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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
My blog:
Morpheus Trading Group - swing trading blog
My book:
Advanced Technical Analysis of ETFs
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  • 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!
  • Here's An Excellent Way To Quickly Measure The Strength Of A Rally

    In a recent blog post, I explained and illustrated how intraday moving averages can be used to improve your stock picking accuracy.

    Since I received a lot of positive feedback on that post, I penned this follow-up article to build on that mini-lesson by drilling down to focus on just one intraday moving average in particular.

    This incredible intraday indicator helps you quickly and easily do three things well:

    1. Measure the true momentum of a rally in any stock, ETF, or index
    2. Remain confident when holding stocks pulling back from their highs (to reap greater trading profits)
    3. Assists you in knowing exactly where to set protective stop prices with your trending swing trades.

    Want to know more?

    Just read on to discover the power of the 20-period exponential moving average on the hourly chart (hereinafter 20-EMA).

    Amazingly Quick and Effective Check

    Over the years, I have found the 20-EMA to be an excellent tool for assessing just how bullish any rally really is (the 10-day MA also works in a similar fashion).

    Simply put, it is tough to question the strength of a rally when the price of a stock/ETF/index is steadily trending higher and above a rising 20-EMA.

    It works so well that I am confident (but never backtested) that you have at least a 50% chance of a winning trade if you buy a stock exclusively because it is trending higher while holding above its 20-EMA on the 60-minute chart.

    Such price action shows the bulls are clearly in control.

    Conversely, a slip below the 20-EMA within a rally is frequently a warning signal of a possible correction by time or price.

    Shakeout Or Breakdown?

    If the move below the 20-EMA was just a minor shakeout, then the price action should reclaim the 20-period EMA within a few hours to a few days, or at the very least set a higher swing low below the 20-EMA.

    Smaller shakeouts will usually recover back above the 20-EMA within a few hours, which causes the 20-EMA to flatten its trend, but avoiding rolling over.

    However, when volatility picks up and there is a severe breakdown below the 20-EMA (1% or more for an index, 2% or more for a stock), the 20-EMA will usually break its uptrend and roll over.

    Accordingly, price action frequently becomes quite volatile, with multiple crosses above and below the 20-EMA over the next few days.

    Show Me, Don't Tell Me

    Rather than rambling on about the specifics of the relationship between price action and the 20-EMA, it is better to show you a few annotated charts that do all the talking.

    Below are three hourly charts of the NASDAQ Composite, spanning from mid-May of this year to the start of September.

    On each chart that shows several weeks of trading within an uptrend, pay close attention to how the price action reacts as it comes into contact with the 20-EMA:

    (click to enlarge)
    (click to enlarge)
    (click to enlarge)

    A Closer Look

    When you learn how to interpret subsequent price action that follows the touch of a 20-EMA, this stellar indicator can be used by swing traders as the proverbial "line in the sand" for knowing whether or not a trend is maintaining very bullish momentum.

    For example, a break below the 20-EMA, followed by sideways price action, and then a return back above the 20-EMA (while it trends sideways) is merely a shakeout that should not bother a trader who is seeking bigger gains with a longer holding period.

    This type of shakeout price action is shown as point "A" on the hourly chart of Tesla Motors ($TSLA) below:

    (click to enlarge)

    At point "B", there is a much clearer violation of the 20-EMA, which causes the moving average to roll over as well.

    Yet, if you are a swing trader looking to maximize profits, holding onto a winning position through a break of the 20-EMA is a necessity; otherwise you will continuously cut your profits short.

    Even at point "C," $TSLA is once again under pressure with a nasty break of the 20-EMA.

    However, after the initial sell-off finds traction, the price quickly reclaims the 20-EMA the next day and pushes higher (which is exactly what I like to see).

    Short-term Shakeouts

    Whenever a stock or index breaks down below the 20-EMA and quickly finds support, the price action should snap back above the 20-EMA the next day (points "A" and "C") OR at least form a "higher low" on the hourly chart the next day (point "B").

    Short-term shakeouts, such as those shown at points "A" and "B," tend to last an average of just 1 to 3 days.

    But if a stock or index trades below the prior day's low (on the next day following a break of the 20-EMA) and continues lower after the first opening hour, the price action may be headed for a deeper correction that could lead to a longer consolidation period.

    Another Tool In Your Arsenal

    Despite my previous implication that a trader may even be able to be profitable using the 20-EMA along, you should not look at the 20-EMA on the hourly chart as some kind of magic indicator that will instantly cause you to become the greatest trader in the world.

    Rather, the 20-EMA is a very helpful tool, just like several other reliable technical indicators used in the stock and ETF trades of my nightly swing trading newsletter (try it risk-free for the first 30 days).

    Any indicator that helps remove human emotion from a swing trade ultimately increases your trading profits, and the 20-EMA on the hourly chart certainly fits the bill.

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

    Original Article

    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.

    Sep 15 1:31 PM | Link | Comment!
  • 9 Hot Stocks Poised For Breakout In The Coming Days

    Using the preset "Potential Breakout" scan of the Morpheus Stock Screener, this 5-minute video briefly walks you through the bullish chart patterns of 9 stocks that may soon be ready to blast off to new highs.

    Specifically, each of these stocks are forming bullish basing patterns near their recent highs (these are not stocks that have already broken out and are too extended to buy).

    The 9 stocks setting up for momentum breakout swing trade entry are: Radnet ($RDNT), Tower Semiconductor ($TSEM), Illumina ($ILMN), Abraxas Petroleum ($AXAS), Alcoa ($AA), Warren Resources ($WRES), Hawaiian Holdings ($HA), Natus Medical ($BABY), and Super Micro Computer ($SMCI).

    As a bonus, this video also highlights a few weak stocks that could be put on a short selling watchlist (only if the stock market suddenly enters into correction mode).

    Click here to view the video on our blog.

    Sep 05 12:16 PM | Link | Comment!
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