Are you tired of watching stocks reclaim their 50-day moving average only to be left wondering when to buy? Do you find yourself paralyzed by indecision, fearing that you’ll miss out on the next big move or get caught in a fake-out? Well, fear not. In this swing trading strategy guide, you’ll discover a powerful technique that can help you identify the perfect entry point after a stock or cryptocurrency has broken its downtrend line and reclaimed its 50-day moving average. By mastering this strategy, you’ll be able to trade with confidence and precision, knowing that you’re getting in at the right time and with lower-risk buy points.
Hey traders, Rick Pedicelli here from Morpheus Trading Group. Are you tired of missing out on explosive moves in the stock market? Do you struggle to identify the perfect entry point after a stock breaks out? Well, buckle up, because today we’re diving into a powerful swing trading strategy that can help you catch those winning trades with lower risk.
This strategy focuses on exploiting a specific price movement after a stock breaks a downtrend and reclaims its 50-day moving average (MA). Imagine a stock that’s been on a downtrend for a while. Suddenly, it breaks free from that downtrend, surges higher, and reclaims its critical 50-day MA. This is a bullish sign, but how do you know the exact moment to jump in?
The answer lies in the magic of the 8-day exponential moving average (EMA). This strategy looks for a pullback in the stock price after it reclaims the 50-day MA, with the ideal entry point being the first touch of the 8-day EMA.
The Strategy: First Pullback to the 8-Day EMA
So, how do we buy a stock that’s reclaimed the 50-day EMA and is potentially building the right side of its base after a correction? We’re looking for a few key elements:
- Break of the Downtrend Line:
- Example: CLS Celestica breaks its downtrend line,
signaling the end of a bearish phase and the start of a potential new uptrend.
- Reclaiming the 50-Day EMA:
- The stock needs to reclaim the 50-day EMA, either on the same day as the downtrend break or within a few days.
- 8-Day EMA Crossing Above the 50-Day EMA:
- The 8-day EMA crossing above the 50-day EMA is a bullish signal, indicating short-term momentum is stronger than the longer-term trend.
4.First Pullback to the 8-Day EMA:
- After the initial surge, look for a pullback to the 8-day EMA, providing a low-risk buy point.
Why is the 8-day EMA so important?
The 8-day EMA is a shorter-term moving average that reacts more quickly to price changes than the 50-day MA. By waiting for the pullback to the 8-day EMA, we’re aiming to enter the trade at a point of support and potentially lower risk. This pullback can also be seen as a “shakeout” that discourages weaker hands from holding the stock.
The Crucial Role of the 200-day EMA (optional):
While not explicitly mentioned in the video, it’s important to consider the position of the 200-day EMA. Ideally, we want the entire setup (downtrend break, reclaim of 50-day MA, pullback to 8-day EMA) to occur above a rising 200-day EMA. This adds an extra layer of confirmation to the overall trend.
Key Considerations for the Strategy
- Avoid Extended Runs: Avoid buying the first touch of the 8-day EMA if it comes after an extended run without a pullback. The ideal scenario is a pullback after a short-term surge.
- Volatility and Stops: Depending on the stock’s volatility, consider using a stop-loss slightly below the 8-day EMA or a more conservative stop below the 20-day EMA or the 50-day EMA.
- Market Context: Ensure the stock is above a rising 200-day EMA. If the 200-day EMA is not rising or the stock is below it, the setup is less reliable.
Examples Make Perfect
Let’s take a look at some real-world examples to solidify this concept. We’ll dissect trades in Tesla (TSLA),and NVIDIA (NVDA), to illustrate both successful setups and those to avoid.
Tesla (TSLA)
- Downtrend Break: TSLA breaks its downtrend line.
- Reclaims 50-Day EMA: The stock surges above the 50-day EMA.
- EMA Cross: The 8-day EMA crosses above the 50-day EMA.
- Issue: The 200-day EMA is above the 50-day EMA, making it a no-go despite other bullish signals.
NVIDIA (NVDA)
- Downtrend Break: NVDA breaks its downtrend line.
- Reclaims 50-Day EMA: The stock surges above the 50-day EMA.
- EMA Cross: The 8-day EMA crosses above the 50-day EMA.
- First Pullback: The stock pulls back to the 8-day EMA, providing a low-risk entry.
- Outcome: NVDA holds above the 8-day EMA and continues higher.
Learning from Failures
Even the best setups can fail. For instance, NVDA had another setup in late 2023 that didn’t produce a winning trade. The stock wedged its way up without much separation from the 8-day EMA, leading to a failed pullback.
Additional Examples
Affirm (AFRM)
- Downtrend Break: AFRM breaks its downtrend line.
- Reclaims 50-Day EMA: The stock surges above the 50-day EMA.
- EMA Cross: The 8-day EMA crosses above the 50-day EMA.
- First Pullback: The stock pulls back to the 8-day EMA, providing a low-risk entry.
- Outcome: AFRM continues higher, validating the strategy.
MicroStrategy (MSTR)
- Downtrend Break: MSTR breaks its downtrend line.
- Reclaims 50-Day EMA: The stock surges above the 50-day EMA.
- EMA Cross: The 8-day EMA crosses above the 50-day EMA.
- First Pullback: The stock pulls back to the 8-day EMA, providing a low-risk entry.
- Outcome: MSTR, being highly volatile, offers a tricky but rewarding entry.
Key Takeaways
- This strategy offers a swing trading approach to capitalize on stocks emerging from downtrends.
- Look for a downtrend line break, reclaim of the 50-day MA, higher lows, and a pullback to the 8-day EMA.
- The quality of the pullback is crucial. A shallow pullback might not be a strong buying signal.
- Consider the position of the 200-day EMA for additional confirmation (ideally, above the 50-day EMA).
- Remember, no strategy is foolproof. Always practice proper risk management and continue honing your trading skills.
By waiting for this specific setup, you can increase your chances of getting in at the right time and maximizing your profits. But remember, no single strategy works 100% of the time. That’s why it’s crucial to continue educating yourself and expanding your trading toolkit.
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