Morpheus Tradin...'s  Instablog

As a technical swing trader whose trading strategy is based on following the dominant trend of the market, I am not bothered when the stock market shifts direction to the downside because my proven market timing model continually keeps me trading on the right side of the market (or out of the market altogether at times). Last week, as the main stock market indexes fell sharply, I profited from several short and inverse ETF trades. In this article, I will walk you through the technical anatomy of one of last week's successful swing trades in which I netted a 12% gain on a 3-day hold time in $SOXS...

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The weekly chart below shows the percentage of stocks in the U.S. stock markets currently trading above their respective 40-day moving averages (this is a built-in indicator on the Telechart 2000 platform). As indicated in the graph, the percentage of stocks trading above their 40-day MAs is nearing the extreme 8-12% level, which we have seen during two major selloffs since the beginning of 2010 (represented by the yellow horizontal line).

This indicator is NOT used for market timing, as the indicator usually leads a market bottom by several weeks or more. Nevertheless, it does a good job of defining where the broad market is in terms of overall breadth. Once the market reaches an extreme level such as this, it can then begin to repair itself over the next few months:

(click to enlarge)

Along with indicator above, both the NYSE and Nasdaq McClellan Oscillator are in deeply "oversold" territory. Furthermore, the major indices are now trading at or near major long-term support of their respective 200-day moving averages. Like the indicator shown on the chart above, the McClellan Oscillator is NOT used by our trading strategy as a market timing tool. Nevertheless, with many indicators and stocks at extremely "oversold" levels in the near-term, astute traders should be prepared for a swift reversal (counter-trend bounce) to the upside.

Until the inevitable broad market bounce eventually comes, we plan to avoid entries into new short positions. Further, since stocks are now in an established downtrend, we are not inclined to play the long side of the market either. Whether the forthcoming bounce will lead to quality short setups on stocks and ETFs that rally into resistance is impossible to know, but that is why we take the market one day at a time and shy away from bold predictions. We only need to know one thing right now: as long as our proven market timing model remains in a "sell" signal, we will be looking to establish new short positions into strength when the major indices bounce.

Finally, now is the perfect time to be patient in the market, especially considering the string of nice winning trades our Wagner Daily swing trading newsletter has had on the short side of the market over the past week. Opening new trades at the current levels involves taking on too much risk with minimal upside potential (negative reward-risk ratio). Nevertheless, select currency ETFs such as $EUO or commodity ETFs like $DZZ (both pointed out as potential pullback entries in today's issue of The Wagner Daily) could be nice plays because they have a low correlation to the direction of the overall equities markets. Otherwise, cash is king and a very valid position.

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.

© 2002-2012 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.

Going into today's (May 17) session, here are three stocks on my watchlist for potential swing trade short entry within the next few days: $MW, $CTSH, $CHRW. You can view the short video analysis explaining the three technical setups here.

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.

© 2002-2012 Morpheus Trading, LLC
Reproduction without permission is strictly prohibited.