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Swing Trading A Sideways Market: Patience Pays

In response to the erratic, back & forth price action in the markets & most sectors over the last two months, I posted the following reply to a comment on how difficult it has been to make money lately with so many nice chart patterns that just don't seem to be playing out, including the XOP/GUSH short that triggered an entry back on April 29th, went on to quickly hit the first profit target for a 10%/30% gain, but then reversed shy of the 2nd & final target, trading sideways since then. My reply was:

I have some thoughts on that which I’ll share along with some charts here or on the front page as you bring up a good point that I believe warrants some discussion. Essentially, it comes down to patience. The market has been just as frustrating for me lately with so many nice short setups that started to play out nicely a couple of months ago but nearly all were hit with sudden rallies that ripped prices right back to where those patterns broke down or in most cases, just slightly above… very frustrating & hard to see coming in the charts IMO.
While one could certainly claim that the early May – early June rallies were a sign of the market’s strength & refusal to go down, not only did that rally put in consecutive, more power divergent highs but I sometimes it feels like most seem to miss the point that the US stock market topped about a year ago & despite the fact that just one of the major diversified indexes ($SPX) isn’t too far from that May 2015 peak, every other major diversified index: $COMPQ, $NDX, $RUT, $MID & even the $WLSH is still comfortably below their bull market highs, with the $RUT & $MID already well exceeding the 20% drop that defined a bear market & the $COMPQ coming within mere basis points of a 20% drop.
Back to my point, I’ll post a couple of charts that highlight how when swing trading, especially during a 2-year sideways/topping market, one must patiently wait for the few big swing-tradable uptrends & downtrends and that getting caught up in a sideways range, such as XOP has been in for the last two month, is just a part of the game. As much as I would have preferred to have avoided that sideways grind & held off on my GUSH short, I’m fine with sitting tight until the trade either hits my final & preferred target (T2) –OR– I’m stopped out –OR– something changes in the charts that convinces me that the R/R no longer warrants remaining short.

This first chart below is a 10-year weekly chart of the SPY highlighting the fact that the last 2 years has been marked by a large sideways trading range which appears to be a gradually topping process in the stock market.

SPY 10-year weekly June 21

SPY 10-year weekly June 21

When viewed on a longer-term chart, the 2-year period on this daily chart is simply a sideways-to-slightly lower trading range. While buy & hold investors have gone nowhere, there have been several lucrative swing trading opps on both the long side (green) and short side (red), all of which came suddenly following periods of choppy, unpredictable trading ranges (yellow), such as the last two months. My expectation is that it next lucrative swing trade opp is coming soon & will likely be to the downside. Should the charts convince me otherwise, I will do my best to recognize & communicate my change in market bias asap.

SPY 2-year daily June 21st

SPY 2-year daily June 21st

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Jun 21, 2016 3:22pm|Categories: Equity Market Analysis|Tags: , |11 Comments

11 Comments

  1. dan123 June 21, 2016 3:25 pm at 3:25 pm

    Great summary Randy, Thanks

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  2. GetItRiight June 21, 2016 3:35 pm at 3:35 pm

    Your point is understood, where the best trading opportunities come in the sudden market moves, however even in sideways trading ranges, we did have good looking opportunities in March and April, which played out to a much better ratio than what’s been presented to us since end of May.
    It’s like the powers to be are afraid to let go of the reins and let things unfold according to what the charts are showing. The overarching reason for this, in my opinion, is the election. Of course there are minor events that could prove risky for the US markets, like Brexit (can’t even think of another one that matters), but the one with the most effect on public opinion is the election in November. I’m thinking there is an agreement in place between the Fed and major market players to keep the calm in the markets until then, so they can avoid shining a light on how badly the economy performed during the last 8 years. If it’s the Democrats’ fault or not, is debatable, given how erratic the Congress behaves, but at least it will not hurt Hillary’s campaign if they can steer the public’s attention to other than the economy.

