Swingly Exposure Status: Risk Off

OVERVIEW
Don’t Blindly Chase Profits

When it comes to trading, it's easy to get caught up in the chase for profits. We all dream of making big gains and hitting it big in the markets. But here's the thing: chasing after profitability can often lead to more harm than good.

Let's talk psychology for a moment. We're all human, and that means we're prone to certain biases and behaviors that can trip us up in trading. Take FOMO, for example – that fear of missing out. It can make us jump into trades without really thinking them through, just because we're afraid of missing out on potential profits. And then there's loss aversion – the fear of losing money. It can make us hold onto losing trades for too long, hoping they'll turn around, even when all signs point to the contrary.

Our Job As Traders

When we focus on being good traders, making money becomes a natural byproduct of our efforts. We strive to make informed decisions, manage risk effectively, and maintain emotional discipline, knowing that these qualities are what ultimately lead to long-term success in swing trading.

Staying on the right side of momentum is crucial for success in trading. At present, the market momentum is decidedly bearish. In such conditions, attempting to increase exposure to the long side is akin to swimming into a tsunami and expecting to emerge unscathed – simply put, it's not a wise move. Instead, it's prudent to align our trading strategies with the prevailing momentum, whether it be through selective short positions, hedging strategies, or simply exercising patience until market conditions shift more favourably.

Remember, in trading, it's not about fighting the tide but rather riding it.

TODAY’S OUTLOOK
Stop Panicking

Large Caps

The Nasdaq breached our crucial support levels, as highlighted in yesterday's publication.

The last instance of QQQ dipping below the daily 50-EMA (and weekly 10-EMA) occurred at the onset of last year's multi-month correction. Interestingly, during last year's correction, it took slightly over two weeks for the market to replicate a similar magnitude of movement. However, in the current scenario, the pullback is more pronounced and has occurred over a shorter span of time

This is Good

While the current market conditions appear challenging and potentially unfavorable for growth-focused swing traders in the foreseeable future, it's crucial to recognize that there is a hidden gem amidst the turmoil.

The sharper pullback over a shorter duration is something we’re quite pleased to observe. It's far less painful to experience a market that swiftly undergoes a correction and completes it in a brief period, compared to enduring a prolonged period of patience-testing erosion over several months.

The market was inevitably due for a correction or at least some form of pullback. We had been consistently extended for months without any significant pause. As we highlighted in yesterday's publication, these periods present valuable opportunities to strategically position oneself in market-leading stocks that demonstrate the greatest relative strength against the downward pressure exerted by the market.

Small Caps

The Russell 2000's IWM, tracking small growth-focused stocks, persists in its downward trajectory towards the daily 50-EMA. This marks the third consecutive week of intense selling, mirroring the trend seen in the QQQ, albeit with greater volatility.

The intensified downturn in small caps isn't unexpected, considering their reliance on a conducive economic environment to sustain growth. These stocks heavily depend on speculative investment, given their inherent instability and less refined nature compared to those in the larger QQQ index.

What this means

In blunt terms: Just wait.

The market, along with its mix of both strong and weak stocks, is entering a stage 4 downtrend. In our opinion, now is not the time to take long or short positions.

At Swingly, we typically focus on trading to the long side, acknowledging the market's tendency to ascend rather than decline. While some swing traders may opt to go short here, we adopt a slightly different approach.

Across decades, the market tends to trend upward about 67% of the time. Although corrections, pullbacks, and bear markets are inevitable, it's noteworthy that the moment you consider going short or trading breakdowns often aligns with the market finding support and laying the groundwork for a new stage 1 base.

This juncture typically marks a shift in focus, diverting attention away from identifying stocks with the highest relative strength and perfectly formed bases poised to emerge as the next market leaders.

Our priority for the foreseeable future is to monitor the stocks demonstrating the highest resilience amidst this market-wide deterioration.

ARTICLE
Kristjan “Qullamaggie” Kullamägi

There is perhaps no retail trader more deserving of praise than Mr. Qullamaggie himself. For those readers who aren’t familiar with Kristjan, in 2011, at the age of 23, he ventured into the world of day trading with eagerness but limited knowledge. Following alerts and chasing stocks, he stumbled through the early years, experiencing the sting of blowing up his account multiple times. Despite the setbacks, Kristjan refused to surrender to defeat. Instead, he immersed himself in study, persevered with determination, and gradually honed his craft by discerning what worked and what didn't.

As the years passed, Kristjan's diligence bore fruit, and his results began to improve. Transitioning from losses to breaking even marked a pivotal turning point. By 2013, he celebrated his first profitable year, a milestone that fuelled his ambition. Recognizing the vast potential of swing trading, Kristjan shifted his focus toward this strategy, where opportunities seemed boundless.

Today, Kristjan’s trading account is worth over $100 Million with even an article in the Wall Street Journal published about his success. With tax informtion being public in Sweden, we can see he was the 17th largest individual taxpayer in Sweden in 2021. 

Kristjan’s Strategy

Qullamaggie trades in a manner remarkably similar to our approach here at Swingly. In fact, we've modeled our trading practices around his strategy of trading highly volatile momentum stocks that exhibit strong revenue growth and both absolute and relative momentum. This methodology shares similarities with the trading philosophies of legendary renowned traders like Jesse Livermore and Mark Minervini.

