Momentum leaders are faltering

In last few weeks  a clear theme is emerging, the momentum leaders that lead the advance in last one year are faltering. Many have broken down on high volume. Some are in longer term range.

Not only are the momentum leaders faltering . but other stocks which did not have spectacular rallies but had been up for the years are also faltering.

A narrower group of stocks continue to lead the advance. As we have seen many times this year such divergence has not been uncommon in last 12 month. It has not been a rally killer so far.

Every time the market starts selling the momentum leaders you see some small group of stocks emerge as new leaders and we see same thing happening now.

If you look at the Market Monitor number yesterday, 228 stocks were down . That tells you the sellers were dominating the action.  But if you were trading some of the below mentioned stocks you would not feel that way.

Symbols from TC2000
OXBT
NYNY
BBSI
ARCW
NUVA
PRAN
DWA
DXYN
LOCK
BGFV
TAS
TASR
BELFB
NANO
KFRC
ZBB
VRTS
NCIT
ATRC
LOPE
STP
IG
BWLD
LVLT
ACHC

Stocks continue to breakout big on earnings. yesterday you had number of earnings breakouts.

Focusing on individual names selectively and setup continue to work. 

Your style choices

I get lot of emails from blog readers asking about trading and how they can learn to trade. One of the issue lot of beginner traders do not understand is lot of active traders swing trade, while many new traders come to market with the intention of position trading.

Sometime they come with misconception they have picked up from some book or website which tries to sell position trading or trend following as "the only best approach".

If you look around the trading universe and look at large sample of traders you will see that there are two basic styles traded by traders:

1. Trying to capture .5 to 1% profit on overall capital
2. Trying to capture 5 to 30 % return per trade on total capital

Trying to capture .5 to 1% profit on overall capital (swing and day trade)

In this approach traders are trying to capture say 500 dollar to 1000 dollar profit with 100k account. They do hundreds or in some cases thousands of trades in a year.

Swing trading with low risk per trade is done by traders for this.

You need to do hundreds or thousands of trades in a year to make big money in this style.

Relatively smooth trajectory of return is the outcome of this type of trading  The primary reason most active traders do swing trading as against position trading is because they want low draw downs. By experience they have learned draw downs create mood swings and is destructive.

Single trade does not move account much up or down in this style of trading. The game is about finding 200 trades that will each generate 1% return on your capital and to do another 200 which may not work but you lose only 500 dollar . Net net you will need to do 400 trades to double the money. This is a slog style.

Swing traders risk  per trade is .25 to 1% of capital in most cases. There are some traders who risk up to 2% of capital per trade. 1% risk means the difference between your entry and stop is 1% of your total account. So if you bought 1000 shares at 20 and stop is 19 then you are risking 1% of your 100000 capital on that trade. Higher the risk you take more will be the up and down in your account. Which can take emotional toll.


Day trading is variation of same thing . It increases the number of trades dramatically and also many or most day traders risk larger than 1% of capital per trade. Those who make big money day trading risk significantly higher capital per trade. They often risk entire account on a trade for few minutes.

In day trading risk per trade is higher but as trades are closed in few minutes or hours your risk is controlled. That is why they can take big risk. But again those who swing big size in day trading find fluctuation in account.

In swing trading or in day trading your returns are function of :

Number of trades

Per trade risk

Per trade profit

To improve returns you can increase any of these variables....or increase leverage.

Swing trading is relatively easy to learn and can offer thousands of trade as stocks tend to move in momentum bursts of 3 to 5 days. There are many swing trading methods employed by traders but the ultimate objective remains same to try and make .5 to 1% on total account.

Because of the large number of trades involved in this style you can learn quickly. You can correct course and cumulative knowledge builds rapidly as you do more trades.

Trying to capture 5 to 30 % return per trade on total capital ( position trading)

In this style traders want to capture big multi week or multi month moves that can increase account in big increments. Infrequent trade held for longer duration that try and capture a big move is what this style is about. The objective is to increase the account in 5 to 30% increments. 

Trend trading and position trading approach aim to do this.Number of trades in a year may be 5 to 20 for these traders. There are not many opportunities like this in a year. Lot of work in this style of trading is in identifying the right opportunity.

