Using Fibonacci & Stochastics for Swing Trades | Swing Trading Days to Weeks
good afternoon everyone john mcnichol here and welcome to swing trading days to weeks our topic today will be utilizing fibonacci to be able to identify potential swing bounces from both a bullish as well as a bearish perspective we'll also talk a little bit about stochastics on maybe scanning uh for stochastic values may be a way to be able to anticipate and possibly find some potential fibonacci balances so stick around [Music] all right hey it's great to see those that are live with us today such as vj bill ron alfred mike wayne krishna got el diego cassoon robert giles bibeck and everyone else mr james boyd is helping out on the chat make sure you congratulate him on having 10 000 followers on twitter uh if you want to help me catch up feel free to if you don't already uh you can follow me on twitter as well at j mcnichol underscore tda and if you don't already follow james his twitter handle is his first initial last name at jboyd underscore tda it's a great way to learn about your instructors and coaches here at td ameritrade education and also learn a bit about the markets as well likewise on this webcast you are on the trader talks channel you probably saw that on the interview so feel free to consider subscribing to trader talks which will allow you to be alerted to some of our upcoming sessions and if you enjoy what you're learning here today consider clicking like so whether investors and traders are able to see what we have to offer here let's take care of disclosures folks we'll get right into it the content is for educational information purposes not investment advice or recommendation of any security strategy or account type options not suitable for all investors please read the characteristics and risks of standardized options before trading we'll talk a little bit about some of these today spread straddles particularly spreads and other multi-leg option strategies can entail substantial transaction costs multiple commissions which may impact any uh which may impact the return on a trade likewise keep in mind that you're encouraged to practice what you learn here today with tools such as paper money software which is for educational purposes and successful virtual trading during one time period does not guarantee successful investment of actual funds during later time periods market conditions change continuously consider and understand as we'll go over here today that a long call or a put option position that entire cost added option may be at risk likewise when one sells options one may deal with a an assignment which may result in a long or short position in an underlying very important that we manage these positions and be able to define risk in each and every trade and while this webcast may discuss technical analysis other approaches include fundamental analysis may assert very different views and a stop loss order will not guarantee an execution at or near an activation price once activated they compete with other income and market orders there's brief background if you are new to the webcast welcome you can see a brief background there i along with james here been around the block a few times and we uh certainly cover the wide spectrum in the financial markets uh whether stocks options futures investment different investment strategies both from a technical as well as a fundamental basis there let's go ahead and look at our agenda folks we're going to talk about fibonacci retracements some to consider as prices have and may continue to pull back identifying where those potential areas of support or resistance may be and as we look at some examples possibly incorporate stochastics as a way of identifying you know when some of those pullbacks in the trend may point towards some of those near term or shorter term oversold conditions and we'll attempt to do some practice trades as well as we apply what we learned and we would encourage you to do the same thing let's go ahead and bring up the thinkorswim platform go and go right to the charts those that followed me yesterday at the market open we started talking about fibonaccis as a theme uh for the week on identifying where some potential support uh may appear now uh for those of you that are totally unfamiliar with the aspect of fibonacci and fibonacci series and those that follow me should at least have a a basic understanding is we're talking about uh different ratios uh leonardo fibonacci that renaissance man basically uh had a lot of free time uh when he wasn't uh i believe he was the uh customs uh person um in uh and gosh i forgot uh what town that was but uh in uh italy there and uh watched uh watched rabbits breed and noticing uh some of the patterns that occurred in the breeding you know starting with two rabbits uh you know two plus one is three or actually one plus 1 is 2. 2 plus 1 is 3. 2 plus 3 is 5. and basically taking those numbers and sequentially adding them onto each other we can see those numbers exponentially expand and also the difference the ratios between them uh have a certain level of consistency and seeing is that these patterns have a tendency of occurring in nature whether it's breeding patterns uh the physical dimensions of the human body to the spiral in a shell to the patterns of a flower technical analysis is the analysis of human behavior in in essence we're looking at buying and selling patterns the thought is that we would see some of that occur here you'll also notice on some of the moving averages that i've utilized as an example a 55 period a 13 period a five period i know james i believe is used in a period at times these are all examples of fibonacci numbers and may have a part in technical analysis and so when we go ahead and we look at the s p 500 or any market any stock we can see that this