When you are building positions over time, incremental moves are a good way to go. You use the feedback from your trades and market indexes like the Nasdaq to determine if you go heavier or lighter.
With swing trading, sometimes those decisions get condensed in a shorter amount of time. You may have to get more aggressive when you see an opportunity. But it also means you can't hesitate if the market breaks expectations.
The Invesco QQQ ETF provides a good roadmap for our recent decisions.
Shot Across The Bow With Downside Reversal
As stocks got extended in this rally, we were naturally decreasing exposure on SwingTrader. But by taking profits into strength, we found fewer setups to replace our reduced exposure. That worked in our favor as a downside reversal (1) on March 8 seemed to be a shot across the bow of rough waters ahead for market indexes.
The weakness was charting a normal path as it came down just below the 21-day moving average (2).
The 21-day line has been providing a level of support for QQQ as well as the Nasdaq composite since the rally started in Nov. 1. The question became, would the line provide support again? As QQQ hit new highs (3), the answer seemed to be yes. As a result, we ramped up exposure.
But it wasn't just in technology stocks. The downtrend in the relative strength line showed that the S&P 500 was outperforming the Nasdaq 100 and the Nasdaq composite. Indeed, the S&P 500 made new highs at the end of March, giving further reason to ramp up exposure.
Setting The Guardrails On The Nasdaq 100
While the Nasdaq 100 held up well enough, April 4 was another day that sticks out on the chart (4). An outside day with a wider spread than we had in a while created some guardrails at the high and low of the day. Over the next few trading days, the indexes stayed within that range.
A break one way or the other could be meaningful. The low of the range coincided with the 50-day moving average line for the indexes.
The day of strength we were looking for came on April 11, and the action of leading stocks led to a big increase in exposure (5). As many stocks offered setups with bounces at moving average lines and areas of support, we took the chance to increase exposure in a big way. Waiting risked having stocks get away from us and become extended.
We tried keeping our entries more precise and, because it was early in the bounce with a lot of reversals, we had stop losses with lower risk. We chose stocks with lower volatility, including index ETFs like QQQ.
Be Willing To Reverse Course
As swift as our action was to increase exposure on April 11, we had to quickly reverse ourselves the next day (6). Why? It was an expectation breaker.
Given the bounces and strength of the day before, the expectation was for either a follow-up move or at least holding the gains. Leading stocks and indexes didn't do that. Many of our stops triggered quickly, the S&P 500 undercut our guardrail set on April 4, and that required swift action.
It's not a mistake to ramp up exposure when things are moving well. But it would have been a big mistake to not move in the other direction when the indexes and stocks broke expectations. That was confirmed just one trading day later as the indexes sliced through their 50-day lines (7). An unwillingness to recognize the change would have been costly.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
