If you are like most new traders, your New Year’s Resolution probably has a “new” set of rules or strategies. One simple strategy is covered in this post, which should answer a lot of questions and solve a lot of issues with your trading.
Summary
The 21d Moving Average Strategy
When we look at a chart we should see several key characteristics.
First and foremost, we should see price action above or below the 21d moving average. If price action is above we assume a bullish trade or bias; if price action is below we assume a bearish trade or bias.
Apple has been trending above its 21d moving average since June. Retests of the 21d are bought for the most part and RSI has spent most of its time above the 50 zone. Buying the pullbacks to support (21d) once price action confirms with a bullish “follow-through” day is best.
Here’s another example of the same strategy with more information that we look for in a swing trade entry.
Hovnanian Enterprises Inc. (HOV) exemplifies the strategy, bullish above the 21d, bearish below the 21d. We also see cycles or phases.
Phase I starts the accumulation or basing action when institutions begin buying shares in August, halting the downtrend.
The breakout on volume starts Phase II, as the bullish trend starts to unfold. This phase is also known as the “markup” phase.
Phase III distribution either leads to Phase IV “markdown” with price dropping below the 21d or some catalyst starts a new leg higher and continuation of Phase II “markup.” HOV is waiting for a catalyst.
Note when RSI trends above and below the 50 zone. In addition, when RSI is above 70 and dark green it is said to have “muscle.”
Many traders think of anything above 70 as overbought and a reason to sell immediately. Unfortunately, this does not allow for nuance, as “muscle” also notes an extremely strong trend and a reason to be patient with long positions.
RSI is a “bound” indicator. This means it cannot exceed its bounds or extremes and rather than sell a “muscle” signal immediately, it pays to refer to the 21d strategy. Skilled traders will sell part of their position and tighten stops on the remaining shares.
21d Strategy – Buy the Pullback
We should look for new entry opportunities if buyers show up. We can confirm that they are buying on a test or pullback to the 9ema, in an extremely strong trend, and the 21d after a bullish candle form. Volume should increase, confirming the presence of institutions.
Luckin Coffee is another example. What Phase is it in now?
Buyers keep stepping up on pullbacks to the 9ema most recently after the 21d test in the second week of December. We are bullish as volume shows institutions are more active.
CHWY Above the 21d
CHWY was a recent trade and one in which we were focused on the beginning of a new trend. We waited until price action was above the 9ema and then confirmed when the 9ema rose above the 21d. This action starts Phase II “markup”.
CHWY broke out on volume while RSI pushed back above the 50 zone. MACD is above its signal line and rising. We are bullish, so we will buy pullbacks met with an increase in bullish activity. Tuesday saw buyers step up at the 9ema, so a continuation from this level should be a great entry or place to add to longs. Stop under the 9ema.
Gold and the 21d Strategy
Gold was a recent bullish trade and another example of this 21d strategy. Note the bullish trend or Phase II “markup” until its peak in late August. There is a slight pause at 52-week highs as “distribution” slows price action, eventually leading to Phase IV “markdown” and consolidation of the previous gains over 16 weeks.
Phase IV “markdown” is characterized by RSI below 50. Price action spends most of its time below the 21d moving average. Now that price action has broken out of this pattern, note how RSI confirms as it rises and remains above 50. All of your indicators are based on price.
INTC 21d and VWAP Intraday
We’ll reference Intel below, for an intraday strategy. We’ll add VWAP.
First, we need to check the daily time frame. We confirm that the stock is trading above the 9/21d moving averages for a bullish setup. RSI is above 50, and its bullish MACD is trending above its signal line.
VWAP Intraday Entry Setup
“The volume weighted average price (VWAP) is a trading benchmark used by traders that gives the average price a security has traded at throughout the day, based on both volume and price. It is important because it provides traders with insight into both the trend and value of a security.” – Investopedia
Second, we watch for price to stay above VWAP after the Opening Range is complete, around 10:00 ~ 10:15 AM. The significance of waiting is this gives VWAP time to mature. We also know that institutions and professional traders make their presence known at this time. If price action is above VWAP and rising we can assume a bullish bias. In this example we also have RSI oversold and triggering as it moves from oversold through 30.
Price action gapped down on earnings, then immediately moves above VWAP during the first 30 minutes (Opening Range).
Third, we watch relative volume (RVOL) intraday comparing the volume to previous days. INTC showed above-average volume by comparison.
ABCD Pattern Plus VWAP
Finally, the strongest setups usually trace out a familiar pattern as price rises above VWAP. Relative volume becomes noticeable and price action frequently traces out ab ABCD pattern intraday.
Morning traders are active as volume surges in the period before lunch, tracing out the first leg of the pattern up to “A” and peaking as these same traders take the rest of the day off or go to lunch. In addition, very strong stocks push VWAP’s slope upward with it’s price sometimes pulling back and then bouncing as professional traders support the bullish trend.
When we miss the first leg, a second opportunity usually presents itself at the “BC” pivots during lunch, as New York traders start buying followed by Chicago area traders an hour later. Very bullish stocks often then see West Coast traders come in during the late stages of the day at “D.”
Stocks that end the day in the upper half of its daily range are considered for a swing.
In the INTC case, all criteria are met, early in the trading day.
Over the next few days, analyze your recent trades.
- Was price above the 21d? Or was price below the 21d?
- Where did you buy? Near the 9ema or 21d?
- Or did you buy with price action too extended?
- What phase was the stock conveying?
- Did you enter with the price above VWAP?
- Was RVOL greater than the day before?
Summary
- If the price is above the 21d we will look for bullish trades
- if the price is below the 21d we will look for bearish trades
- Look for new entries on a pullback to the 9ema, 21d or support
- In strong trends, look for entries at the 9ema. HOV example
- Confirm the next day with a bullish follow-through day
- Follow the trend and use proper money management
Intel (INTC) exhibits all criteria we look for in a potential long setup.
- Price above 9/21d
- MACD above signal or crossing bullish (RSI > 50)
- Price “opens” and remains above VWAP
- ABCD pattern holds
- Price closes in upper half of daily range
Bearish setups are the exact opposite, with price below the 9/21d, MACD dropping with price below VWAP.
A note on stops. If your entry is working using the above strategies, and you are “day trading” with no intention of swinging the position, watch for topping candles at the “A” pivot. If you hold through “BC” pivots, a loss of VWAP can be used as a stop.
Moves back above VWAP are common, so re-entry is fine once the stock starts building higher lows when it transitions back above VWAP.
For now, exercise these strategies and consider joining us today in the trading room for our LIVESTREAM broadcast
during market hours, as we navigate the current environment. Watch, listen and trade from 9:20 AM to 4:15 PM Monday through Friday.
Happy Trading in 2020,
Vinny
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