price action uh although it seems to go straight up uh notice that there's the zigs and the zags of the market okay the sequence of higher highs as well as higher lows that occur with that market and you'll notice without you know applying fibonacci notice with my example of a 55 period exponential moving average you know over the course of uh you know just going back these last six months i can see how whoops can see how those levels had held as support if i go even further back here you know on a yearly chart i really haven't spent much time at least over the course of this last year below an intermediate average in this case a 55 period and so you know one may utilize averages to anticipate uh those retracements and that's what these are retracements in a trend but may also attempt to quantify it by utilizing tools such as fibonacci retracements and in a lot of cases when we see pullbacks that occur in a previous move usually these pullbacks have a tendency of being a a percentage of that previous move now a common retracement actually is about 50 percent and 50 is actually not a uh a fibonacci ratio but it is tied has ties in the dow theory uh and therefore is also uh discussed here in the fibonacci discussion so you'll notice when we kind of eyeball here the spx with this recent run up we can see where this pullback is and it looks like at least about half of that previous move when we go ahead and look at the run-up from july you know we can see a pullback being a fraction of that so what we can do is uh take our drawing tools here up at the top we're going to go ahead and click on the drop down for a percent and we're going to go to the drawing tools here and under the drawing tools there is the percent fibonacci retracement there's also fibonacci extensions i have talked about fibonacci extensions and the breakdown reversal patterns i may talk more about that tomorrow if we do have some breakout scenarios uh you know there's also traders may look at uh fibonacci over time cycles or you know different other ratios we're going to focus on the retracement here today and in applying it as we kind of pull that out what we want to do is identify a a swing or in this case an upward movement in a in a bullish case from a swing low going up to a swing high if we go ahead and isolate this a little bit we already got that fibonacci tool i'm going to go ahead and click on the low we're going to draw in the direction of that tradable trend in this case since we still have a bullish trend we're trading going from the low to the high and you'll see some percentages that will appear on the chart uh notice i actually have some of these a little colored here you can you know utilize these however way you'd like you can right click on that fibonacci tool and select edit properties and you'll see these different percentages now you know common retracement percentages are going to be around a third a half and two thirds uh 38 50 and a 61.8
uh in stronger trends we may see those bounces occur closer to that quarter to a third think of some of like bull flags as an example or in the downtrend bearish flags things may go a little bit deeper to a 50 percent some traders may consider that to be more of a value area and then the 61.8 the reason why i kind of put that in gold and with my history of utilizing fibonacci we we had a common term uh what we refer to as a maker break point for the trend that if the trend is to hold uh it should hold that 61.8 otherwise it may transition into more of an overall consolidation think sideways patterns or if it continues breaking down may end up being more of a reversal of a trend and so you know kind of important as we look at it from a shorter term here is where do we see the intraday low low and behold for the s p 500 today kind of reach that psychological area there on that 61.8 can't explain why uh some people call it voodoo but uh you know and you know nothing's 100 but it's interesting as we can see uh with 45 minutes left in the market and this can change at least attempt to hold that 61.8
now what bullish traders may look for uh is well some traders may just trade off of that anticipating a bounce and looking for prices to rally higher they may look for a little more confirmation think of like those haramis or inside days and as a common bounce technique that both i know james myself and others teach the cohold you know looking for the trade or the close above the high the low day so even though we have a down day in the market and as we look and over the last what seven or eight sessions one two three four five six you know seven uh has been to the downside question mark will this hold uh notice uh averages may provide a bit of a convergence on that area and then you may look that to concur with moving averages holding two now notice we'll talk about stochastics in a little bit uh but i do have an example of a a fast stochastic on the bottom relatively sensitive for on the shorter term side with a 7 3 setting if you want an example of this chart i did create a shared chart it is case sensitive if you go ahead you can transcribe that code if you come up to setup in the upper right hand corner select open shared item you can type in that again make sure it is case sensitive there and i'll take the liberty for those that happen to be here live we'll plug that into the chat ideally plug it into the chat let's see here hopefully that came through right there we go and if it loads up correctly should look something like this and if you click import uh basically uh kind of the similar moving average uh sequence that i have and from my previous sessions there's the macd and there's a stochastic and we can see from a shorter term standpoint you know kind of in that over sole area below the 20 zone and notice a bit of confluence when you look at some of these holds