Last week we talked about the anticipated Summer Rally that I’ve identified based on background information on the last 10 years of data between Memorial Day and July 4th.
As I mentioned, over the past years as we pushed through Memorial Day into mid-July, the US stock market got a nice little “lift.”
The reasons are varied, but generally this is because there is very little in the way of corporate earnings releases, and very few surprises coming out of Washington. And no news out of DC is great news for Wall Street.
I want to bring you up to date on what’s happened since last week, and give you the “skinny” on an “inside pattern” that delivered a juicy 63% return…
This Pattern “Swings”
Let’s start by taking a look at the SPDR S&P 500 ETF Trust (NYSEArca:SPY) chart from last week in detail, and see where we ended up through June 15.
This daily chart of the SPY tells me that in the last few months we have had a few pullbacks in the SPY.
But what catches my eyes is a short-term pattern I’ve identified in the chart that has a very good long-term track record.
It is what I refer to as a “swing” pattern. Basically what we are doing is looking to catch a falling stock before it rebounds…
And I look at pullbacks into 10-day lows as possible entry points.
In both May and June, we had this occurrence result in higher prices, but you have to act fast with a swing trade. Indeed, it’s a one-week trade at best, and the problem with trying to catch falling stocks is that you are at the mercy of any volatility in that stock.
Trading swing patterns in individual stocks is risky business, but with ETFs like the SPY you have diversity on your side.
So What Am I Doing?
I am looking for 10-day lows in index markets such as the DOW and S&P 500. That is my buy signal.
Now there is a lot more to the “swing” system, including what to do if the index keeps dropping, if and when to add to positions, and when to sell, but the foundation of the entries are 10-day lows.
So how good is the track record on catching a falling ETF like the SPY? Here’s a summary of the last six years of trades, which were backtested using a 10-day low.
So options not only play a role in lowering cost and risk, but when used properly, they also offer an exit strategy by forcing us to make quick decisions, and at the same time, keep within our trading plans when it comes to entry and exit timeframes.
Until next time,
Americas #1 Trader