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  3. schooner June 21, 2016 3:58 pm at 3:58 pm

    Randy — thanks for your thoughts — this is definitely a market that has been frustrating for bulls and bears. You’ve done a great job of identifying some outstanding individual set ups, and you’ve nailed some excellent sector moves as well. It’s just a damn tough market and it does require a lot of patience, whether it’s giving swings some time and room, or re-entering short term trades time and time again. I appreciate all the hard work and insight that you continue to provide.

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  4. GetItRiight June 21, 2016 4:07 pm at 4:07 pm

    Just to echo @schooner ‘s comments, I appreciate the effort you put into teaching us and providing us this platform for sharing our ideas and experiences.. I personally learned a lot from you and the other members and applied a lot of that in my trading.
    My frustration comes from the fact that I am in some trades that were intended for shorter term and extended to 2 or 3 months already and am missing other, possibly more beneficial ones, with my capital tied up.
    This being my first few months of trading, I am allowing myself mentally a period of adjustment when I understand the losses might get bigger than expected, as long as they are offset by some gains as well. This latter part is the one lacking lately.

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    • rsotc June 21, 2016 4:58 pm at 4:58 pm

      Thx for that feedback @getitriight @schooner & @dan123 . I had planned to update the trades ideas last weekend, removed a couple which were already stopped out as well as removing any that just don’t look very compelling anymore in order to make room for some new setups but it turned out to be a busy weekend in which I had to leave town again. I’ll use the rest of this week & over the weekend looking for new setups & with the market still in grind-mode, I’m considering adding some setups with smaller than usual profit targets (single digit to low double digit percentage gains) but only if I can find any that look to have a very good shot of playing out. That will allow us to get a few winning trades under out belts & make a few bucks until this market starts trending (I’m referring to something more than the two 4-5% up & down micro-trends that we’ve had in the broad market since April 20th).
      I’ve learned that you can’t force trading just as you can’t squeeze blood from a stone. If the market just isn’t conducive to trading or I can’t find any compelling trade setups, I won’t post trade ideas just for the sake of posting new content. The next big swing trading opp is always around the corner & personally, I think this whole Brexit thing, although I realize the potential repercussions if it did pass, is simply a distraction away from the recent deterioration in corporate & economic fundamentals & the markets will likely turn back their focus to once the Brexit vote is behind us.
      On a somewhat related note, although the previous GDX/NUGT trade was stopped out when the suggested stop was exceeded on June 8th (and that trade will be officially removed from the Active Trade category soon), it still looks likely to make another run back down to the 22 area & quite possible the 21 area in the coming weeks. Always a volatile trade but one of the better looking (bearish) charts right now & if it weren’t for the fact that gold prices could explode, should the Brexit vote pass, I would have added it back as an official trade idea recently.

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  5. riverbirch June 21, 2016 6:33 pm at 6:33 pm

    Thanks Randy. One group which you might want to examine is the US Marine Transport Index. ($DJUSMT).
    KEX, GMT

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  6. Shambo June 21, 2016 9:29 pm at 9:29 pm

    Randy, I also very much appreciate your work. And the site. I’ve been quiet lately, trying to focus I guess. Yes, I don’t get the whole Brexit thing. I understand that an exit would be negative, but why would a remain vote send the market higher? That makes the whole thing a non-event.

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    • rsotc June 22, 2016 9:42 am at 9:42 am

      @shambo , Exactly. If the market had been steadily dropping over the last several weeks or months on worries of a YES vote, then one could reasonable assume that much or all of the risk of a Brexit has been priced in. However, as the market has rallied a very strong 16% off the mid-Fed lows & is current only slightly below the 2016 highs, Therefore, I think that it is safe to say the market has almost fully priced in a NO vote which leaves little upside if that proves to be the case but room for a tremendous drop if the polls are wrong & we get a YES vote.

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      • GetItRiight June 22, 2016 10:07 am at 10:07 am

        I remember in 2008, probably October, when TARP was voted in favour in Congress and Senate, everybody was expecting a ‘Yes, we are saved’ rally. Instead we got an ugly selloff. We might see the same thing here in case of Bremain. Market does the unexpected, when it functions properly.

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  7. snp June 22, 2016 3:10 am at 3:10 am

    @shambo-probably either result will be bullish simply in that the uncertainty is removed. the trend has been up. resumption of the trend.

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