Most important thing to understand about this style of trading is that you need considerably higher order skills and knowledge to do this. It will take you long time to develop this kind of skills. If you are going to be doing only 5 trades in a year there is little chance for course correction.

Because you are only going to be placing 5 to 20 bets in a year margin of error is low. You ought to get them right.

In order to make 5 to 30% returns on your total capital in this approach you need to risk larger amount per trade compared to swing trader. Position traders take bigger risk per trade often putting in 50 to 150% of account in one good idea.

Which again means you need to get this right or you will have big draw downs. Larger risk per trade if not done right can lead to large draw downs and that is why you will see trend followers often have huge draw downs of up to 50% or more. They try and glamorize it by saying you need to have that to catch large moves.

Your ability to find the right stock at right time to bet big on is the key to success in this approach. You need very well thought out strategy for this. Against that in swing trading you are relying on large number of trades to make money.

For beginners the challenge is in learning this kind of style.Things which you do only few times in a year might be difficult to learn as against things you do 1000 times in a year. This is a challenge for those wanting to learn this style. It might take you long time to learn as the trades are infrequent.

Most beginners under estimate the challenge involved in this style and so they soon get disappointed. To stat with they start with wrong assumptions and expectations. 

Both styles work. But you need to approach each with understanding of logic behind them. And to make them work you need persistence of 6 months to a year or more. 

Top 50 momentum stocks for swing traders

The markets have continued to climb higher since the resolution of govt shutdown. There has hardly been a pause.

The move has also been supported by breadth. If you see the Market Monitor breadth figures, since 10/10/2013 we have had overwhelming number of positive breakouts.  In last 3 days we have seen a bit of selling.

The market move has been characterized by  rotation. New sectors have taken up leadership and many stocks that were momentum leaders in prior move have reversed or in correction mode.

Few days /weeks spent digesting the move can set us up for year end rally.


Top 50 stocks ranked by momentum

ACAD

IDRA

CSIQ

ZHNE

RSOL

SPWR

TSL

CSUN

JKS

RVLT

VIPS

GALT

GST

CMGE

GNVC

TSLA

BCRX

LCI

EVC

MTG

NFLX

HSOL

HIMX

RAD

NXST

YGE

IQNT

FOE

CLVS

GENT

CPRX

GTN

BITA

ICAD

LIN

CLDX

KERX

ARWR

PLUG

AEGR

USAK

III

ISIS

BEAT

INO

ROIAK

GERN

VISN

STP

EGLE

The list is updated daily and you can find it on the Stockbee 50 tab. The list is primarily helpful to swing traders to find both long and short stock ideas.

Top 50 stocks for swing traders

As a swing trader you can focus on many kind of stocks, but momentum stocks offer you one of the best risk reward situation.

If say your swing trade hold period is 5 days, what kind of stock do you want to be in, a stock that barely moves in 5 days or stock that moves explosively making 8 to 40% move in that period.

If you want the second kind of stock, then focus on stock with momentum. They are for that period the fastest moving stock.

You can look at a mix of one year, one quarter and one month momentum candidates . That way you will not miss any big swing move.

Top 50 stocks by momentum

ACAD

CSIQ

IDRA

DQ

ZHNE

SHOS

RSOL

RVLT

SPWR

TSL

JKS

CSUN

VIPS

GALT

HSOL

VISN

GST

GNVC

TSLA

YGE

BCRX

HIMX

MTG

NFLX

LCI

BITA

RAD

ICAD

EVC

NXST

GTN

IQNT

EGLE

PACB

STP

KERX

CPRX

INO

SOL

LIN

RCON

ARWR

CLDX

PLUG

NNVC

PRKR

III

ANAC

BEAT

NQ

Ranked by one year anchored momentum. The list is updated daily. 

How traders learn to trade

When you want to learn some new skill, if just general instructions are given and no specific steps explained or demonstrated, it is unlikely to help a person learn the skill. That is why apprentice based model of learning has been around since human beings first established society along the banks of Nile river.

When I worked in advertising , I studied every single learning theory. You can only create good communication if you understand how consumer learn and process information. There is overwhelming body of research which shows skills are only learned by demonstration and by practice. That learning theory has universal application.

