In stock trading, the type of trade strategy employed depends heavily on the overall market trend. Trade setups for bull markets are vastly different as compared to bear markets. During strong bull markets, wherein the price is above MA200 and near 52 week highs, the approach is to go aggressive. During such conditions, prices will break key resistances due to heavy institutional buying. This is a stark contrast from bear markets wherein the price is below MA200 and near 52 week lows. During these conditions, the trade stance shifts more on the defensive end.
In this post, we will err to the side of the bulls and outline practical tips on how you can maximize your gain using momentum trade setups.
Ride the Trend until it Bends
A fresh bull market often emerges after a market has endured a steep crash. If the economy is resilient and the fundamentals are strong, the discounted levels will likely encourage institutional buying. When the buying gains momentum, the prices will often form a distinct uptrend pattern that paves the way for a new bull rally.
Riding a bull market is a play on emotions. Bounce setups and Buy-On-Support strategies will likely fail as prices continue to reach new highs. During a buying frenzy, there is little to no chance to enter at discounted prices. The market will leave bottom fishers behind as it surges to break key resistances.
The most efficient trade strategy during a bullish market is a Momentum Trade strategy. This is a trade setup that allows for aggressive positioning. The trick is to buy High and sell Higher while paying close attention to price action and volume.
Here are some momentum based techniques you can consider to help you ride that raging bull.
Momentum Trade Strategy (Buy Signal)
1. EMA9 - MA20 Bullish Crossover
EMA9 (green line) is a reliable measure of momentum. For stocks wherein increasing institutional buying is taking place, the EMA9 line will serve serve as the dynamic support.
The chart above illustrates a classic Momentum Trade. The buy signal in this setup is the EMA9 - MA20 Bullish Crossover wherein the EMA9 (green line) goes above the MA20 (red line). This indicates a potential rally which in this case is validated by heavy buying volume.
2. Breakout with Above Average Volume
A price breakout is distinguished by a successful rally above a key resistance level. When the breakout is supplemented by above average buying volume, the price action will shift to a sustainable uptrend wherein increasing institutional buying propels the price higher.
The chart above shows a successful breakout formation. The key resistance here is at 0.75. As you see, previous attempts were unsuccessful and resulted to price rejections causing the price to swing back to support. By end of July, the price finally broke resistance and a spike in buying volume allowed the price to make a significant rally.
It is important to note that breakout plays tend to be successful only during bull markets. When the appetite for risk is high, such plays encourage aggressive buying. Without that demand, plays such as this will result to a price rejection.
Momentum Trade Strategy (Sell Signal)
1. EMA9 - MA20 Bearish Crossover
Being the dynamic indicator of momentum, a close below EMA9 is often a sign of momentum weakness. As such, prices closing under the EMA9 is a stern warning that profit taking might be taking place. This is illustrated as a bearish crossover wherein the EMA9 (green line) goes below the MA20 (red line).
The chart above shows you proper entry and exit signals by using EMA9-MA20 crossovers. At the 1.20 price level, a bullish crossover forms after the initial bearish crossover and starts a fresh rally up to the 2.40 price level. A second bearish crossover forms prompting another sell off. When timed right, this allows a trader to ride the meat of the rally and sell at the proper time to secure profits.
Note that volume will validate price action. A decline in demand which is supported by high sell volume is often a signal to sell the position before a collapse in price takes place.
2. Bearish Divergence
A bearish divergence is illustrated in the price chart as a contradiction between the price action and the RSI. This occurs when the RSI is forming Lower Highs while the stock price is forming Higher Highs. The divergence in this context indicates that the price action is losing momentum and is erring to the side of the sellers.
The chart above shows a clear Bearish Divergence pattern. The price shows two resistance peaks wherein the second peak at 2.40 is higher than the first peak at 2.00. The RSI does not agree with the bullish price action and shows two peaks at the overbought area wherein the second peak is lower than the first. This contradiction signals a weakness in buying and will likely result to a pullback in price.
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