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The Harmonics Of Trading

Swingly Exposure Status: Moderate Risk 

OVERVIEW
The Market Cycle

The Wyckoff Market Cycle presents a roadmap for identifying trends and making informed trading decisions. This cycle comprises four distinct phases, each offering valuable insights into market sentiment and potential price action:

Wyckoff’s Logic Price Cycle

Accumulation

In the accumulation phase, “smart money” accumulates shares of an asset at lower prices. Swing traders keen on spotting potential reversals or trend continuations look for signs of price consolidation and relatively low volume.

This is precisely why, at Swingly, we emphasise the importance of focusing on high relative (RS) strength stocks that ride the moving averages. This is indicative of institutional accumulation during market downturns.

Markup

As accumulation concludes, the market enters the markup phase. This stage is characterized by sustained upward price movement, accompanied by increasing volume. As swing traders, we aim to capitalize on this shift in the momentum trend by entering long positions aggressively in high relative strength (RS) growth stocks as prices trend higher. We then look to add on subsequent pullbacks or at low-risk secondary and tertiary entry points.

Distribution

Once prices reach significant highs, smart money begins to distribute their accumulated holdings to less informed and less aware traders. The distribution phase often sees increased volatility and a tightening of the trading range. Swing traders adept at spotting signs of distribution may consider scaling back long positions or even initiating short positions to profit from potential reversals.

Markdown

In the markdown phase, the market experiences a downtrend as supply overwhelms demand. Prices decline, often accompanied by panic selling and heightened volatility. Swing traders with a keen eye for trend reversals may look for opportunities to enter short positions or wait patiently for the next accumulation phase to begin anew.

Kell’s Cycle of Price Action (daily 10 & 20 EMAs displayed as blue and red lines)

When a stock or any market security reaches its peak, it transitions into a downtrend and eventually bottoms out, following these steps:

1. Exhaustion Extension

2. Bear Flag Breakdown

3. EMA Crossback

4. Formation of a New Base and Subsequent Base Break

5. Reversal Extension

Conversely, when a stock or market security hits bottom, it enters an uptrend and eventually reaches its peak, following these steps:

1. Reversal Extension

2. Bull Flag Breakout

3. EMA Crossback

4. Formation of a New Base and Subsequent Base Break

5. Exhaustion Extension

To ascend in the trading world, a deep understanding of market cycles is critical. What makes swing trading so addicting is the perpetual repetition of market cycles. We truly suggest to everyone, go look at thousands of historical charts spanning decades, and you'll witness the same patterns playing out time and again.

The Timeless Repetition of Market Cycles

The market's cyclical nature is a constant, a reassuring reality amidst the ever-shifting tides of bombardment of fear mongering economic news. Each cycle echoes its predecessor, offering predictable insights into future market movements. From bull markets to bear markets, from accumulation to distribution, the patterns persist, inviting swing traders to learn their secrets.

The Power of Personal Agency

Amidst this repetition of cycles lies a profound truth: mastery rests in your hands. Embrace the cycle, internalise its rhythms, and wield its power to your advantage. Memorise its intricacies, dissect its nuances, and find the not-so-hidden opportunities for arbitrage. With each cycle, you'll uncover several low-risk, high-probability trades that you wouldn’t have noticed before taking your trading career to new heights.

Charting Your Path to Mastery

As you embark on this journey of understanding, study the past trades that you could have been involved in, dissecting them with a detailed eye. Reflect on what you missed and why you missed the trade, see if you can come up with innovative strategies to capitalize on the next time this trade appears again. With each hour, you will inch closer to mastery, honing your skills and refining your craft with unwavering determination.

We aren't exaggerating when we say it takes thousands of hours to develop your pattern recognition skills to a level where you can not only identify the right setups but also comprehend the overall market climate. This includes recognising when these setups are likely to be effective, along with understanding the underlying fundamental reasons for the fluctuations in prices.

Mastery is not a distant dream but a tangible reality within reach. By embracing the eternal dance of market cycles, you unlock the keys to profitability and success. Build up the power of understanding, and let the timeless rhythms of the market guide your journey.

TODAY’S OUTLOOK
Contained & Expected

Large Caps

The QQQ currently sits below its weekly 10-EMA, with the nearest daily support level at approximately $424, which coincides with its weekly 20-EMA. The daily chart presents a notably harsh picture, showing a rapid almost 3% decline over two trading sessions, surpassing twice its average daily range (ADR).

QQQ Weekly Chart

While estimating market movements, a task no swing trader should dwell on excessively, much of the recent intense selling pressure is attributed to last week's bearish CPI data. Powell's remarks at yesterday's meeting echoed the sentiment, acknowledging the ongoing challenges in addressing inflation concerns, as underscored by CNBC. Despite this, Powell highlighted the economy's resilience and hinted at the Federal Open Market Committee's readiness to maintain current monetary policy restrictions until clearer signs of inflation easing emerge.

In yesterday's discussion, we emphasised our relief at the sharp market pullback, a sentiment we maintain. We prefer a swift correction over a prolonged, nerve-wracking four-month bear market.

IWM Daily Chart

Small Caps

The Russell 2000's IWM is undergoing a similar trend, though it has found support around the key level we identified yesterday. The rising daily 200-EMA presents a hopeful opportunity for a rebound or a potential short-term relief rally. Anticipating further decline, we foresee the IWM descending to the $191 level, aligning neatly with both the daily 200-EMA and the weekly 50-EMA.

