Schwab Live: Midweek Market Trend for April 26, 2017

Follow us on Twitter @Schwab4Traders. For more technical insights, join my weekly webinar, Charting the Markets, where I provide market analysis and answer your trading questions in real time.    

Note:  Kevin Horner will be a guest contributor while Lee Bohl is on sabbatical, returning May 15th. Kevin is passionate about showing people how to filter through the noise of the market to better understand how their own emotions can affect their trading success. You can also see Kevin in the next Schwab Live event on May 18th, 9 a.m. PST.

Many technical traders like to trade securities showing strong bullish or bearish trends.  However, locating stocks with these trends is not as easy as watching the crawling trade ticker at the bottom of your favorite financial news station.  Some traders might enjoy poring through charts and symbols to find what they want, but what about those of us looking for an easier way?

The Screener Plus tool in Schwab’s flagship trading platform, StreetSmart Edge®, is adept at combing through the entire market to find stocks that fit your strategy.  Traders can use a variety of fundamental and technical criteria to build a watch list of well-rated stocks in trending chart formations.

In one of the Trading Community Proactive Trader sessions I host, we discuss this tool in depth.  We begin with a review of some preset screens available and customize them further to fit a specific technical condition.

Source: StreetSmart Edge®

One of these screens is titled “Uptrend and Currently Oversold’.   This screen searches for stocks in longer-term uptrends which are also trading at what might be considered ‘oversold’ technical conditions.  Some traders like to initiate positions in these types of trends as they may offer a favorable risk/reward ratio.  This screen will frequently provide a list far greater than one might have time to review and research.  With this in mind, incorporating fundamental criteria, like A and B rated Schwab Equity Rating securities, for example, can help a trader to eliminate some of the less desirable trade opportunities.(See breakdown of the Schwab Equity Ratings methodology and their performance).

Take a look at this chart for one of the stocks that appeared when using this screen:

Source: StreetSmart Edge®

For the last year, this stock has been in a well-defined uptrend using the 50-Day Simple Moving Average (SMA) as support along the way.  It looks as though retracements to the 50-SMA have been appropriate levels at which to add during this trend.  A trader who wants to follow this trend might consider buying near this current level and establishing a stop order beneath the 50-SMA to exit the trade if this trend is broken.

Taking a closer look, entering the trade near the current price of 26.79 and establishing a stop order at $26.13 (50-SMA) and simultaneously setting up a profit exit at the prior high of $29.87 gives this trade nearly a 5:1 risk to reward ratio ($.66 to stop order, $3.08 to target price).

Source: StreetSmart Edge®

It’s important to keep in mind that while the 50-SMA might be our view of support, the stock itself does not care about this.  Traditional market volatility may force a stock to trade below a support level intraday, only to close above said support.  One way a trader might combat these intraday moves is to place their stop order lower than what they’ve declared as support by using a calculation known as the Average True Range (ATR).  ATR takes into account any gap up or down from the previous day as well as the high and low for the current day.  This can give the trader an idea of what ‘normal’ activity for a given stock is during a specified period.  By placing their stop level beneath support by this amount, it’s possible for the trader to reduce the ‘whipsaw’ action of watching your stock move higher after being stopped out. 

Source: StreetSmart Edge®

In the chart above, you can see the addition of the Average True Range study in the lower left corner.  Notice the reduced stop level by the amount of the ATR and how it impacts the trade.  If a trader is still entering at $26.79 with a new stop at $25.36 and the same target at $29.87, they’re now risking $1.43 to make $3.08.  This is still better than a 2:1 risk/reward ratio, but not the 3:1 ratio for which many traders strive. 

Regardless of your method in trading the market, establishing and adhering to a plan while doing so can only help the trader improve upon their successes while learning from their failures. 

Next Steps

For access to more research and guidance to take your trading to the next level, visit Trading Insights

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. Examples are not intended to be reflective of results you can expect to achieve.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Past performance is no indication (or "guarantee") of future results.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly.