Best of the Battle Plan: Profits and Pullbacks for Swing Traders

The TradingMarkets Battle Plan had an excellent August, with the vast majority of our trades closing profitably for the month. While past performance is no guarantee of future results, we are looking forward to shedding the slow summer trading season and gearing up for the final months of the year.

Click here to learn more about the TradingMarkets Battle Plan for Stocks.

One recent trade highlights one of the key strategies that we use every day in the Battle Plan. While we like to trade pullbacks, we have discovered that we tend to be more richly rewarded when the pullbacks we trade are deeper, rather than shallower.

When we buy deep pullbacks - and, moreover, buy those pullbacks on additional intraday weakness, we position ourselves to take advantage of what trader, author and trading coach Tom DeMark once called "the last dumb seller." In an interview with TradingMarkets earlier this year, DeMark observed that markets made bottoms not because of smart buyers, but because the last seller has finally thrown in the towel.

Click here to read our interview with Tom DeMark.

And that last seller's panic selling at the bottom is what makes for profits for swing traders who buy weakness and sell strength.

Consider the stock of Live Nation (LYV | Quote | Chart | News | PowerRating) which we offered as a potential trading opportunity for subscribers back in late August.

LYV had a Short Term PowerRating of 10 when we first introduced the stock back on Tuesday, August 26. Recall that 10-rated stocks - our highest quality stocks - have outperformed the average stock by a margin of nearly 17 to 1 after five days. Combined with the stock's 2-period RSI of 5.52, this stock looked like a suitable one for a potential trade... provided the stock pulled back even farther.

LYV had already been moving lower. By the time LYV appeared in the Battle Plan, in fact, the stock had been down for the past three days (August 26th would mark the fourth consecutive down day). This, in addition to high Short Term PowerRatings and low 2-period RSIs, is one of the factors that we look for in pullbacks: consecutive lower lows or down days. While we like to see at least five in a row, any time we see stocks that are above their 200-day moving averages moving lower day after day, we know a potential opportunity is emerging.

We were filled in LYV that morning, as intraday selling brought the stock down into our suggested entry range. Long at approximately 15.47 on Tuesday, we saw LYV close above its 5-day moving average - our exit signal - only a few days later on Thursday, August 28th at 16.40, a gain of 0.93.

Again, not every trade in the Battle Plan will work out as well as Live Nation. But this trade in LYV does underscore the strategy we use every day to take advantage of markets that are oversold. While the average trader - to say nothing of the breakout trader - sees multiple consecutive down days and thinks "sell," those of us who understand short term stock price movement know that these are often the best opportunities to buy.

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David Penn is Editor-in-Chief at TradingMarkets.com.