Editor's note: With this column, we are pleased to introduce Alan Farley, a professional trader and author of The Master Swing Trader. Alan also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Alan's column, "The Swing Shift," will appear Tuesday and Thursday afternoons. Enjoy the column, and, as always, let us know what you think.
At the height of the recent stock market bubble,
Securities and Exchange Commission
muscle descended upon broker-dealers. With self-preservation in mind, brokers responded to keep government heat from turning into a raging inferno. They dusted off a popular strategy from the futures pits as a prophylactic for their high-frequency clientele: swing trading.
After the bubble burst, most daytraders discovered they had little appreciation for the market's considerable downside, nor the skills to sell short at the right time. But throughout this secular nosedive, legions of swing traders survived and prospered.
So how did swingers save the family fortune? The fact is that neither bear markets nor terrorist attacks can repeal the laws of market physics. Price mechanics rule, and swing traders rule price mechanics. They work their game off the debris of inefficient markets. Swing traders are graduates of the school of What Works Now.
To survive as a swing trader, you must focus ruthlessly on risk management, and let profits take care of themselves. Visualize an exit door before each position is entered, not afterward. And never forget that swing trade execution is price- and time-sensitive. Do your homework, or pay the piper.
Now, let's see how price mechanics can create opportunity.
A big volume spike is usually a call to arms for swing traders. Last Friday,
jumped 26% on three times its average daily volume. The big move cut right through intermediate resistance at the 50-day moving average. While a momentum player might jump in immediately with this type of price action, the swing trader stands aside and takes a close look at the charting landscape.
Fibonacci grids are great tools to watch price retracement play out. Friday's pop carried Juniper to about $21.5, a 62% bounce off of its August-to-September freefall. In Fib lore, this horizontal level is strong resistance.
But if a market can break it cleanly, odds favor a rally all the way back to the beginning of the prior selloff. For Juniper, this yields a very healthy price target of $29, or about seven points above Friday's close. Not bad for a trade we might put on for one to two weeks.
In a normal bear bounce, we'd expect a rollover to the downtrend right at this resistance level. But this isn't a normal bounce. That powerful volume shifts the dynamics so that a breakout above resistance is now the higher-odds play. But don't log in to your trading terminal just yet. We have more work to do.
Strong gaps are traders' best friends -- or worst enemies. For this setup, we have two gaps to work with. The first, in mid-August, busted through the same price level we're watching for a breakout. Last week's rally triggered the second one.
So we have one above and one below Friday's range, with price now caught between an irresistible force and an immovable object. Swing traders love these boxed-in hotspots because, once resolved, they can generate strong vertical movement.
But it takes more than a pretty picture to make a good trade. Profits demand precise "ATM" -- that's analysis, timing and management. And just like the cash machine, if you punch in the wrong code too often, it will shut down your account. So when will Juniper become safe for swing trade consumption?
Wonderful things happen when you look at trade setups in different time dimensions. New patterns, new obstacles and even safe harbors are revealed. Juniper's 60-minute chart reveals a narrow price range with well-defined upper and lower boundaries. The resolution of this congestion pattern should tell us what to do next.
In the best-case scenario, we'd watch price rise slowly to the top of the range at $21.50 and then sit there for a few bars. That quiet spot might be a perfect place to enter a long position. With a little luck, we get the break immediately and jump into a profit. If not, we get out with a small loss and wait for a better entry.
But what if price drops below this range over the next day or two? That may still bring good news. It gives us a great opportunity to see how serious the buyers are. Do they come in quickly and bid price back into the range? Or are they conspicuously absent, suggesting an overbought stock without good sponsorship?
One thing we definitely don't want to see is Juniper closing Friday's gap. That kills both the pattern and the setup. (The reasons have to do with esoteric studies by Edwards, McGee and Elliott. But that's for another time.)
If Juniper does pop its top, chances are it will happen with an overnight gap. That shifts the risk/reward ratio considerably if we're not positioned yet. Don't try to board the moving train on a gap open. Instead, allow it to return to the station on a pullback and pick up a limit order.
And what if it doesn't come back? Never fear, swing traders have a bag of tricks that would make even Bozo jealous.
Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called
HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley held no positions in any of the stocks mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to
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