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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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  • Why Our Stock Market Timing Model Is About To Trigger A “Sell” Signal

    On January 27, I said it was not yet time to sell stocks, but the technical situation has deteriorated quite rapidly since then.

    Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another "distribution day" (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite.

    In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand.

    However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner.

    The 3-Part Test

    There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up.

    1.) Volume Pattern Of Broad Market

    In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model is now flashing a clear "sell" signal.

    2.) Broad Market Trend

    In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case.

    With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a "sell" signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back).

    3.) Performance Of Leadership Stocks

    The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current "neutral" mode from officially shifting to "sell" mode (click here to see the five modes). Still, even this portion is barely holding on.

    NASDAQ 4000 - Coming Soon?

    Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support).

    If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day's high could lead to a short-term bounce:

    (click to enlarge)

    Although my swing trading newsletter is not yet in full "sell" mode, I have been laying low (in "neutral" mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry.

    The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile.

    Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence.

    Trade What You See, Not What You Think!

    Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go.

    Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow.

    If my timing model shifts into full "sell" signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness.

    Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment.

    Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break.

    With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side. Upon doing so, you will surely see the importance of maintaining discipline and patience right now.

    Want to make sure you are instantly alerted to a new "sell" signal? Subscribe today to The Wagner Daily and you will stay out of trouble, while also knowing when it's time to step back on the gas again.

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    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.

    Jan 30 2:28 PM | Link | Comment!
  • How Multiple Time Frame Analysis Increases Your Trading Profits

    In the formative years of my trading career (late '90s), I frequently found myself scratching my head over an interesting problem.

    Despite analyzing the hell out of stock chart patterns, ensuring the technicals looked quite favorable before buying, I still found my trades completely going in the wrong direction way too often.

    Thanks to the help of a trusted trading mentor, I eventually discovered the problem; hyperfocusing primarily on the daily time frame.

    Although the daily chart has always been pivotal for locating low-risk buy setups, my extreme focus on that single time frame was causing me to ignore the power of confirmation from longer time frames (such as weekly and monthly charts).

    Put simply, I was missing the "big picture" and it was destroying my trading profits.

    Are you...

    Missing The Big Picture Too?

    Every technical trader has his own specific approach to scanning chart patterns and locating potential buy setups.

    Although I have my own, rule-based swing trading strategy, which has been thoroughly explained on this blog and nightly newsletter over the years, my trading system is just one of many types of successful trading methodologies out there.

    Nevertheless, there is one trading technique you (and every trader) should always use, regardless of your individual trading style:

    Multiple Time Frame Analysis

    Multiple Time Frame Analysis (let's call it "MTF" hereafter) is an extremely simple, yet incredibly powerful concept, that can be applied to analysis of stocks, ETFs, forex, futures, bitcoin, and any other financial instrument that can be charted.

    If you too have been making the same mistake of hyperfocusing only on the daily charts, read on to find out why you're missing the big picture of what's really happening with the stocks and ETFs you trade.

    Exploring For Oil On Multiple Time Frames

    One of the ETFs currently on my watchlist for potential buy entry is SPDR S&P Oil & Gas Exploration ETF ($XOP). Using MTF analysis, I will show you how this ETF actually landed on my swing trading watchlist.

    Starting with a long-term monthly chart showing at least 10 years of data or more (if possible), we see that $XOP stalled at resistance of its all-time high a few months ago.

    If you were buying $XOP based strictly on a daily chart with three to five years of data at that time, you probably would not have even seen the highs from 2008:

    (click to enlarge)

    Although $XOP pulled back after bumping into resistance of its 2008 high, the ETF firmly remains in an uptrend, above support of its rising 10-month moving average. Furthermore, the current base of consolidation is holding above the prior highs of 2011.

    The next step in my MTF analysis is to zoom in to the shorter-term weekly chart interval, where each bar represents a full week of price action:

    (click to enlarge)

    On the weekly chart, notice the 10-week moving average is trending lower, but the price is still holding above the 40-week moving average. The 10 and 40-week moving averages are similar to the popular 50 and 200-day moving averages on the daily chart.

