Swing Trade Setups Part 1: The move up and the move down

Do you know that feeling, when you look at a chart, and you know instantly that it has the potential for a great swing trade?  Where everything aligns perfectly with what you are ideally looking for?  I know I do!

I’m going to show you exactly what I look for in a positive swing trade reversal, where everything aligns with what I am looking for in a trade.

I am going to walk you through my thought process behind 2 trades… AAPL & ON.  These two trades are examples of what I look for in a positive swing trade reversal.

For me, when I look at the graph of a potential positive swing trade reversal, I start by looking at two things:

  1. The previous move up (which is the setup)
  2. The very recent move down (which is where I enter)

Ok, let’s start with the cart of AAPL below:

My entry point on this chart occurs at February 12th.  You can easily see where I’ve highlighted in grey, the days that follow the entry point.

On this chart, let’s start with the GREEN arrow.  I always scan to the left to view the pricing action going back over the previous month.  You can see that right around the start of November, AAPL moved sharply higher.  That is a pretty powerful move.  It lasted about 9 days (each candle is a day) after trading in a relatively quiet period through October.  Notice how October had relatively small candles.  After that initial move that lasted about a week and a half, AAPL traded sideways for the most part and then…

The bottom fell out…where I have the RED arrow!  Look at what happened during the time-frame at the end of October and the start of February, where I have the RED arrow.  The price just kept dropping.

Let’s think of the psychology behind the move up and the move down:

  • The move up (Green arrow), was relatively fast and quick.  Those that bought here, I call Phase 1 buyers.
  • The move down (Red arrow), was relatively fast and quick.  Many of those that sell here, are the same Phase 1 buyers that now have a loss.
  • There is another “hidden buyer”, which is the one who regretted not buying in during the sharp move up which occurred during the GREEN arrow time-frame.  Hidden Hillary’s I like to call them.

 

First, let’s think about the Phase 1 buyers on the previous up move during the period shown by the GREEN arrow: I’m sure many of them were new buyers.  They got in, expecting it to continue to move higher.  After that week and a half, it didn’t do much… trading sideways.  They held.  Then comes the sharp move down.  The recent buyers are now showing a loss.  Day after day, the pain gets greater and greater.  They watch as each day, their loss keeps increasing.  Finally, they’ve had enough.  They throw in the towel along the wreckage along the way shown by the RED arrow.  Those previous Phase 1 buyers (GREEN), become Phase 1 sellers (RED).

Now, let’s think of the “hidden buyer”.  Hidden Hillary, was sitting there watching the sharp move up and didn’t participate.  Maybe she was already a holder and regretted not adding more.  Maybe she wanted to buy, but was uncertain of the direction.  Well, she watched as AAPL rocketed higher and completely missed out, kicking herself each day.

Then, a miracle happened!  It’s coming back!  The train is coming back to the station!  That’s the RED arrow again.  What do you think she’s going to do when it gets near the previous trading range, when she was considering buying, but didn’t?  She’s got a bargain on her hands, thinking to herself: “This is a buy!  I know it’s going higher!”

So she gets in on the trade.  Probably buying the same shares from the previous Phase 1 buyers that are now desperate to get out and unload their bags.

What happens next is a thing of beauty, isn’t it?  Because actually there are tons of Hidden Hillary’s out there…buying in to get a bargain before the train leaves the station.  And that’s exactly what happens.  Now the Phase 1 buyers/sellers sit and watch as the stock reverses sharply higher.

Man, there’s a lot of pain and happiness occurring at the same time in the market, isn’t there?!

I’ve got another example to show you.

Take a look at this chart of ON and see if you can see the same concepts…the same similarities.

Here you can see the same thing.  Notice the sharp GREEN arrow, highlighting the previous upward movement is relatively the same size and duration of the RED down movement.  As in the previous chart, notice how the move starts right around the beginning of 2018 with a big candle, after some relatively blah, boring trading days with small candles.

All of the same concepts apply as before, Phase 1 buyers in along the GREEN time-frame, experience losses during the RED time-frame, and many throw in the towel.  Hidden Hillary who missed out on the previous GREEN move step up the plate and start to buy.  The stock then reverses and moves higher.  Picture perfect!

So here you have what I consider two examples of perfect positive swing trade reversal charts, along with what I think is the major psychology going on behind them.

Up and Down Moves that I would NEVER consider trading:

Now let’s take a look at other charts that certainly could be considered reversal patterns, but I would never consider trading them.

This previous move up (GREEN arrow) is way too fast for me.  Yes, it turns and heads lower.  If you were watching this on the way down, it is hard to decide when and if this will reverse and move higher.  Instead, you have a long, painful decline (RED arrow).

There are 2 major traits that I don’t like about this chart:

  1. The sharp move up
  2. The long slow painful decline

One reason I don’t like that sharp move up is this: These Phase 1 buyers are on a hair-trigger.  They probably know they could be bag holders at any point…and quickly.  They are going to sell and sell quickly, and in droves.  Trying to time when Hidden Hillary’s are going to enter and bid the price back up is extremely hard to determine!

Also, look at that long slow decline.  There isn’t a clear point where the Hidden Hillary’s will say to themselves, “Now is the perfect time to buy!  I see it so clearly.”   Sure, some will do that.  But not en-mass.  That sharp move up is a deterrent to a confident round of buying that would cause a bounce!

Instead you see a long painful decline with a few spike moves that do not lead to a reversal.  This decline is entering its third month!  Sure, it might reverse, and is actually now near the point of the big breakout, but we are swing trading here.  We are holding between 1 day and 2 weeks at most.  I don’t see a sharp reversal happening here.  This could languish for months, trading sideways.  Or worse, keep heading lower.

What you want to see is a decline that happens relatively quickly over a period of 1 – 2 weeks.  This way, the emotions are still fresh and pent-up.

Ok, one more sh*tty chart as an example of something I would never trade…

With this chart of SMLP, we have a previous move that isn’t so sharply defined.  Unlike the previous example, this up move is taking its own sweet time happening.

Matter of fact, when examining the previous uptrend with the GREEN arrow…which uptrend are we looking at?

The huge move from the start of December until the end of January?

The mini moves that start with the areas in grey that I circled?

Where does it start?

YUCK!

This previous move is not a good setup to me.  It is not clearly defined.  We want to see relatively crisp moves up, not to sluggish like this one, and not too sharp like the other ugly example, GLNNF.

Also, look at the decline.  There are no signs of stopping.  It is also not showing that symmetrical match of the uptrend.  It just keeps going down.  I would say the reasons it keeps going down, is there aren’t any Hidden Hillary’s that can clearly see a worthwhile bargain after sitting on the sidelines.  The move up was choppy and in phases, so you then don’t have a en-mass huge influx of other Hidden Hillary’s who jump in at the same time.  That ill-defined, sloppy, upward movement, led to a sloppy, haphazard decline, with no clear, easy to spot turn-around point.

I hope you can see what I consider to be an ideal previous move and decline that I use to make for a perfect swing trade reversal.

I’m not done yet though…

We have to keep analyzing these two potential swing trade setups to build a case whether we should enter or not.

Up Next: Using Moving Averages

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Swing Trade Setups Part 2: Moving averages

The Greedy Goblin

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