IWM Monthly Chart

An important aspect to consider is the positioning of the IWM on the longer-term monthly chart.

Currently, it's at a significant juncture, finding support on its monthly 10-EMA, where ideally buyers will step in to defend. Previous instances of touching this point have resulted in upward momentum, with buyers consistently supporting these levels. This history provides a reason for optimism.

PSYCHOLOGY
Zen & The Art of Profitable Trading

Maslow's Hierarchy of Needs is a psychological theory proposed by Abraham Maslow in 1943, outlining the five-tier model of human needs. This framework suggests that people are motivated to fulfil basic needs before progressing to higher-level needs.

Maslow’s Hierarchy of Needs

Low resolution

For us traders and in an overarching way, the Maslow Hierarchy of Needs translates as follows:

  1. Physiological Needs: We prioritise financial security, ensuring we can cover living expenses and manage debt before diving into trading.

  2. Safety Needs: Risk management and capital preservation are paramount for us to navigate the volatile trading environment safely.

  3. Love and Belongingness Needs: We seek connection and support in trading communities, forums, and workshops to fulfil our need for camaraderie and belonging.

  4. Esteem Needs: Consistent profitability and mastering market analysis fulfil our esteem needs as we strive for recognition and respect within the trading community.

  5. Self-Actualization Needs: We aim for continuous learning and skill development, striving to reach our full potential and achieve long-term financial goals.

High resolution

Similar to constructing a sturdy building, the foundation of profitable trading must be solid. Before progressing up the hierarchy of trading mastery (developed by Asym Trading), traders must ensure that every layer, from the base of risk management to advanced strategies, is firmly established. This encompasses mastering foundational elements such as trade expectancy, general risk management, and, most importantly, emotional control.

Progress is not a linear path but rather a gradual ascent, akin to climbing up a mountain. Each step forward builds upon the knowledge and experience gained from previous stages. It's a journey of continuous growth and learning, where traders refine their skills and adapt to evolving market conditions.

PRE MARKET GAMEPLAN
Don’t Get too Bearish

bear

Despite the recent downward trend in the market, we're attempting to maintain a cautious outlook, recognising that the last three consecutive weeks have been marked by declines, resulting in many stocks being significantly affected.

However, amidst this sea of red, there are notable market leaders displaying exceptional strength. Some of these stocks are forming perfect multi-week bases, with a few even breaking out of their established ranges. This resilience amidst broader market turmoil is noteworthy and suggests potential opportunities for those stocks exhibiting such strength.

What does this mean

Market-leading stocks often serve as indicators of future market trends. If we observe these leaders moving upwards and sustaining momentum, we may consider cautiously exploring the possibility of a potential, albeit possibly short-lived, relief rally.

It's important to recognise that just as things don't ascend indefinitely, neither do they plummet endlessly. The market's digestion of recent events has unfolded over the course of several months, rather than merely a few days. The recent downturn has likely been expedited by the pessimistic outlook on interest rate cuts and the release of CPI data.

Stocks often depreciate in value swiftly and aggressively, characterised by rapid declines. Conversely, when stocks rise, they typically do so over an extended period, with less volatility on a single day. Upward movements often unfold gradually, while downward movements tend to be more abrupt but shallow, occurring rapidly.

Wyckoff’s Logic Price Cycle

We'll maintain a moderate risk stance today, but with a more defensively leaning exposure. Upon reviewing the chart above and comparing it with the daily QQQ and IWM charts, we estimate that we may be at a point where a low-volume rally could occur. While it's not yet an ideal time to scale into positions, we observe several market leaders with setups, and some are even attempting to break their bases. Given the sharpness of this sell-off, a short-term relief rally seems likely.

QQQ Daily Chart

IWM Daily Chart

We'll closely monitor for any signs of a potential reversal in the trend. Specifically, we'll pay close attention to how stocks with the strongest relative strength compared to the overall market perform. If these stocks begin to move higher, breaking above established ranges, we'll observe whether there is sustained follow-through in their upward movement.

These observations will offer valuable insights into the market's potential direction and could prompt us to start adding exposure. However, we'll exercise caution by initially adding positions at half to a quarter of our usual size. This approach allows us to gradually increase our exposure while managing risk effectively in a still very much turbulent market environment.

WATCHLIST
Our Market Leaders

SMCI: Super Micro Computers, Inc.

SMCI Daily Chart

  • As we've been discussing for several days, SMCI remains a powerhouse in the market. Yesterday, it showcased remarkable support and even hinted at a breakout.

  • Despite the overall heightened volatility and bearish sentiment, we refrained from initiating any long exposure to SMCI. However, it's important to note its remarkable relative strength, solidifying its position as a definite market leader.

DAVE: Dave Inc

DAVE Daily Chart

  • DAVE has managed to find support on its rising support line, indicating a certain degree of stability. While it would have been preferable for DAVE to maintain its moving averages, it remains a market leader nonetheless.

  • It's worth noting that DAVE is a highly volatile growth stock, characterised by exponential revenue growth and the potential for explosive moves.

OSCR: OSCAR Health, Inc

OSCR Daily Chart

  • This stock is demonstrating remarkable strength, even breaking out above a price consolidation that has lasted for several weeks.

  • Regarding OSCAR, we recently talked about its negative correlation to the broader market. Being a health stock, particularly in biotech and related sectors, it tends to be less affected by overall market conditions.

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