    The current base of consolidation will take some time to develop, but as it chops around the 10-week moving average, the price should eventually flatten out and begin to tick higher.

    Finally, let's use MTF analysis to drill down to the benchmark daily chart time frame:

    (click to enlarge)

    The $XOP daily chart shows last week's price action holding above the prior swing low. If this low holds, the price action can begin to set "higher lows" with the base and form the right side of the pattern (learn more about base building patterns here).

    The next breakout in $XOP will likely be the one that launches the ETF to new highs on multiple time frames, which would be a very powerful buy signal.

    Still, if you were to only glance at the daily chart of $XOP, without taking into account the weekly and monthly chart patterns, you might understandably make the mistake of assuming this ETF is not in a steady uptrend.

    On the contrary, the "big picture" provided to you by MTF analysis definitely shows a dominant, long-term uptrend in place. Pullbacks and consolidations along the way, such as shown on this daily time frame, are completely normal.

    Why Longer Is Better

    Now that you understand the easy, yet crucial concept of MTF analysis, you may be wondering which individual time frame holds the most weighting, especially in the case of conflicting chart patterns.

    Remember, in the beginning of this article, when I told you about that problem I had when I first started trading?

    As I found out the hard way, a longer time frame always holds more weight over a shorter time frame.

    In the best, most promising stock trading setups, all three chart time frames (daily, weekly, monthly) will confirm the patterns of one another.

    But if that is not the case, just remember that a weekly trend is more powerful than a daily trend, while a monthly chart holds more sway than a weekly trend.

    Of course, you must also keep in mind that longer time frames also take a longer period of time to work themselves out.

    For example, daytrading based on a weekly chart pattern does not work. However, that same weekly chart is of paramount importance if you are looking to buy a stock as a core/position trade.

    There's no doubt in my mind that utilization of Multiple Time Frame Analysis will substantially increase your trading profits...but only if you make the decision right now to start applying this underrated technique to all your stock chart analysis.

    To profit from swing and position trading the best ETF and stock picks (using our precision MTF analysis), subscribe to The Wagner Daily now.

    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.

    Jan 23 2:44 PM | Link | Comment!
  • Why You Should Not Worry About A Stock Market Pullback

    Stocks fell hard yesterday (January 13), igniting the usual fears that it's time to sprint for the exit doors and sell all your stocks.

    But just wait! Grab a seat, close your eyes, take a deep breath, and let's objectively assess the situation on a technical level.

    Although the NASDAQ and S&P 500 tumbled 1.5% and 1.3% respectively, you must ignore fear-mongering of the financial media and keep the January 13 sell-off in perspective.

    If you are new to stock trading, you must know that bull markets do not trend in a straight line (the same is true of bear markets).

    Rather, even the strongest uptrending market undergoes the occasional pullback along the way. Then, after catching its breath for a month or two, buyers return to the scene and once again drive stocks to new highs.

    This cycle of a rally, pullback (or consolidation), then rally again is what forms the "higher highs" and "higher lows" of any healthy market uptrend.

    Furthermore, the longer a market rallies without a pullback, the more severe the eventual correction off the highs will be. As such, it's better to have a correction now, rather than after stocks have entered into a parabolic moonshot.

    I personally welcomed yesterday's pullback because it is likely the start of a healthy, short-term correction that is necessary in order for stocks to take a break before eventually marching higher again. But in the meantime, you may be wondering...

    Where will the main stock market indexes find support?

    Because of the intensity of the January 13 sell-off, it is unlikely that stocks will immediately snap back. Rather, short-term bearish momentum is likely to keep the bulls in check for at least the next several weeks (one to two months more likely).

    To help give you an idea of where the S&P 500, NASDAQ, and other indexes may find their next levels of price support, I have annotated the daily charts of several popular, broad-based ETFs. While looking at the charts below, keep in mind:

    • During stock market corrections, key technical support levels generally get "undercut" (quickly probe below the obvious support level, then rebound just a few days later).
    • It is better to think of support as an area or zone, rather than just a precise "line in the sand."
    • We love to see bullish reversal candlesticks (such as "hammers" or "engulfing" patterns) that substantially undercut key support levels.
    S&P 500 ETF ($SPY)

    Let's begin with the S&P 500 SPDR ($SPY), an ETF proxy for the benchmark S&P 500 Index.

