Since we have a disciplined, rule-based trading strategy, there are only three different types of swing trades we buy: breakouts to new highs, pullbacks of uptrending stocks, and trend reversals (only used when coming out of a bearish market). One thing all three of these technical trading setups have in common is they are based on the stock or ETF exhibiting relative strength to the main stock market indexes.
By our definition, an equity is showing relative strength when it fails to decline when the broad market moves lower. Furthermore, stocks and ETFs with the most relative strength may even move higher as the Nasdaq, S&P 500, and Dow Jones move lower. If a stock is so strong that it does not even succumb to the pressure of a weak broad market, it stands to reason that the same stock will be the first to surge higher as soon as the broad market eventually bounces.
Of all the ETFs we monitor on a daily basis, iShares Nasdaq Biotech (IBB) has shown the most relative strength to the benchmark S&P 500 Index during the recent stock market correction. As such, one would expect IBB to provide one of the best ETF buying opportunities on the long side when the market gets healthy again.
To clearly illustrate the relative strength in IBB, take a look at the chart below, which is a relative comparison of IBB versus the S&P 500 in recent months. Notice how IBB managed to form 3 consecutive “higher highs” (as annotated on the chart), while the S&P 500 was forming “lower highs” and “lower lows” at the same time:
The second chart below shows the actual entry point in which we bought IBB in The Wagner Daily swing trading newsletter, as it gapped and rallied above the high of its short-term downtrend from the May 2012 high:
Although we have already bought IBB on the breakout, a low-risk secondary buy entry point can be found on a pullback. A retracement that “undercuts” (quick dip below) the prior highs just below $127 is still an actionable buy entry. Since that level formerly acted as resistance, basic technical analysis states th same level should now become the new support level because the price has moved above it. If buying IBB on a pullback, a relatively tight protective stop of around 2.5% can also be used, as we would not want to see the price drop below the $123.50 area (below the 20-day exponential moving average).
When trading ETFs, we often look for confirmation by seeking bullish charts of leading individual stocks within the same industry sector as the ETF. In this case, on such example is the chart of Amylin Pharmaceuticals (AMLN). As annotated on the longer-term weekly chart interval below, notice the very tight base of consolidation forming near the 52-week high of the stock. The two actionable levels for potential buy entry are shown on the chart as well:
In addition to AMLN, other strong stocks within the biotechnology sector include the following tickers: SXC Health Solutions, Corp. (SXCI), Salix Pharmaceuticals Ltd. (SLXP), Perrigo Co. (PRGO), and Alexion Pharmaceuticals, Inc. (ALXN). All have similarly bullish chart patterns that could each individually present new swing trade buy entries. Moreover, the confirmation of strong chart patterns by numerous individual stocks increases the odds that the associated ETFs, such as IBB, will continue to show relative strength in the near to intermediate-term.