The reason for that is skills are processed in procedural memory part of the brain. Procedural memory can not be built by just reading instructions and providing general guideline like saying everyone must develop their own trading style, or saying do not follow others, or become a hermit or psychology is the real key to trading. There is zero evidence to show these kind of things build procedural memory. 

Procedural memory as name suggests is memory about how to perform a process. To trade you need procedural memory specific to trading a setup or style of trading like growth investing or value investing or swing trading.

If you want to learn trading follow the apprentice model. Work under someone who knows trading , wash dishes for them. Observe how they select stocks, where they enter, where they put stops, where they exit, how much do they risk and so on. Those process oriented details are extremely critical to learning to trade. Absent that you can spend years and you will never learn trading.

As a new trader, or new to a method or instrument unless you work from some one else template, you will find it difficult to learn. 

Let us say you are not familiar with options and you want to learn to trade option, ad if someone gives you general advice saying buy when IV is low and sell when IV is high or saying never buy calls or any other general coverall statement. How useful is that. What you need is step by step hand holding. You want to see an actual trade and broken in to process step by step and you want to see it executed hundreds of time in real life situation to learn. That will help you learn faster than any other way to learn.

The same thing can be said about Triple ETF or any other instrument. And same thing applies if you want to trade a new style like say value investing or some other approach.

Once you master someones approach then you take it, innovate around it and build your own method around it. That is how learning works for vast majority of people.

Unspecific trading advice without step by step breakdown is not worth even one cent.... And it is available all over the place with hundreds of oft repeated aphorism and rules. They sound good but they do not enhance your trading ability.

Think about it and just don't get influenced by any and everything you read. You will see some people just get quickly influenced by every new flavor of the week trading idea or aphorism....

Learning theories have not changed since civilization was formed and they are not going to change in our lifetime...

If a trade is based on valid logic and well thought out market structure, it is going to work whether you tell everyone about it or secretively execute it or sit in a cave and do it....

Breakout Anticipation Setups for swing traders

Market has been acting very well. Technology and small caps are leading the action. Those two sector indexes are in new high territory. Possibly this rally might continue till year end.

Earnings season is also leading to good earnings breakouts. Higher priced stocks are leading the action with big Dollar Breakouts in number of stocks.

The IPO market is in red hot territory with IPO doubling on first day of trading .

All in all this is good market for momentum traders.

Stock likely to breakout soon

SCOR
TQNT
TSL
BDBD
PWRD
FDML

Big earnings surprises lead to big moves

The earning season is on and it is time to look for big earnings surprises.

There are many surprises during the earnings season but only few are genuine game changer. A Game changing earnings is when the earnings signals start of a new growth period lasting 3 to 6 quarters for the company. It tells you something is going right for this company.

In case of a growth company this kind of game changing earnings shows significant growth acceleration or profit acceleration. The important thing to research in this kind of situation is the sustainability of the earnings for few quarters. If that happens and if the stock was not rallying prior to earnings you have a potential double bagger ahead of you if it is small or mid size company . For large cap it means probable 25 to 50% mover.

In case of a turnaround stock the game changing earnings signal a back to sustained profitability for the company. Again the key thing to look for is whether this is one quarter phenomenon or real turn around. In turnaround kind of situation you may not have good sales growth . but it is earnings that matter. In many turnaround management fixes business by cutting cost or changing product mix.

In recent years DPZ is good example of this kind of sustainable turnaround. From its first big earnings surprise some 12 quarter or so again, it has never looked back. A new management and revamped product did that SBUX is another example of this in last 3 years.

Last earnings season the big game changing earnings play was FB . It has gone up 50% plus since its earnings day breakout. That earnings was game changer. It showed new growth impulse for the company in mobile segment. The catalyst has legs to continue for 3 to 4 quarters.

Finding game changing earnings is easy if you have a process flow for that. Most of the real big game changers are so apparent that even a blind person can find them. The Stockbee Episodic Pivots method offers one systematic way to find it.

During earnings season spending just 10 minutes daily on looking for big game changing catalyst stock can help you find the big movers in the market.

