Swing Trade Setups & Scans

I often get asked about how I find swing trade candidates. Hopefully this post will answer those questions. As I’ve written before, most of the stocks I track initially came up on one of my candlestick pattern scans. (Please feel free to search the archives and/or use the subject index) My process is no different today than it was in November 2004 when I wrote that post. My entry and exit rules are also the same as I’ve previously stated — for longs entries are typically above the previous day’s highs with a stop below the previous days low or some other support level on the chart. So instead of writing all of that again I’ll give a few examples here.

Typically (for longs) what I’m looking for is a buyable pullback to support. That support may be a trendline, moving average, multiple moving averages, straight line support, gap support, a Bollinger Band touch, etc. When I scan for reversal candlestick patterns I take note of the ones that are near one of those forms of support. And oversold stochastic is always a nice plus. (Reverse everything I just said for shorts.)

I caught a couple of big winners today in stocks that were on my swing list. Obviously they don’t always work out this well. First is Novellus (NVLS). I began tracking NVLS by adding it to my TeleChart watchlist after that first gap in January. Had I missed the gap during the day I would have found it when I ran my %b scan, which finds stocks outside of their Bollinger Bands. The stock gave one of my favorite setups a couple of days later as it bounced off of the top of the gap. But since earnings were around the corner I wouldn’t have entered a swing trade then (but that’s just me). So as you see it gapped up post-earnings and was once again above the upper Bollinger Band. Once again I noted it in TeleChart and just kept watching it daily, waiting for an entry point.

I’ve circled a couple of hammers on the chart that may have given small gains if one managed their stops effectively. Over the last week NVLS kept popping up in various scans of mine — doji, NR7, 50-day moving average cross. Noting that it might rebound over the 50 DMA, that it closed the first January gap and it gave a stochastic buy signal I made sure to set an alert for NVLS. I would have taken the entry yesterday if the overall market wasn’t so weak.

The case of Lam Research (LRCX) is similar to NVLS. It also gapped up, above its upper Bollinger Band post-earnings. I’ve been tracking it ever since. It gave a nice entry two days later as it made that harami cross right at the top of the gap. Stocks that are showing this kind of strength will often walk up their upper Bollinger Bands just as LRCX did for the next 4 days. So anyway, fast forward to the end of January and you see that it made a doji (caught by my doji scan) right on the support from the earnings gap and just above the 50-day moving average. (hmm) Yesterday it made a bullish engulfing (double hmm!)

I missed CYMI today for a day trade since I didn’t see an entry I liked after 10:30 (I was waiting for th oil report before I began trading today) but it’s similar to the previous two examples:

Here’s RACK, which I bought in my IRA a couple of weeks ago. Same old boring story, a strong, trending stock that pulls back and makes bullish candles:

Duru pointed out WIRE to me today as he marveled at how it regained its post-earnings highs. Somehow this one got past me but if I was paying attention I would have caught that hammer-like candle after the earnings gap:

There are a lot more examples in the archives. Other than the ‘chart requests’, almost all of the posts in the Chart Reading category contain examples of stocks that I found via my scans.

I also get asked for my actual scans [Telechart calls them Personal Criteria Formulas (PCFs)]. If you have TeleChart you can download the scans from my server. Be careful when you do the import though. TeleChart will ask you which parts of that file you want to import. You probably only want to import the scans. If you import that entire file you’ll wipe out your tab settings. So you may want to back up your setting before importing.

Of those scans the ones I use the most are:

  • %b – I look at values below zero, around 0.5 and above 1.0 to find stocks around their lower, middle or upper Bollinger Bands, respectively.
  • The first 9 candlestick PCFs. You may want to tweak the formulas. I use 5 day extremes to define the candles. For example, a candle with the shape of a hammer has to make (at least) a 5-day low in order to show up in the scan results. A shooting star would have to make (at least) a 5-day high…
  • NR5 – Narrowest range in 5 days
  • NR7 – Narrowest range in 7 days
  • Recent New High – stocks which have made a new 52-week high (250 days) in the last 10 days. Often catches pullbacks from new highs.
  • Swing High 2 and 3 – stocks which have made a new monthly high (21 days) and have made 2 or 3 lower highs.
  • Swing Low 2 and 3 – stocks which have made a new monthly low (21 days) and have made 2 or 3 higher lows.

Comments

  1. Posted by jason on March 2, 2006 at 1:36 am

    Nice article Michael!

    Curious, are you playing the stock, the option, both, or all of the above depending on situation?

    Currently I am in a position that is concluding a wedge and has used it’s open and close to fill the wedge perfectly (of course with some intraday wicks above the trend-lines). I never saw one paint the wedge like it before. It has about 2 more days before breakout or breakdown. I am leveraged with calls on the breakout, not hedged or initiating position in the underlying.

  2. Posted by Ken on March 2, 2006 at 2:41 am

    Mike – Great post. Thanks for sharing your methodology and PCF’s. I’ve been a regular visitor to your site and will continue to be. You mentioned avoiding trading around earnings – do you do any kind of scanning for stocks that may be having positive (or negative) future earnings revisions for possible long or short setups? If so, are you doing this in Telechart? Thanks again.

    Ken

  3. Posted by Michael on March 2, 2006 at 7:46 am

    Jason, Just stocks — I’ve never traded an option in my life.

    Ken, No, I’m not doing any such scanning.

  4. Posted by Jamie on March 2, 2006 at 9:08 am

    Great post Mike. I’m printing this one, its a keeper.

  5. Posted by thetradingdigest on March 2, 2006 at 9:18 am

    Mike – Do you usually run your scans against the entire universe of symbols in telecharts, or a subset filtered on other criteria (volume, market capitalization, etc)?

  6. Posted by Michael on March 2, 2006 at 9:27 am

    Thanks Jamie.

    TradingDigest — I run the scans against what i call my universe of tradeable stocks. Right now that filter is set to Price > $15, 5 day average volume in the top 25% of all stocks and volatility in the top 75% of all stocks

  7. Posted by Drew on March 2, 2006 at 1:25 pm

    Mike – thanks for all the great info you make available. I’ve been investing for less than a year and have found you site very helpful.

    Regarding Telechart. I’m currently just using stockcharts.com to manage my charts but find it cumbersome in some areas. Do you think Telechart is the best or are there any other similar packages that may be worth looking at. Again, thanks.

  8. Posted by Michael on March 2, 2006 at 1:37 pm

    Drew,

    I haven’t used any other packages besides MetaStock in several years. MetaStock is good but I find it to be overkill for most of what I do (and it’s expensive). I’ve heard good things about IQCharts but I haven’t used it myself in a looong time. You may want to check the forums at Elite Trader to see what people are saying about various packages.

  9. Posted by Ken on March 2, 2006 at 11:54 pm

    Mike,

    I keep coming back to your site to learn how to trade. Thank you for sharing the information. I notice there are some black candles on your charts. Why are they in black? On the WIRE chart, why do you consider that candle a reversal candle? Do you consider it a hammer? And lastly, you mentioned that a doji or hamari cross at gap support is a sign of strength. Is this your own observation? or it’s a pattern from a book? Thanks!

    Ken

  10. Posted by paul on March 3, 2006 at 5:59 pm

    mike great post,you said you bought rack for your Ira where can I open up an Ira that lets me swing trade.

  11. Posted by Michael on March 6, 2006 at 9:25 am

    Paul,

    My IRA is at E*Trade. As far as I know you can (swing) trade stocks in any IRA account.