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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 Profit From Short Selling Former Leadership Stocks

    On January 30, I said the stock market was about to trigger a new "sell" signal, and also suggested the NASDAQ may fall to the 4,000 level in the near-term.

    Three trading days later, the NASDAQ plunged 2.6% and indeed kissed its next key area of support near the 4,000 level (closed the day at 3,997).

    That February 3 decline put a nail in the coffin for the current rally, thereby forcing my rule-based market timing model into "sell" mode for the first time since June of 2013.

    In "sell" mode, I avoid establishing new long positions because all major indices are trading well below support of their respective 50-day moving averages.

    Most have also sliced through support of their prior lows, meaning an intermediate-term uptrend is no longer in place.

    Time To Sell Short...But Not So Fast!

    With the timing model now sitting in "sell" mode, entering new swing trades on the short side of the market becomes a possibility for me and our subscribers for the first time in 8 months.

    However, since most stocks are already too extended to the downside in the near-term, it is crucial to wait for a decent bounce before initiating new short positions (be sure to review this classic blog post for the key points of my short selling strategy).

    Trading on the short side requires much more skill in the market timing department, as both sell-offs and counter-trend rallies are substantially more violent on the short side.

    This means most of my short entries have significantly shorter-term holding periods than long entries. For example, it may take a market nearly a year to rally 20%, but only one or two months to give back 75% of that advance.

    Above all, you absolutely must have a high degree of patience to wait for proper short selling entry points (this timeless video from 2012 explains why).

    Short Selling Strategy #1 - Former Leading Stocks

    Just as there is very specific criteria for stocks I buy, I am also very detailed in what I look for when short selling stocks.

    There are two basic technical setups for swing trading on the short side, each with very different looks in terms of where these stocks are trading in relation to their 52-week highs.

    The first setup, and the one I personally favor the most, is selling short a former leading stock.

    These former leaders are stocks that have rallied 300% to 1,000% (or more) during the length of the last bull market, and are now over-owned by institutions.

    They are usually just beginning to breakdown from an all-time high, and are 20% to 30% below their 52-week highs by the time they hit my radar screen as a potential short candidate (it is way to dangerous to try to call the exact top of a leading stock).

    The idea is that once these stocks begin cracking below key support levels, institutions have no choice but to start unloading shares, thereby adding to the bearish momentum and making for some violent moves to the downside.

    Lululemon - 3,000% Gain In 4 Years

    After a monster, four-year rally that drove the price of Lululemon ($LULU) from $3 to more than $80 (nearly 3,000%), the former leadership stock is now breaking down below a major area of price support:

    (click to enlarge)

    The monthly chart above shows the huge advance from 2009-2012, followed by stalling action in 2013.

    Last week's breakdown below key support of that prior base of consolidation is definitely a bearish sign, which should soon lead to a test of the $40-$42 area.

    From there, $LULU may form a bearish base at the lows OR bounce into resistance of the declining 10-week moving average (similar to the 50-day moving average).

    The pink, horizontal line on the weekly chart below shows the area of resistance that $LULU may bounce to, which may present you with a low-risk entry point for swing trading on the short side:

    (click to enlarge)

    As always, I prefer to react to price action, rather than predict it.

    Therefore, I have no idea whether or not $LULU will neatly bounce off support and into resistance of the $55 area.

    But if it does, I will be ready to present my exact entry, stop, and target prices for this short selling setup to Wagner Daily newsletter subscribers.

    More importantly, even if $LULU does not play out as expected, you now know a simple, low-risk strategy for short selling former leading stocks by patiently waiting for a breakdown to key support, then selling short on the subsequent bounce into resistance.

    Out Of Harm's Way

    Prior to the new "sell" signal being generated, my timing model was already in "neutral" mode since the close of January 24.

    As such, over the past 11 days, I have only bought one individual stock (with minimal share size) and one ETF.

    Further, the great thing about the ETF I bought is that it has no correlation to stock market direction because it follows the price of natural gas ($UNG). Presently, the $UNG trade is already trading approx. 10% higher since my January 30 buy entry in my swing trade newsletter.

    I have also already closed most of the winning positions in the ETF and stock portfolios of the newsletter by tightening stops to protect profits.

    Laying low since the "neutral" signal was generated on January 24 fortunately enabled our subscribing traders to stay out of harm's way ahead of the February 3 sell-off (but undoubtedly hurt those who ignored the 3 reliable warning signals of a pending market correction).

    To Be Continued...

    As previously mentioned, this is just one of the two types of setups I target when short selling stocks. I will cover the second type of short setup (short selling stocks near their 52-week lows) in my next blog post, so stop back again soon.

    By the way, if you are not familiar with short selling, you can find a good basic primer here. Furthermore, there's nothing wrong with waiting on the sidelines, protecting your profits in cash, until the stock market eventually generates a fresh buy signal.

    To learn how to profit in both up AND down markets, get started today with your risk-free test drive of The Wagner Daily.

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    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.

    Feb 05 8:40 PM | Link | Comment!
  • 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.

    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.

    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!
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