Breakout Anticipation setups for swing traders

We are likely to get sell the news reaction as the entertaining drama on Govt shutdown is over. Markets have repeatedly bounced back from corrections in last few months , but have been unable to make convincing new high.

Underlying setups on many momentum stocks also show damage from recent selling and bounce. Many stocks that bounced back did so on low volume and are prone to failure.

The recent action in Chinese speculative stocks with no profit and negative sales is another sign of lack of good leadership. When traders start chasing Lottery Ticket stocks , always keep one eye on exit door.



Stock likely to breakout soon:

TSL

KTOS

AMED

EJ

GME

Big surprise lead to big moves

Oh my god this companies earnings is up 800% !!!

Holy shit, this company increased sales from 10 million to 250 million !!!

Let me rub my eyes and check this again. What this company is growing earnings 500% and sales has gone up 800% and no one was tracking this company !!!

Everyday hundreds of stocks release news before and after hours. These news releases can lead to stock making big move for the day. What you have to look for is extreme surprise or growth. Not 10% growth or 30% growth but the extreme growth.

When news is released either it is already discounted by the market or the market is surprised by it. The stocks can either go up or go down.

Announcement related to earnings in either as guidance or actual earnings have potential for starting or ending multi month moves.

This phenomenon is called PEAD or Post Earnings Announcement drift. It is considered a market anomaly.
In a perfectly efficient market a news should get discounted immediately and there would be no way to profit from it.

So let us say a stock releases significantly better earnings. If such earnings is going to lead to doubling of the stock, then at open it should gap up to the double price and there would be no way to profit from the new information.

But markets are not efficient. What happens is the new surprise gets priced in over time. This is what the PEAD phenomenon is about.

When companies announce earnings, if the earnings are significantly better or worse than market/analyst expectations then the company stock goes up or goes down for next couple of months.

If you want to make money using earnings announcement read following posts:

How to trade earnings

How to trade earnings Part2
How to trade earnings Part3
Earnings and Bulkowski
Improving odds in earnings breakoutEarnings Season- Time to be very careful...
Earnings and Dan Zanger
Earning Surprise System for $1495
Trading Earnings Breakouts
Earnings Acceleration- Long Term Impact
Trading Earnings Breakout -Part1
Trading Earnings Breakouts -Part2
Trading Earnings Breakouts -Part3

Politics and volatility

The intense drama in Washington is producing some big swings in the market. The big bounce in last 2 days was relief rally in hope of a deal and resolution. It also shows aggressive dip buyers.

Aggressive dip buying has been the key character of this market for last 12 to 14 months. Any small pullback is aggressively bought , however it does not necessarily lead to new highs. Such V shaped bounces have petered out near high in few weeks. But as long as dip buying works, there is no reason for traders to change their tactics.

The selling in recent days has affected many momentum stocks. Especially the biotech stocks have been hit hard. The bounce has only set hem up for further weakness.

At the same time new leaders are emerging and the Top ranked stocks by momentum show that. 

The weakest ETF to keep an eye on

When it comes to ETF's often the best buy opportunities tend to be in the weakest one. The weakest ETF tend to bounce most due to mean reverting nature of many markets.

Especially in the VIX and country and major sector related ETF this tendency to bounce back from hard sell offs is very common.

As of now the bottom 10 ranked ETF by one month momentum are:

1. NUGT
2. SVXY
3. XIV
4. BIB
5. GDXJ
6. UDOW
7. SIL
8. XBI
9. FBT
10. FAS

Out of these personally SVXY, XIV, UDOW, and FAS are what I am interested in. 

Swing Trading : Breakout Anticipation Setups

The market had a big down day yesterday. The breadth supported the down move. After many months we had a broad based selling. There were 361 breakdowns among stocks I monitor. That was highest reading in few months.

In this market so far in last 15 to 18 month such selling has failed to have follow through, in fact on many occasion such selling resulted in V shaped bounces. Let us see what happens this time. Either way as a swing trader it does not matter much. Some of the momo stocks that went up a lot also make good shorts if this trend accelerates to down side.

