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 * Swing Trading


HOW WE HANDLED BEAR MARKET RALLY IN RUSSELL 2000




Licensing
 * JUSTIN NIELSEN
 * 05:03 PM ET 09/02/2022

August ended with a stark reminder that we are still in a bear market with
indexes stuck below their 200-day moving averages. But that doesn't mean you
can't make some profits in a bear market rally by swing trading. Here's how we
used IWM stock to take advantage of strength in the Russell 2000.

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A NEARLY 25% GAIN IN RUSSELL 2000

When the stock market indexes put in a bottom in June (1), it wasn't immediately
apparent that a strong rally was unfolding. The next few weeks saw the indexes
remain below 50-day moving average lines in downtrends.

But the Russell 2000 distinguished itself by being the first index to cross
above its 50-day line early in July (2). Since we had low exposure and a large
gap of outperformance on SwingTrader, we added the iShares Russell 2000 ETF
(IWM).

If the rally worked, our low exposure would likely lead to underperformance. The
Russell 2000 trade would help offset that.

If the rally didn't work, our low exposure would increase our gap of
outperformance.



We often will go with a leveraged market ETF to get a larger increase in
exposure. The ProShares Ultra Russell 2000 ETF (UWM) offers twice the gains (or
losses) of IWM stock. But the stock market is contending with the overhang of
inflation and Fed rate hikes, recession fears and a long way to go to overcome
resistance. So, we went with the lower risk trade.

Later in the week, when IWM stock showed a downside reversal on an outside day
(3), the non-leveraged position helped us weather the storm. It was a manageable
loss with a 1.6% drop that day challenging near-term lows. A leveraged ETF might
not have been so easy to hold.


TAKING PROFITS IN IWM STOCK

After weathering the initial storm, the Russell 2000 made a steady climb over
the next few weeks. As is typical with our swing trading strategy, we took
profits along the way. Our first third came off with a 5% gain (4).

Our second third exited when we gapped up to a 10% gain from our entry early in
the trading session (5). However, we started to get a little cautious since we
saw a downside reversal that day after coming close to the 200-day line.

--------------------------------------------------------------------------------

Want to learn more about swing trading? Watch our latest webinar Swing Trading
Rules Of The Road

--------------------------------------------------------------------------------

Everything seemed fine, though, as the Russell 2000 surpassed its 200-day line
and started to hold above it (6). But it was also getting pretty extended from
its 50-day line at that point. As a result, we didn't give IWM stock much room
and removed our final position when the Russell 2000 crossed below its 5- and
200-day moving average lines (7).


GOING THE OTHER WAY

We try to keep our swing trading nimble and with the 200-day line acting, once
again, as definitive resistance we went the other way. Since the Nasdaq 100
actually had a stronger move up than the Russell 2000, we switched instruments
to go short the market after the indexes fell below their 10-day lines (8). We
chose the ProShares Ultrashort QQQ ETF (QID), a double inverse ETF tied to the
performance of the Nasdaq 100 to profit should the market go down.

Although it was a good time to go short, it still wasn't an easy hold. Headlines
continue make larger moves and now we've returned to our low exposure. It's
better to wait for new swing trading opportunities than to try and aggressively
make money in a stock market that can't hold a trend for more than a few weeks.

More details on past trades are accessible to subscribers and trialists to
SwingTrader. Free trials are available. Follow Nielsen on Twitter at
@IBD_JNielsen.

YOU MIGHT ALSO LIKE:

Swing Trading Strategy Basics

Potential Profits From Flirting With Disaster

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Ken Shreve: How To Identify Bottoming Bases

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