Stair-Step Breakouts

Analyzing the trajectory of thousands of top-performing stocks over the past century reveals a recurring pattern: the stair-step movement. Typically, these stocks surge by 20-50% or more, then pull back and consolidate before embarking on another upward journey. It's a hallmark behavior of leading stocks and offers a strategic advantage to traders.

To spot these setups effectively, we focus on stocks exhibiting the highest upward momentum across three timeframes: 1-month, 3-month, and 6-month periods. This method enables us to pinpoint the stocks currently leading the market.

Executing this strategy involves three key steps:

1. Identify Setup: Look for stocks that have experienced a significant upward move in the past 1-3 months, followed by an orderly pullback and consolidation phase characterized by higher lows and a tightening trading range.

2. Enter at Breakout: Enter the trade at the opening range highs, using various timeframes such as the first 1-minute, 5-minute, or 60-minute candle. Alternatively, anticipate the breakout, but this requires more skill and experience.

3. Manage Risk and Profits: Set a stop loss at the lows of the day, ensuring it does not exceed the Average True Range (ATR) or Average Daily Range (ADR) of the stock. Sell a portion of the position after 3-5 days, move the stop loss to breakeven, and trail the remainder with the 10- or 20-day moving average.

This is the most basic and often the most profitable technique swing traders use to profit out of the market.

Episodic Pivot

When unexpected positive news impacts a stock, particularly if the stock has been overlooked, it can trigger prolonged moves spanning months or even years.

EPs can arise from various catalysts, including:

• Earnings reports and guidance updates

• Regulatory changes or political developments

• Biotech events like drug trial results or FDA decisions

Among these, the primary focus lies on earnings and guidance-related EPs. When a stock surprises the market with strong earnings and optimistic guidance, it often ignites a significant and enduring uptrend.

The steps to trading this setup are as follows:

1. Identify Criteria: Look for stocks that gap up by 10% or more with significant volume. For earnings-related EPs, prioritize stocks with robust growth numbers, including substantial EPS and revenue growth, ideally surpassing analyst expectations.

2. Volume Confirmation: Confirm that the volume supports the price action, either in pre-market or within the first 15-30 minutes after the market open.

3. Consider Recent Performance: Preferably, select stocks that haven't experienced a significant rally in the past 3-6 months. This ensures that the market is genuinely surprised by the positive news.

Once identified, traders should:

• Enter at Opening Range Highs (ORH): Take the entry at the highs of the first 1-, 5-, or 60-minute candle following the market open.

• Set Stop Loss: Place the stop loss at the lows of the trading day to manage risk effectively.

• Trail Stop Loss: As the trade progresses and surpasses the initial stop, trail the stop loss with the 10- or 20-day moving average to capture potential gains while managing risk.

You can learn more about Kristjan and his strategy from going to his blog.

We attribute a significant portion of our profitability to his teachings, and we make no attempt to claim credit for originating all of the teachings mentioned above.

PRE MARKET GAMEPLAN
Playing Detective

As mentioned, now is the time to analyse which stocks have exhibited the greatest resilience during yesterday's market downturn.

How to do this

1. Moving averages: Seek out stocks that have maintained their positions above their daily 10, 20, and 50-EMAs, and/or weekly 10 and 20-EMAs. This indicates that buyers are actively defending these levels, signalling continued belief in the stock despite the prevailing downward pressure in the market.

2. Fundamentals: While the strongest momentum stocks may occasionally experience surges due to factors like supply and demand dynamics (as seen with AMC & GME short squeeze), the majority typically require a catalyst to ascend. In nine out of ten cases, this catalyst is an uptick in the company's revenue and earnings per share (EPS). Focus on identifying stocks exhibiting exponential improvements in their sales, and monitor them closely for potential opportunities.

3. Absolute & relative momentum: During the next bull cycle, the market leaders will likely have demonstrated a significant prior move from their previous cycle's stage 1 base. Therefore, it's crucial to analyse which stocks exhibited the strongest momentum in the previous cycle, both in absolute terms (individual percentage increase of move) and relative to other stocks within the same sector, particularly during market downturns.

Putting all these factors together will ensure that you are well-equipped to identify potential market leaders for the next bull cycle. By analyzing moving averages for signs of buyer confidence, evaluating fundamentals for sustained growth potential, and considering both absolute and relative momentum from previous cycles, you can effectively position yourself to capitalize on emerging opportunities and navigate market downturns with greater insight and confidence.

WATCHLIST
Our Market Leaders

SMCI: Super Micro Computers, Inc.

• Unsurprisingly, SMCI has once again managed to maintain its position above the daily 50-EMA, marking the second instance of touching it.

• We're keeping a close eye on SMCI to observe whether it can sustain this level of support and if buyers will continue to defend it, ideally prompting a sideways movement.

OSCR: OSCAR Health, Inc.

• OSCR appears to be a standout on our watchlists, one of the few stocks maintaining positions above all three key moving averages (daily 10, 20, and 50-EMAs).

• Healthcare stocks often exhibit lower correlation with overall market direction, though it's typically not advisable to trade them aggressively during such times. We're closely monitoring OSCR to observe its ability to sustain this level and continue building a solid base.

GCT: GigaCloud Technology Inc

• This stock is showing significant strength as it constructs a multi-week base with higher lows, maintaining positions above all key moving averages.

• With exceptional revenue and EPS growth in recent years, it stands out as a true market leader, exhibiting substantial relative strength alongside high volatility. It's a compelling contender for potential inclusion in the next bull cycle.