Hi Folks,
I just wanted to make a step by step educational guide on a new short term swing trade that I made over the past 2 trading days. I entered this trade on 08-25-2023 and closed it out and booked profits the following Monday 08-28-2023. I think this is a trade worthy of a review especially since its been a very frustrating August for most traders!
In this step by step trade review we will cover everything from:
Spotting the initial setup
What made the setup an ideal short term swing trade candidate
The how and why of the entry and exit
How you can apply the same strategy to your own trades
lets get started on the review!
In our last educational blog post we covered the Utilization of NYMO and NAMO to Spot High Probability Reversal Trades! and this explained how to spot the end stages of a short term trend in the market, highlighting oversold and overbought conditions to find high probability entries for reversal trades. That strategy is great for the initial bounce but after that the market can go through a drawn out stage of chop, whipsawing traders in every direction.
This is where this new blog post here fills that void! So after an initial bounce the market can go through a period of whipsaw, volatile action, while trying to establish a new trend. For the most part high probability trades will be few and far between during this period.
What I like to look for is relative strength! In addition to this, reward becomes more favorable in relation to risk because many of these relative strength stocks have now drifted into a more attractive price point after the market has pulled back.
What is relative strength?
In the simplest terms and in the context of this guide, a relative strength leading stock is a stock that is clearly outperforming the market on a short term daily basis. It is made especially apparent on days in which the market closes down red and the relative strength leading stock closes with strength in positive territory on the day.
How can I scan for relative strength?
I like to use Finviz. This is the "screener" tab. To sort stocks by performance on the day simply click the "Change" column and it will sort highest / lowest.
Additionally to quickly visualize performance by sector you can visit the Finviz Maps page to see performance of individual stocks sorted by sector and sized by weight.
Ok, now that I know how to scan for relative strength what sort of stocks would make an ideal candidate on a watchlist?
Your ideal candidates should meet a basic criteria to be potentially tradeable:
The stock is in a clearly defined longer term uptrend
The stock trades more then 1 million shares a day (liquidity)
The stock has a market capitalization of 5 billion or greater
The stock price is $10 or greater
Technology sector stocks are usually the best candidates. All of these criteria can be filtered on the Finviz Screener page!
The particular stock that I used for my recent relative strength trade was $CVNA. It met the above checklist as an ideal candidate but it also had one VERY IMPORTANT additional attribute that should not be ignored! Over 36% short interest! With short interest this high it also makes the stock a short squeeze candidate. Almost a perfect storm for a relative strength play shortly after a market has put a short term "bottom" in!
Ok, perfect! How did you trade the setup?
I first started stalking the setup when I noticed $CVNA was showing signs of relative strength shortly after NYMO and NAMO had bottomed and the market started the reversal process. What was particularly interesting was the ability for the stock to hold both support and resistance while the market chopped relentlessly, and although $CVNA traded a wide 10% daily range it did so in uniform fashion outside of what the market was doing each day.
Here was my first tweet making note of the pattern on August 23rd:
I tweeted Art of Trading private members at the same time too so they could follow along with the setup! At this point I'm just taking note of the setup as the indices maneuver around their oversold condition. It is particularly important to be patient with new setups around this time!
On August 24th $CVNA sold down with the market and the R2G setup didn't pan out. I continued to keep a watchful eye on the setup as it developed though!
On August 25th $CVNA started flexing its strength throughout the day once again. I made quick note of the to Art of Trading private members! A very notable attribute on top of the relative strength on Friday was the previous days close. $CVNA closed above the previous day low where as on the same day the market traded well below its previous day low.
Clear relative strength attributes!
I tweeted this:
Shortly after I decided to take the stock long.
I tweeted the alert out to Art of Trading private members!
Monday August 28th arrives and $CVNA gaps up at the open! A gap up open isn't an ideal scenario. I'd rather see a gap down red open that goes green (R2G), its easier to manage. Gap up opens often sell down to fill the gap then reverse higher intra-day. Knowing this I didn't want to give a 5% gain for nothing and knowing how wide of a range $CVNA trades each day I thought it would be best to book a little. So I took half the trade off on the opening gap up Monday morning.
I tweeted this:
$CVNA quickly found more relative strength within the first 2 hours of the trading session! I noted this with this tweet here:
As the day progressed and indices chopped tirelessly up and down I decided it would probably be best to book the second half of the trade, knowing that $CVNA could easily trade back through the daily range. In volatile tapes, especially with quick trades like this its important to book gains quickly instead of wishing you did later.
After this trade was all said and done it produced a 10% return from the entry on Friday afternoon into the scaled out exit Monday afternoon. The stock probably has some more room to run here but its a tough sell in this current environment! I'm satisficed with the short term performance on this trade.
As I mentioned earlier in this post, $CVNA with its extreme short interest makes it a potential short squeeze candidate. The daily price range this stock trades through could be attributed to that too. If you're interested in learning more about how short squeezes work and how I rank them with my personalized chart check this post out here:
Be sure to check out the Art of Trading Blog ( https://www.artoftrading.net/blog ) and all that it has to offer! I've created an extensive catalog of real world trading techniques, strategies and reviews such as this one! The free educational content can add a lot to your trading tool box and make you a more confident trader!