The Benefits of a Tough Trading Month

Everything that could possibly go wrong with the world has happened during the past four weeks. The devastating earthquake and tsunami in Japan, along with political turmoil in North Africa and the Middle East did a good job of exacerbating a market correction that took its toll on long stocks.

March has been a very difficult month to be a swing trader. Quality set-ups evaporated as soon as the market turned. Even the surge in commodities— specifically silver and oil— were only producing effective microcap trades on extremely limited time frames.  It was all too easy to get lured into a breakout, only to have it whipsaw you back down to your stop, or worse, a small loss.

But late last week were different. After a month of painfully choppy market action, stocks climbed higher, possibly fueled by solid earnings news and increased M&A activity.  In only two days, it felt like the market’s attitude went from doom and gloom to absolute euphoria.  The S&P 500 and the Nasdaq shot back above key support/resistance—  seemingly ignoring negative news about the deepening sovereign debt crisis in Europe and  housing prices slipping yet again since Uncle Sam’s no longer giving out his $8,000 home-buying incentive.

It’s amazing how the market can put in its earplugs, ignore the negative noise, and find higher ground.   We’re back to climbing the wall of worry, but it will be a little while longer before we know for sure whether or not this is a return to the primary bullish trend or merely a selling opportunity in the midst of a larger correction.

What we do know is that, from a trading standpoint, small stocks look a heck of a lot better now than they did on March 1. Here’s one important clue that tells us we can dive back into our regularly-scheduled swing trades:

The risk/reward balance have moved in our favor…

At the end of February and beginning of March, small stocks looked overextended. It was difficult to find suitable trade candidates that offered a compelling entry point. Simply put, nothing was trading near any form of support, whether it be a horizontal support zone or a 20- or 50-day moving average. Sure, there were plenty of names that were outperforming the market. However, hardly any of them gave off a legitimate safe buy signal. Almost all trades on the long side would have required “chasing” an overextended stock— and that’s not a smart way to go about growing your portfolio.

After the brief correction, it’s been easier to spot stocks bouncing off support, giving savvy traders compelling signals to jump back in on the long side for short-term trades. My momentum scans that were only producing 10-15 names earlier this month are now giving me 30-40 swing trade candidates per day.

A prevailing trend is more likely to continue than break. But it does need time to consolidate. The market’s action this month has, so far, been a perfect example of this phenomenon. There’s no guarantee we see the market quickly top the February highs, but individual microcaps are showing signs of a strong rebound. That’s positive news for traders and investors alike.

Sincerely,

Greg Guenthner
Penny Sleuth

The Benefits of a Tough Trading Month was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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