wagner Daily, be sure to attend our next Live Q&A Webinar (October 8 at 12 noon ET), where we will more thoroughly dive into money management and position sizing.

    Follow Us: Follow us on Google+ Follow us on Twitter Join us on Facebook Our trading blog - RSS feed

    Original Source

    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2014 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

    Oct 07 1:35 PM | Link | Comment!
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