As the correction took down many momentum stocks, there were still some holding up well. Those are the stock to watch for possible breakout in any bounce:

SHOR

AFFX

AMED

GBCI

ATK

UCBI

TESO

GGAL

NOK

AEL

KTOS

BDBD

SSH

CQB

FSS

MTDR

GME

FNSR

Setups as against individual trades

If you want to be profitable trader understand the concept of setups. Once you understand that you will begin your journey to trading expertise building.

Setup is a set of conditions used to find, enter and exit a trade. A setup encompasses a whole process of trading a specific trading method. If you know a traders setup you should be able to replicate his or her trade on your own. On this site the constant focus is on setups and processes.

Once you understand the concept of setup and comprehend it you will look for setups rather than individual trades.

With proliferation of social media sites like Twitter, Facebook, Stocktwits and blogs there is constant sharing of trades. A trade is of no important if you do not know the setup logic, scan and steps behind it. If you know the setup you know a replicable way to find that kind of trade.

Setups allow you to become an expert. Successful trading is about developing a significant expertise in a very narrowly defined setups. Most traders trade only 1 to 3 setups.

In absence of setups one thinks of random trades or acts on emotions....

Setup selection is very important for new traders and those just starting out. Your task should be to hunt for a setup. Understand it in depth. Break it down in terms of logic and process flow and then recreate it. Try it out for few months and then make changes to suit your personality.

All successful traders trade a setup or a bunch of setups. They have skill specific to their setup. Successful traders have developed cumulative expertise on trading a very niche setup.

Some have very well defined setups, some have fuzzy and discretionary setups. Some can describe their setup clearly. Some can never articulate their setup even though they can trade it. Some purposefully make their setup sound exotic by using made up terms.

The problem for beginner trader is that as a beginner you will not understand the importance of a setup. Because there is no manual or book which tells you that the key to trading is to find setup.

What is involved in developing a setup is you start with broad concept or start with setup that has worked for someone else and then make it work for you. For that you have to go through a versioning process. You refine and refine a setup till it works. This is a iterative process.

The task for novice trader is to go from their current stage to a level where they have a setup which works for them and suits them perfectly. You will have immense confidence once you reach that destination. Once you can make a setup work, then it is easier to make other setups work or develop other setups.

I constantly look for setups and study other peoples setups. You will see most successful traders do the same.

Whenever I visit a blog or see people talking about a trade I always look at what is this persons setup. If I find a good setup I study it. I may not use it, but it gives you ideas.

When reading a trading book look for setups. If you go through hundreds of books on trading you will often see variation of a basic setup again and again.

If you see the Jesse Stine book his setup ideas which he developed on his own are very similar to the Episodic Pivots setup. And his setup of buying extremely beaten down sector or stock is very similar to setup idea discussed in Richard Love book.

If you see day traders, almost all of them trade same kind of basic setups. They might claim , that no one trades their setup , and might have invented vocabulary for their setup, but look around and you will see all day traders do same kind of setups.

Similarly most swing and position traders trade few basic setup ideas that have been around for years.

So if you are a trader looking to progress your trading further think setups and not individual trades...

Once you have a setup your problem of cognitive load will decrease because you will be doing a very narrowly focused task. Once you find your own setup you will be able to shut out environmental noise.

Any expertise is task specific. So defining a specific task to become an expert at is very critical. The first step in becoming a good trader is to arrive at a tradable setup. And then become an expert in trading that particular setup. It is a very microscopic skill.

Swing Trading : Breakout Anticipation Setups

We are set for a negative open today. The overhang from Govt shutdown is creating volatility on day to day basis. However so far selling has been very muted. If you see the breadth data  you will see that we have not seen any major selling in last couple of weeks. Down days have been on very low breadth. This indicates lack of urgency to sell on part of large speculators. Big selling will reflect in 300 plus day on 4% down daily.

However follow through on individual stock breakout has not been stellar. In many cases post breakout stocks have given up breakout day gains and gone back in to range or consolidation.

We are at the beginning of earnings season and the earnings announcements will accelerate in next week. Earnings season is always the season of opportunity and this earnings season will be no exception. Expect some big breakouts like Facebook (FB) during this earnings season. If you search this site you will find ton of posts on how to trade the earnings season.

