Our top 3 swing trading setups

Deron Wagner

Founder
Morpheus Trading Group
 Overview of core beliefs
z Swing trading in the near to intermediate-term timeframe is the
best fit for overall strategy
z Trading with the intermediate-term trend
z Momentum-based strategies work!
An object in motion tends to stay in motion
Stocks trading near 52-week highs have the least amount of
overhead resistance
Cheap stocks are cheap for a reason
We buy high and sell higher, not buy low and sell high
Human nature is to underestimate how long a trend can last
z Main market structure is base, breakout, pullback
Trade with the dominant market trend
Momentum-based strategies work!
Momentum-based strategies work!
Momentum-based strategies work!
Buy stocks at or near 52-week highs
Buy stocks at or near 52-week highs
 MTG buy setups
Our swing trading strategy establishes long positions using 3
types of entries:
− Breakout entry – Buying on strength when a stock
breaks out from a proper base of consolidation
− Pullback entry – Buying a stock that has put in a near-
term pullback (3 – 7 days) from its recent high
− Trend reversal – Buying a stock that forms a base after
breaking out to reverse above a substantial downtrend
line (only after a prolonged downtrend in the broad
market)

NOTE: Of the 3 types of buy setups above, the breakout and

pullback entries will account for the overwhelming majority of
trades you make.
 Primer to buy setups

Before a stock makes our breakout “watchlist,” it must satisfy

two key criteria:

z Stock must be in a clear and distinct uptrend

z Stock must have a valid basing pattern

 Trend qualifier
Stocks must be in a clear and distinct uptrend, as follows:
z 20‐day EMA must be trading at or near the 50‐day MA when the stock 
is forming a base and clearly above the 50‐day MA when in trend 
mode.  For pullback trades, the 20‐day EMA must be above the 50‐day 
MA.
z 20‐day EMA must be above the 200‐day MA
z 50‐day MA must be above the 200‐day MA
z Both the 50 and 200‐day MAs must be in a clear uptrend for at least a 
few months.  
z The price action should be in an uptrend with a series of higher highs 
and higher lows in place over the past 3 ‐ 6 months (at the very least). 
z Current price should at least be 30 ‐ 40% above the 52‐week low.
Trend qualifier – rules for breakout setups
Trend qualifier – rules for breakout setups
Trend qualifier – rules for breakout setups
Stocks must have a valid basing pattern
z A base (or zone of congestion) is anywhere from 1 month to 1
year in length. For our style of trading, we prefer bases that form
in a 1 - 3 month period that find and hold support of the 50-day
MA.
z We want to see “tight” price action in the base, especially during
the last two weeks before the breakout.
z A valid base should pullback anywhere from 10 - 30% off the
swing high. Once a stock retraces 40 - 50% or more, we begin to
question the strength of the uptrend.
z We must see a “higher low” form within the base. This is crucial
to the pattern. Without a higher low forming, we have no way to
set a stop and therefore can not define the risk.
z Volume should be declining during a base, or at the very least, not
heavier than average. If there are too many days of heavy
volume selling in a base, the base could be faulty.
Main characteristics of a valid base
Main characteristics of a valid base
The breakout entry
The breakout entry and follow-through
The breakout entry (example #2)
The breakout entry (example #2)
The breakout entry and follow-through (example #2)
A pullback setup occurs when a stock breaks out from a
valid basing pattern and then pulls back for 3 – 7 days:
Pullback buy entry
Pullback buy entry and follow-through
Pullback buy entry (example #2)
Pullback buy entry (example #2)
Pullback buy entry with follow-through (example #2)
 The “trend reversal” setup
z Trend reversal setups are used only when the main stock
market indexes have been in a bear market (downtrend) for
9 months or more.
z The purpose of this setup is to locate early buying
opportunities in stocks that are about to reverse trend.
z These setups do not require that an uptrend be in place
prior to the entry, so they are very different than a breakout
or pullback entry.
z We do not use this buy setup when the markets are healthy,
as this would lead us to locating stocks that are showing
relative weakness.
Trend reversal buy entries
Trend reversal buy entries
Trend reversal buy entries
Trend reversal buy entries (example #2)
Trend reversal buy entries (example #2)
Trend reversal buy entries (example #2)
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