these shorter term pullbacks were typically preceded by a short-term dip close to that zone now stronger trends may not come all the way back okay and uh make a mental note of that we may utilize a scan to look for stocks that may generally be up trending but maybe short term in that over sold condition and that can be tied into utilizing some of these fibonacci retracements to look for that anticipated bounce and potential follow-through okay so uh you know i'll go ahead and i'll leave that fibonacci retracement on the chart we'll see if we violate that before the close or at least in the last 45 minutes or last 15 minutes so when we'll end up okay if we go ahead and look at the nasdaq you know the nasdaq is relatively stronger although prices did trade up the upper part of its longer term channel this has been a topic in some of the webcasts more recently as you can see this over the last year and even uh did a contrarian a little more of a practice trade with the likes of google which will take a closer look as well you know has it's been pulling back now notice the trend is still relatively stronger we can apply it to the likes of the index and i'll go back and bring it up on google as well now you'll notice when we look at the price action still making higher highs and higher lows you know and with the nasdaq still above some of those previous highs so a relatively stronger trend and santiago says you're understanding that fib should be drawn from high to low for bullish uptrend patterns to look for the 61.8 retracement uh yeah you may be getting confused with uh extensions or utilizing the fibonacci retracement to set price targets uh in retracements you are drawing with the trend so in this case drawing from low to high and looking for those potential bounces and notice in the case of the nasdaq 100 uh that 38 retracement demonstrating that the nasdaq trend is relatively stronger although we aren't seeing a bullish bounce prices could continue possibly violating back notice to make or break point that 61.8 kind of coincides with retesting that previous breakout and also the middle part of what i have is the longer term trend or the existing longer term trend for the nasdaq and notice the 55 day moving average as well possibly drawing down on that so something to kind of keep an eye on if we do see some continued selling pressure is to look to see if this overall trend holds the dow djx now in the case of the dow let's make sure i'm making the same reference now you know both the nasdaq and the s the nasdaq and the s p i was referencing around the middle of august that previous low as we look at other indices such as the dow we can see how they've struggled going from mid august there was an attempt to hold that 61.8 about four sessions ago but notice the selling pressure on the dow on that relative weakness we're even below the 55-day moving average so the industrials have been taking it on to chin much harder over this last week and you can also see a bit of the confluence with that 61.8 retracement and a common reversal pattern that we teach in breakouts and reversals a head and shoulders top so we're already seeing that uh potential uh correction uh with the uh dow going from the high you know we're basically only three percent you know ten percent would be correction territory but we can see the momentum has been more towards the downside now that's a note to make here as you look at something like the stochastic even though technically that action may be over sold it can stay in that extended period for some time if prices continue cascading prices can stay in that zone that's why some traders in to confirm a bounce or that change in momentum may look for that indicator to come back out of that zone all right so make note of that and then finally with the russell rut now this overall trend has been more sideways and so keep that in mind as far as on you know overall fib retracements one may have to go ahead and look at a longer term at the shorter term we can see this range and if i go ahead and again take the drawing tools and draw from the low to the high we're seeing a violation of that 50 percent and kind of the make or break point as prices are trading at the low uh for the russell is seeing if it's able to stabilize and hold in this case potentially around that 21.90
so you know as we went ahead and looked at those fibonacci levels uh on the broader market that could be one way from a matter of posture and potentially identifying which of those trends are stronger and if there is a bounce at one of those levels a potential tradable opportunity now we're not seeing that today but something to keep an eye on as we go into the rest of the week to see if these levels hold now on individual stocks you know we can apply that same principle and i'm still focusing on the bullish retracements we'll take a look at bearish retracements as well but seeing as a debt for the most part the trends in the market have been up with a few exceptions uh focusing on more of the bullish areas uh let's see um let's bring up uh ebay uh as an example and then we may see this from a few uh different uh nasdaq stocks now you know compared to the market uh ebay did actually retrace a hundred percent uh from those lows uh back in the middle of the august which we were looking at some of the different markets but looking at from different time frames if one goes further out can identify some of these ratios as well so if i go ahead and again we have an upward trend drawn from low to high see a bit of confluence around the 50 percent level kind of in between the 50 and 61.8 some of these previous highs so what some traders may be keep an eye on even though we're still trading at the lows is will there be an inside day signifying a potential bounce and with some follow through which can be a bullish