In the meanwhile for swing trade the focus continues to be on stocks with momentum. Some of the following stocks are likely to breakout in next few days/weeks.

Swing Traders: Breakout Anticipation Setups



swy

pol

sva

ntes

amd

fss

fdml

Every trading method has an implicit underlying assumption

Every trading method has an implicit underlying assumption. Some of the assumptions are based on observed market behavior and some are based on beliefs. If the underlying assumptions behind your trading methods are sound and based on structure of the market then they work. More importantly they can be replicated by others.

 Above all assumptions based on market structure persist  and those edges do not degrade. The tactics might change but the structural phenomenon do not change. On the other hand many trading beliefs are just beliefs , they are strongly held beliefs and do not work unless you adopt same belief system.

One of the most enduring phenomenon in the market for hundreds of years has been that price tend to move in direction of range and volume expansion. The magnitude of follow through might differ based on market conditions but this phenomenon has  persisted on individual stocks for hundreds of years.

Look at the following examples of stocks that had large range and volume expansion near start of their big moves.

In each of the above case at the beginning of the move there was abnormal magnitude of range expansion and volume expansion. These stocks had in many cases highest traded volume or range expansion in their life time of trading or in years. That one day big move has translated in to start of a new momentum phase lasting weeks or months and of big magnitude ranging from 50% to over 1000%.

On a day to day basis not many stocks exhibit this kind of above average range and volume expansion. By focusing on those stocks you can find big winners.

The underlying structural phenomenon in these cases are :

1. Stocks move in direction of range expansion
2. Stocks move in direction of volume expansion
3. Surprisingly good news leads to big range and volume expansion
4. Such surprise does not result in just one day move, it can kick off a mufti month /week move 
5. The up move has number of 3 to 5 day momentum bursts

Now this is a repeatable phenomenon in market. And it has big edge. If you believe that to be true then you can build trading methods around it by using a set process. Like this there are number of structural phenomenon in the markets and trading methods have been developed to exploit such phenomenon. 

Lot of time new traders base their trading methods on questionable assumptions and as the assumption holds no water , the trades based on those methods do not work.

The starting point for any trading method should be to thoroughly examine your assumptions and how valid they are. 

What are the underlying assumptions behind your trading method?

If you can not answer that question easily, then its time to reexamine your approach. 

Swing Trading: Breakout Anticipation Setups

Swing traders can still find lot of opportunities in this market as long as you do not focus on the Indexes. Index weakness is not translating in to broad based weakness on individual stocks. A handful of stocks continue to attract buy interest. Especially the Nasdaq kind stocks have been largely unaffected by selling so far.

Swing traders will find lot of stocks are having orderly pullbacks or having low volume consolidations near their high. This indicates lack of aggressive selling and buyers willing to hold through correction.

Swing traders looking for 3 to 5 day trading opportunities on stocks with established momentum will find following setups interesting.

CHTP
NTES
CTRN
ETFC
BHE
FDML
LEA
SID
FSS
INFN
BPI
RPRX

Swing Trading : Top 50 momentum stocks

Momentum is your friend if you are a swing trader. Stocks can spend months or years going no where, but once they enter a momentum phase, they offer both long and short opportunities.

When stock has confirmed momentum it tends to move in short momentum bursts of 3 to 5 days. These moves can be of 8 to 40% magnitude. After the momentum bursts the stock can reverse or go in to another consolidation or range.

As a swing trader you can find the momentum pauses and wait for a breakout or buy in anticipation of the breakout.

Top 50 stocks by momentum for swing traders:

NNVC

ACAD

IDRA

CSIQ

VIPS

CPRX

RVLT

ZHNE

DQ

TSL

CLDX

JKS

TSLA

BCRX

SPWR

AEGR

RSOL

CNIT

GALT

HSOL

GST

NFLX

HIMX

PLUG

EGLE

YGE

LCI

CSUN

CLVS

PACB

GNVC

SKBI

EVC

STP

RAD

MTG

ISIS

NXST

BEAT

ACRX

IQNT

LIN

INO

AFOP

SOL

OWW

KERX

PSDV

GTN

SVU

If you are swing trader look for pullback or consolidation in these stocks to watch for entries.