Swing Trader's Market - Educational Piece
The "Easy Dollar" Environment
Many of the greatest traders say similar things:
They make most of their money in the right type of market (the “Swing Trader’s Market”)
Swing Trader’s Markets occur 2 to 4 times a year for a few weeks at a time
When the market indices are rising in a low volatility fashion, and stocks are hitting new highs, traders can make the bulk of their money
When it is not a Swing Trader’s Market, stocks can decline or chop around until the next Swing Trader’s Market is set up
When it is not a good market, the best traders observe, hold cash, and sit on the sidelines
What are the signs that a Swing Trader’s Market is upon us? Here are the clues we look for:
Above the 21 Exponential Moving Average: The index (SPY, QQQ, IWM, IWO) should be in an uptrend above a rising 21 EMA.
MACD Above 0: The index should have a MACD Line above the 0 mark and uptrending or grinding sideways but not declining.
Net New Highs: The New Highs vs. New Lows breadth indicator should show a robust amount of net new highs. The higher the number of net new highs, the greater the money-making opportunity will be. It is important to analyze which sectors and industry groups the new highs are occurring in, as different uptrends bring different investment themes. On the other hand, a growing number of net new lows is a sign that we are not in a Swing Trader’s Market.
QQQ for Large Growth Stocks: One could follow the S&P 500 (SPY) index to gauge if we are in a Swing Trader’s Market, however, the Nasdaq 100 (QQQ) is more indicative that large-cap growth stocks are participating. This type of stock often returns 20% to 100% per year in a good year. When QQQ is in an uptrend above a rising 21 EMA, while MACD is uptrending above 0 and Net New Highs are positive and growing, it is a sign that large cap growth stocks are participating in the Swing Trader’s Market.
IWO for Baggers: The Russell 2000 Growth Index (IWO) is a prime gauge of “Bagger” stocks. Baggers are smaller growth companies that often have low to negative earnings but large revenue growth rates. This type of stock can return 2x to 10x in a good year. For example, Zoom (ZM) returned 8x in 2020, which some would call an “8-bagger”. When IWO is in an uptrend above a rising 21 EMA, while MACD is uptrending above 0 and Net New Highs are positive and growing, it is a sign that Baggers or small-cap growth stocks are participating in the Swing Trader’s Market.
The chart below shows a good Swing Trader’s Market from November 2020 to February 2021. Notice how both the QQQ and IWO trended above their 21 EMA, while the MACD Line (blue MACD line) was above 0. The Net High/ Low breadth indicator also showed a robust level of new highs. After a pullback in the Winter of 2021, QQQ has an Easter rally, but IWO does not participate. IWO’s MACD stayed below 0 in the Spring of 2021, which was a tip that it would underperform.
2013 and 2014 had an extended Swing Trader’s Market. The key item to point out is how MACD on the QQQ stayed above 0 and went sideways as the index stayed above the 21 EMA. IWO’s MACD oscillated more and as the index had more trouble staying above the 21 EMA.
2022 was NOT a Swing Trader’s Market. Investors would have been well served by putting their money in the bank and not swing trading. Notice how the QQQ and IWO were downtrending under their 21 EMAs, while the MACD Signal Line spent most of the year below 0.
2023 has been a mixed bag. There was a Swing Trader’s Market from the end of May until the end of July. Autumn saw a choppy correction and although the QQQ and IWO recovered a bit in early October, it was still not a Swing Trader’s market because both indexes were having trouble staying above the 21 EMA and there were Net New Lows.
Now everyone knows what to look for during the next Swing Trader’s Market to maximize Making Money, our primary goal at Cycles Edge!
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.