setup or if prices were to break the 61.8 and hold then that may be more think along the lines of potentially more of a top and pattern that instead of making those higher highs and higher lows uh digging a bit more deeper may end up creating more of a lower high and again think more of those bearish reversals okay uh let's see a couple other ones on the tech side uh zs a z scaler now they are post earnings but notice here if uh we see even much more of a stronger trend we even have a bit of a hold here although we saw some selling here post earnings if i go ahead and draw the fib you know and i kind of identifying the low now you know one tool that may help depending on how far back you're looking is you know turning on the williams fractal if we come up to the top here select show patterns on the patterns tool select patterns we'll go to the candlestick tab and bring up williams fractal we'll go ahead and add that uh this will plot some of those candle reversals on the chart and so you can go back and see uh previous low there is a fractal that's hidden behind there a lot of cases if you apply your understanding of price patterns such as triangles rectangles things like that a common technique i'll look for which kind of concurs with this williams fractal is drawn from the low preceding a breakout that closest low preceding a breakout and we go ahead and draw from that low to that high and notice how that make or break with a dragonfly doji intraday yesterday basically held that 61.8 make or break and a bit of a follow through now some traders if they're utilizing the fibonacci levels whether look for a cohold or maybe looking for that price action to get above that 50 level as being a bit of a a confirmation all right now you know if i did want to be you know let's say an example of a bullish trade although it's kind of interesting looking at things from the opposite side notice how this quarter retracement is actually bisecting this long range day these middle ranges of a long-range candle can act as support and resistance that's at around the 280.
so let's say i was looking at a spread and may expect the stock to trade higher maybe not necessarily at a higher high but maybe trade up into this range around the 280 range we can do a spread uh in this case possibly a a bull call spread where we may go ahead and sell a strike that's somewhere in or at the money and buy a strike or correction a buy a strike that is uh close to the current price maybe a little into money and then target maybe around the 280 area for the strike to sell it'll be a defined risk define gain trade we can go ahead and go to the option table let's go and bring that up and that was a z scaler for our example and uh you know we may go out uh you know look around you know 30 to 50 days here i'll focus on around the near the 30 days and then we got our deltas here uh we'll look for a strike that may be uh a little more in the money whether slightly in or possibly a little more here's the 270. now this is a more expensive stock but uh we'll see and how this can be a trade where we have a limited risk a limited amount of capital tied up into that and still may be able to accomplish the goal of the trade bouncing and possibly trading up to that 280 mark uh consider liquidity there spreads to be relatively small in this case less than 10 percent of the ask price if i went ahead and just click buy for this option that would be about 14. uh times the multiplier that's tying up fourteen hundred dollars in equity now notice that significantly less versus if we did an example of let's say a hundred shares of the stock which would be about twenty seven thousand here we got a defined risk uh but we can also re uh potentially reduce the cost of the trade and uh therefore define the risk a little bit more by going ahead and selling the strike where you believe the price may be going up to we've talked about the 280. i'm gonna hold the control key and hit sell now we reduced the debit down about four dollars and eighty cents and when we do the confirm and send we can see that we have a defined risk based off of what we pay for that spread 480 certainly significantly less uh compared to the underlying for relatively shorter term trade our maximum gain at expiration that would be mid-october if the price is at or above 280 would realize that potential maximum gain the other nice thing uh and those of you that followed me as far as with spreads uh particularly a little slightly in the money uh on the long one there uh is our break even uh can be very close it doesn't require much movement for the trade to be profitable now there still is risk and we can position size with that accordingly so let's say if i wanted to risk about a thousand dollars on this trade we can do this two times so i'm going to go ahead and change this two times hit confirm and send and another thing to make a note if you're keeping a trade-in journal or a log is profit management if we're able to capture you know maybe close to fifty percent of this maximum gain some traders if there's a you know a quick move you know may try and capture you know 30 percent but have an idea of profit targets and if we're able to realize about 500 dollar gain on this position it may consider closing it or maybe scaling out of the trade by closing part of that position okay let's see if we can go ahead and send this one through now there is a little bit of a spread here if i put it through right now it may or fill at that mid price some traders may adjust a little bit higher here if i do a confirm and send we did get a fill there so that some will continue following up and i actually do have examples uh of spreads some we did in this class uh other uh particularly i believe this polti group now this is actually a long put vertical so we were looking for the downside for