Chart Advisor: A Swing Trader’s Paradise

By Trent J. Smalley, CMT

1/ PTON Pop

2/ $QURE Pop

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PTON Pop

Tonight’s post we will title “A Swing Trader’s Paradise”

Yesterday’s article was focused more on longer term holds using some simple tools to help you stay on the right side of the trend. Today, we are going to switch gears a bit and dig into my old swing trading bag of tricks. It has been years now since I have traded for my sole source of income, as I now spend my days managing portfolios for clients with longer term investment objectives. That doesn’t mean however, that I forgot all my old tricks. I still have several setups that I use in attempt to generate some extra personal trading profits when time allows. One of those setups I am going to demonstrate here.

Similar to my chart layouts from a longer term perspective, I keep things as simple as possible. Very few indicators, very little clutter, and very simple (yet specific) setups. This particular trade is one I used to call “Pop, Float, Pop” in old trading rooms that I used to be a part of. More recently, I have seen them referred to as “Episodic Pivots” which sounds much better. Whatever you want to call them, they are effective and for my swing traders out there, you will want to be on the lookout for these.

To qualify, we need a few main criterion to be satisfied:

A: A gap up in price.

B: Substantial to extreme volume accompanying said gap up in price.

C: A “float” lower in price on decreasing volume back toward the original price level when the gap occurred.

In this first chart, we will use the recent pop in former pandemic darling Peloton to illustrate that the 3 criterion have been satisfied. It has been no secret that Peloton’s meteoric ascent during the dark days of the pandemic, followed by carnage in price ever since has been tumultuous. Keep in mind, we are in my swing trading bag of tricks today, and I have no opinion on Peloton as an investment. As for a trading setup, all three criteria are met. Nearly all gaps in price on major volume are due to some note worthy episode (hence the name Episodic Pivot). In this case, a better than expected earnings quarter was the match that lit the fuse. We have the earnings gap up, supported by much higher average volume. It is clear that the market was caught off guard, and positions had to be adjusted from both the long, and likely the short side.

Next, we wait patiently. I do not buy the initial gap, and I don’t chase. At this point, I simply take notice that two of our criterion for this strategy have been met and set an alert on my trading platform. If the stock continues ever higher without me, I don’t get involved. That is not my trade. I wait, sometimes days, sometimes weeks, and sometimes even months to see if my third objective is met which is for price to come back toward the gap up, and most importantly, on lower or quiet volume. As the saying goes, price has memory and in my experience extreme volume accompanying price has even better memory. Here we see that after the initial gap up on high volume, price meanders back toward the “pop point” on less substantial “sleepy” volume. Approximately a month later price has drifted from a recent high of $5.25 back toward $4.00 and that is where I look to get involved.

What I am banking on with these is that a decent sized fund is still trying to build a position back toward that “episode” where the story changed for the underlying business. Sometimes price nears the gap and pops, other times price drips back into the gap and pops, and sometimes the setup fails. You have to know what you want to risk on the trade, know where you want to be involved, set a limit order, and have a price objective in mind for where to take gains should your order be filled. When I traded full time I kept a stack of notecards on my desk, and for each trade I entered I had the setup detailed, and the objective outlined on the back in terms of profit target and stop loss. When trading for income you cannot afford to leave things to chance. That is called gambling and gamblers lose, almost without fail, over any extended period of time. If the trade “won” I put it in the win pile. If I lost on the trade and was stopped out, the notecard went in the loss pile. At the end of the month I had a stack of notecards in two piles and without even having to look at my P&L, I could tell if it was a good month based on the size of my win/loss notecard piles. Over time you start accumulate enough trades to know your win rate and loss rate, and then it is a matter of adjusting position size and profit and loss targets in order to make sure you have a winning system on your hands.

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$QURE Pop

I will give you one more example of an Episodic Pivot trade that I am actually currently in as of this post. Stock symbol $QURE, the company Uniqure NV. You will see these types of setups fairly often in biotech land due to the volatile nature of ongoing drug trials and FDA approvals. Once again, major gap up in price accompanied by major volume. Criterion 1 and 2 are satisfied and an alert is set should price drift back toward my level of interest. You will notice that on this particular setup I included one additional indicator called Volume Profile or Volume By Price. This simply charts a histogram where transactions have occurred, what price they occurred at, and with what amount of volume. Price will often spring board off of the high volume nodes shown in volume by price charts. This is an example of one that drifted further than I thought it would and nearly hit my stop loss. My entry price was on the 10th of September at $5.29 and my stop loss was set at $4.29. So I was quickly in the money on the trade and then began to take some heat. Neither my price target nor stop loss has yet been hit so the trade is still working.

A couple of final tips on these. If these setups are found in lower float stocks, that is like adding gas to the fire. If the name has a high short interest, even more gas to the fire. And, if the name has all three criterion satisfied above along with BOTH low float and high short interest… get in touch with me because I don’t want to miss it.

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Originally posted 24th October 2024

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