    The first zone of support for $SPY is convergence of its prior highs from November/December and 50-day moving average (around $180-$181). If that band of support (not much below the current price) is breached, expect $SPY to find support near the prior "swing low" from December (labeled as "Support zone 2"):

    (click to enlarge)

    NASDAQ 100 ETF ($QQQ)

    PowerShares QQQ Trust ($QQQ), a very popular ETF that tracks the tech-heavy NASDAQ 100 Index, is nearing support of its 50-day MA, which converges with its prior swing lows (around $85). The second zone of support is formed from the basing action in October and November (around $83):

    (click to enlarge)

    Dow Jones Industrials ETF ($DIA)

    The Dow Jones Industrial Average SPDR ($DIA) has support from a prior swing high and 50-day moving average, which are converging around the $160 area.

    The second level of support is from the highs of September and October 2o13, along with a prior swing low in December (around $157):

    (click to enlarge)

    Small-cap Russell 2000 ETF ($IWM)

    The iShares Russell 2000 ETF ($IWM) is currently sitting at support from its November 2013 high, as well as its rising 20-day exponential moving average.

    The next major support level is the 50-day moving average ($112 area), while the second zone of support is the prior swing lows (just below $110):

    (click to enlarge)

    As you can see, there is a plethora of technical support below the current prices of the main stock market indexes.

    As long as the major averages remain above their 50-day moving averages, and leadership stocks continue holding above pivotal support levels, our stock market timing model will remain in "buy" mode.

    If you missed the most recent leg of the rally and have been waiting for a substantial pullback to start buying stocks, consider waiting for a bullish reversal pattern to form as the major indices test support.

    Patience Pays Off Again

    Over the past few days, we at Morpheus have been doing a bit of housekeeping in the portfolio of our swing trade newsletter by taking profits on winning swing trades, while bailing out of a few dogs.

    On the January 13 open, we sold Tekmira Pharmaceutical Corp. ($TKMR) for a share price gain of +56.1% since our November 29 buy entry.

    That same day, we unloaded HomeAway ($AWAY) for a 10% gain, and also locked in a gain of +15.3% in Direxion Financial Bull 3x ($FAS), a leveraged financial ETF, when it hit our tight trailing stop.

    On the downside, disappointing price action in US Silica ($SLCA) caused us to stop out with a 15.3% loss the same day (basically a wash with the 15.3% gain in $FAS).

    On January 10, we sold Montage Technology ($MONT) for +21.2% gain and partial shares of Shutterstock ($SSTK) for +18.5%.

    Finally, we are selling Montage Technology Group ($MONT) on today's open, in order to lock in the better part of our 27.4% unrealized gain. Although this trade is up nearly 30% since our entry just one week ago, we are making a judgment call to take the quick profit and run because $MONT is not an "A-rated" setup.

    In this blog, we like to remind you that lots of patience is necessary when holding on to winners, and several of the intermediate-term swing trades we've recently closed are a good example of this.

    On the other hand, never forget that it's equally important to get the hell out of Dodge when stocks go the wrong way and hit your stops.

    Don't Make Like Nostradamus

    How deep will the developing correction take stocks, and how long will stocks remain in pullback mode? We don't have a clue!

    More importantly, we don't even care because we will simply follow our rule-based trading plan, rather than becoming a hostage to emotions.

    In the near-term, our simple, objective plan is to take profits on non-core positions (momentum swing trades) when we can, while holding on to core positions (A-rated stocks) as long as the market timing model remains in "buy" mode.

    As always, the key to our trading system is not to predict what is going to happen, but to simply react to what is actually happening. Remember our mantra is to trade what you see, NOT what you think!

    Want to profit from the hottest stock picks when the market heads back up again? If so, sign up now for your 30-day risk-free subscription to The Wagner Daily swing trading service.

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

    Article 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.

    Jan 14 10:01 AM | Link | Comment!
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