it to trade down in this case down to 51 the short strike was our target uh currently the stock's trading at 47. so that's well below that so not only did it break down on a swing on this ryzen wedge a pattern we talked about about a month ago in some of the webcasts if you look at the archive you should be able to see those and so this one looks like going to be pretty close to potentially being that maximum gain and if i go back on the monitor first position you know there's 17 days left to expiration so time management comes in as well since these options will expire at some point if i went ahead to right click and close this order this is only a three dollar spread and i can sell it for 285 now with it being a three dollar spread there's only 15 cents left question for the audience do i wait 15 cents or a correction 17 days to try and collect 15 cents thereby putting our current gain at risk which is about 90 percent return on the debit that we had paid for i know there's a little lag in the chat but i assume that everyone would lean towards locking in that gain uh this exceeds the 50 or 50 uh target there so therefore profit management will create a closing order and go ahead and sell that position okay now there is a little bit of a wider spread here so i'm going to put this through and see if it does get filled sometimes you may have to bring it down a little bit but we did get filled now this is a demo count your results may vary as you're practicing some of these trades and if i go back here's google which was another put one we actually did this in the long verticals and diagonal class which is uh discussed on thursdays at 11 a.m eastern time now this has 10 days left and we're at about a 35 percent return there so if one hasn't reached their preferred target and let's say as an example we said about 50 percent when we get in that last week of expiration and you know some diligence probably needs to be taken is okay well how do we see things over the next couple of days where is price moving you know as we look at google you know it has retraced up a little bit into this distribution day hasn't sold off a lot of the big tech probably with yields uh dropping some traders have considered the fang stocks to be a little bit of a flight to quality although that may depend on which one but with yields dropping potentially benefiting some of those stocks as we go ahead and take a look at uh in this case on google go if price rolls over that would be beneficial if price continues trading higher not beneficial since it's a bearish trade now the short strike was 28.70
which is basically right up above the high of that day so since it's kind of a little more neutral uh and no one knowing exactly what may happen tomorrow this may be also a way of closing out the position and at least locking in some of those gains a little bit of a judgment call but we'll attempt to see if uh we're able to get that filled uh looks like the spread may have opened up a little bit there uh but it looks like we were able to get a fill there so if you learned a little something new there as far as as we've been you know utilizing the bounce how a defined risk trade whether it's calls or puts can be some beneficial and here's a reason why if you recall last week we did a practice trade on wind resorts and this does not have a desired outcome what happened today with a lot of these gaming stocks or i should say gambling stocks w-y-n-n we bring that up a gap down now it's not official but there have been reports that there may be some more regulation for those gambling stocks in macau over near china now prices did potentially find some support but this was a pretty big drop now if we had done the stock and let's say we did 100 shares of stock 107 uh the potential entry price as it broke higher that could hold i think that's when we had entered it and right now it's trading at 92 dollars uh if my math is correct uh that is about fifteen dollars okay or about fifteen hundred if we did a hundred shares and if the price continued falling our risk would continue to increase or that risk of loss whereas when we did this trade we knew even though we didn't know what the potential outcome was it was a defined risk based off of buying 925 and selling uh 3.95 so i believe we paid about a little over four dollars or uh per uh or four dollar was the quote and with two contracts that would be times two hundred so close to about eight hundred dollars now if i go and right click on this and create a closing order this spreads only worth about a buck 56. now one could go ahead and say well close out and preserve what's left which is about three hundred dollars but there's not much left to lose and we do have uh 31 days left not saying that we would have a positive outcome but if prices do trade up in that range is possibly be able to close it out for less of a loss okay so hopefully you found that beneficial folks and you know kind of one of the reasons why we do some examples of those defined risk trades now we've talked about primarily on those bullish fibonacci retracements we can look for the same thing on a bearish side and one of the ways of doing that is starting off with stocks that may be below a certain moving average uh in this case like a 50 day so if we go and look at ibm uh ibm potentially breaking below resistance here taking out some lows knows the trend has been down if i go in and i draw fibonacci from a high we're drawing with the trend now from a high down to a low notice that price has failed to be able to get back above that 50 percent retracement let alone the 61.8 so one may be looking for bearish bounces to trade down this may be a continued theme that will apply next week particularly if the market continues breaking down uh if there's a swing to the upside could there be swing failures and possibly