This 2020 focus your Swing Trading mainly on Technical Analysis

Given the indecipherable fluctuations of the economy during this year, the title of this post reflects one of my feelings about this unusual 2020 stock market. A Q1 quarter where the SP500 falls 20% and the next Q2 turns around and rises the same 20% is surely something we will not experience again in our lives. Thus, it's complicated to make a serious analysis  as usual, that is to say, reviewing both fundamentals and technicals details, alike.

Powell and the Fed with its zero interest rate (good decision) and unlimited QE (excessive) are artificially propping up the financial markets, literally destroying the risk in markets, instead of investing for growth, just for trying to hide the US (and global) recession, already foreseen since January and accentuated by the coronavirus. Now we have market indicators at dangerous edges, like the SKEW index (that measures the risk of a black swan, a 20%+ plunge of markets) spiking now above its March levels. Or the Nasdaq Put/Call ratio (40% of this index are the FAANGs!) telling us that the market is extremely greedy, wrapped in an impressive bubble. Its excessive valuations and overbought, matter little.

Today, the fundamentals do not matter: growth, value, P/E ratio, EPS, dividends, ROE, profit margins, all those key data seems distorted this year due to the COVID and the Fed management of the crisis. Institutional investors, hedge funds continue outside the stock market, mainly in cash and bonds since March, nobody dares to put together long portfolios.

Regardless of the news and sentiment trading, which always moves the market, I am refining my swing trading analyzes, granting more (all!) influence to the technical analysis, which seems is working these months more accurately than usual. Forgetting for now fundamental analysis, until the November elections have passed. Price action, support and resistance levels, pattern and candlestick prices, Fibonacci levels, all are very accurate in this 2020 market, always for the short-term in swing or day trades.

So focus on the Technical Analysis in your Workspace

For the above explained, and for a while, the technical analysis will guide my trading decisions. Less fundamentals. Simply using price action analysis with few indicators, considering ideas from previous posts, for day trading. Now, I resume briefly my simple trading strategy for swing trading, based on Price Action Analysis:

- Use a triple screen (thanks, Mr. Elder) with timeframes daily (or 4-hour), 1 hour, and 15-minute. To create a long-portfolio, work better with the monthly-weekly-daily timeframes combination.

- Define the "big" trend in the daily and a "tradeable" trend (that can differ) in the 1-hour timeframe, drawing obvious levels (supports, resistances, Fibonacci, and psychological), up/down trendlines, moving averages (enough an EMA50 and SMA50, 200) and price patterns (triangles, channels, wedges, flags, head and shoulder, cup and handle, double top/bottom) in both of them. 

- Define the key area in the intersection of daily-chart lines with 1-hour lines, and wait until price approaches it. 

- Decide your entry-level (target and stop-loss) of your swing trade in the 15-minute timeframe. So, when price touches the key area, look here for a price reaction (rejection, pause or momentum loss, confirmation, reversal) through the respective candlestick pattern (pin-bar or long-wick, inside-bar or harami, momentum no-wick, hammer/shooting star/engulfing) or other pattern combinations (bigger candles, multiple-rejections, shrinking, color-change candles). And always verify volume: as increase, reinforce the power of the candlestick pattern.

Let's review what happened last week with the SPY, through its 1-hour chart, below.

Last two weeks the SP500 had a very predictable behavior in its price action: the holy grail of any swing trader. As the big trend in the daily chart (not shown) is bullish, we use this 1-hour timeframe for more details: analyze the continuation of that bias or unlike, a short-term pullback. After the Monday explosion, the SPY price began losing momentum and showing candle rejections in the midday Tuesday session, especially when touches the Fibonacci level of $313.22, the green line. A breakout opportunity could appear there, or not... be patient.

It happens on Wednesday: a double-top pattern was formed (grey box), so we need to wait for a breakout of the immediate trendline we draw (yellow line). When price broke it, a big momentum candle appeared, with increasing volume: that's the confirmation of a reversal. Go ahead to the 15-min chart (not shown) to decide the correct place to enter your short trade. Place your stop loss in the double-top level and trail it for lock profits. Wait until the price approaches the most recent swing-low level (near $310, the yellow upper-narrow) to decide if exit the trade.

The exact behavior was repeated in the SPY three more times with the same typical move (!): rising to a level forming a double-top, an immediate trendline break (also breaking the black-line EMA50, which reinforces the signal), and a big momentum candle confirmation with increased volume. Surely, more great swing trades opportunities are coming with the double-top and double-bottom patterns. 

That's why I told you that technical analysis seems more accurate than usual this 2020. Just follow your strategy as I do with mine. And be patient, as a sniper, waiting for the opportunity.  Remember trading is not just charts: it's mostly risk management and psychology (patience, emotional intelligence, discipline...)