August ended with a stark reminder that we are still in a bear market with indexes stuck below their 200-day moving averages. But that doesn't mean you can't make some profits in a bear market rally by swing trading. Here's how we used IWM stock to take advantage of strength in the Russell 2000.
A Nearly 25% Gain In Russell 2000
When the stock market indexes put in a bottom in June (1), it wasn't immediately apparent that a strong rally was unfolding. The next few weeks saw the indexes remain below 50-day moving average lines in downtrends.
But the Russell 2000 distinguished itself by being the first index to cross above its 50-day line early in July (2). Since we had low exposure and a large gap of outperformance on SwingTrader, we added the iShares Russell 2000 ETF.
If the rally worked, our low exposure would likely lead to underperformance. The Russell 2000 trade would help offset that.
If the rally didn't work, our low exposure would increase our gap of outperformance.
We often will go with a leveraged market ETF to get a larger increase in exposure. The ProShares Ultra Russell 2000 ETF offers twice the gains (or losses) of IWM stock. But the stock market is contending with the overhang of inflation and Fed rate hikes, recession fears and a long way to go to overcome resistance. So, we went with the lower risk trade.
Later in the week, when IWM stock showed a downside reversal on an outside day (3), the non-leveraged position helped us weather the storm. It was a manageable loss with a 1.6% drop that day challenging near-term lows. A leveraged ETF might not have been so easy to hold.
Taking Profits In IWM Stock
After weathering the initial storm, the Russell 2000 made a steady climb over the next few weeks. As is typical with our swing trading strategy, we took profits along the way. Our first third came off with a 5% gain (4).
Our second third exited when we gapped up to a 10% gain from our entry early in the trading session (5). However, we started to get a little cautious since we saw a downside reversal that day after coming close to the 200-day line.
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Everything seemed fine, though, as the Russell 2000 surpassed its 200-day line and started to hold above it (6). But it was also getting pretty extended from its 50-day line at that point. As a result, we didn't give IWM stock much room and removed our final position when the Russell 2000 crossed below its 5- and 200-day moving average lines (7).
Going The Other Way
We try to keep our swing trading nimble and with the 200-day line acting, once again, as definitive resistance we went the other way. Since the Nasdaq 100 actually had a stronger move up than the Russell 2000, we switched instruments to go short the market after the indexes fell below their 10-day lines (8). We chose the ProShares Ultrashort QQQ ETF, a double inverse ETF tied to the performance of the Nasdaq 100 to profit should the market go down.
Although it was a good time to go short, it still wasn't an easy hold. Headlines continue make larger moves and now we've returned to our low exposure. It's better to wait for new swing trading opportunities than to try and aggressively make money in a stock market that can't hold a trend for more than a few weeks.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