bearish opportunities as was mentioned as far as time frame you know this could be applied to any time frame if one's looking at a trend trade think weeks to months with james one may go back a bit in time and look at the overall trend since this is days to weeks we're looking at things typically more shorter term our focus may be a little more on more recent swings and notice if i go ahead and look at some of these smaller swings from high to low notice again failure to get it back above some of these fibonacci retracements make or break with that 61 and that 50 percent bearish bounces may portend more downside movements okay as we're seeing right now so let's say uh ibm was to bounce one may go ahead and look at the more recent swing down and look to see if that price holds as far as resistance or notice if it is a bullish reversal and gets above the 61.8 knows there's a bit of confluence with a break of a downward trend okay some other practice ones to look at and some of these are maybe more on the bullish side uh jks jinko solar notice intraday bounced off of that 61.8
from low to high no follow through today there is an earnings event so be interesting to see what happens with that some discretionary stocks macy's notice going from low to high kind of dancing around that 50 into two thirds retracement notice the 55 day moving average coming up on that and even in some of the healthcare uh baxter international now notice with a few of these that i brought up notice that these trends generally have been up and we saw a stochastic kind of dip below and start to turn up so what i want to finish up with is well john how did you find some of these and uh i have shared a scan that which is in the chat or a collection is in the scratch pad here i'm going to copy that i'm going to paste that into the field for those of you that are listening to the archive session you can follow along now i did notice too we have a survey and we're going to push that out as well so as i'm explaining this make sure you click on the link for the survey and provide some feedback hopefully you're learning something new and some maybe you can apply to the market this week is with that scan again case sensitive now this can only be used on a real-time account if you go up to setup in the upper right hand corner select open shared item and plug in that code click preview now if you do it on paper money you'll see a big red error that'll come up it's because we are using some indicators that are only accessible on the real-time account if i go and click import this is what it looks like and you're encouraged to practice with it make it your own but it's generally utilizing some of the same criteria we've utilized in the past you know looking for stocks that are above a certain price area in this case above 20. looking for liquidity that's why we have a study on there i'm trying to share this so i'm not blocking that code which is right here but looking for liquidity stocks that are trading over a million shares looking at the moving average that the price is at least one percent above the 55 which has been our trending indicator we've utilized in this class and then finally utilizing the fast stochastic which was shown on the chart on the shared chart is looking for a positive crossover coming out of that over sold area which may imply potentially a kaholt or setting up for a hold within the last two bars now i went ahead and scanned all optional stocks you can scan a watch list or the s p 500 but if you go ahead that's how i found some of the examples such as baxter i think pharmaceuticals car now these are not recommendations to buy or sell any security these are just identifying stocks that may have pulled into an oversold area let me see if i can go ahead and bring this up again by the way when you do save that scan that could be part of your watch lists and see if i can find it here bear with me for a moment i called it a fib and stochastic scan even though it's not necessarily looking for uh fibonaccis but the implication is that if the stock's pulled back those fibonacci levels may come into play if you use some of the other script we've discussed you may be able to identify some of those holds that's how we found a z-scaler for our example today and with some of the illustrative examples that we went through so we encourage you to practice with that this may be something we may highlight more uh next week as we go ahead and see how this market develops as we go in the end the week will september continue to degrade or will be some support in that market and once again we're encouraged to practice what you learn here today by maybe doing a practice trade maybe define risk spread like we did with our practice trade on z scaler and if you start seeing some bearish ones uh may look at the long put verticals that we've also done in this class once again fill out the survey and for those of you that are listening to the archive session consider clicking like that gives an opportunity for other traders to pick up on what we're teaching here today as we went over fibonacci retracements and integrated utilizing some over uh bought conditions with the stochastics to find some of those practice trade setups like to thank mr james boyd for helping us with on the chat today and more importantly thanking you for joining us each and every week as we go over these short term setups utilizing the thinkorswim platform now remember in order to demonstrate the functionality of the platform we did have to use actual symbols keep in mind td ameritrade does not make recommendations or terms suitability of any security or strategy for individual traders any investment decision you make in your self-corrected account is solely your responsibility have a great afternoon evening everyone we'll talk to you again real soon bye now