Momentum Trading Strategy

Notes

Finding Leading Stocks

What to buy: how to find, screen and rank the strongest stocks and industry groups.

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$IBB ×
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The Best Swing Trades Look Like This Before They Explode

Study this chart.

CAI is a great example of what can happen when industry strength, price action, volume, fundamentals, and risk management all align to create a low-risk, high-reward swing-trading setup.

Biotech had a strong run in June. IBB then spent July building a base, formed a handle near its highs in August, and broke out to new highs.

While the industry group was confirming its strength, CAI was setting up.

  1. Character change: The stock established a higher low followed by a higher high. That higher high confirmed the higher low and signaled the character change I look for.

  2. Volume and growth fundamentals: Around earnings, volume expanded dramatically, quarterly sales grew 45%, and price moved back above both the 50-day and 200-day moving averages.

  3. Low-volume pullback: CAI pulled back on declining volume almost perfectly to the 200-day moving average and found support.

  4. Entry: The following day, it gapped higher on increasing volume, providing an entry near the open on August 19.

  5. Clearly defined risk: You could have placed a very tight stop below the low of the entry day. My preferred stop was below the higher low, the 200-day moving average, and the low of the pullback.

  6. Sell into strength: Once the stock reached a multiple of the initial risk, you could sell some into strength to help finance the trade, protect your principal, and give the remaining shares room to capture a potentially larger move.

That is what low risk really means.

It does not mean the trade cannot fail. It means you know exactly where you are wrong, while the characteristics of the setup offer significantly more potential reward than what you are risking.

Even the wider technical stop required less than 6% risk. Within only a few days, CAI had gained approximately 18%, or three times the initial risk. That created an ideal opportunity to sell some into strength while allowing the remaining position more room.

The fundamentals also supported the setup:

  • Sales growth of approximately 45%

  • ROE above 20%

  • The number of funds owning shares more than doubling over the past year

  • Improving forward estimates

  • One-month RS of 98

  • Three-month RS of 95

CAI does not fully meet my longer-term position-trading criteria, particularly because its one-year relative strength remains weak. But for a swing trade, it fits extremely well.

This is why traders like Kristjan Kullamägi focus on the market’s strongest performers over the previous one, three, or six months.

Strong industry group. Character change. Massive volume. A lower-volume pullback. Support at a key moving average. A clear entry and clearly defined risk.

Study these characteristics.

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The Quiet Leaders: What’s Been Outperforming the Market All Year

Looking at my Relative Strength Dashboard and combining it with IBD’s RS data, which ranks stocks and ETFs against over 11,000 tickers across the entire market, a clear group of long-term leaders emerges.

These are not just beating the S&P 500, they are outperforming almost everything.

Here is what has dominated across 1-year RS, 6-month RS, 3-month RS, and 1-month RS:

Biotech: IBB, IHI, XPH, PBE Biotech consistently shows up at the top regardless of timeframe. It has been one of the most reliable pockets of strength in the entire market, even during periods when growth cooled off.

Metals and Mining: XME, GDX, SIL, SLX, GLD, SLV This entire complex has been a powerhouse. Industrial metals, gold miners, silver, broad miners. Every category keeps landing near the top of the RS rankings. This is structural strength, not a short-term theme.

Chips (Semiconductors): Semis have shown strong RS over 1-year, 6-month, and 3-month windows. The only softness has been in the past month, and even that looks more like normal digestion after a big run.

Foreign Markets: Canada and Brazil consistently rank near the top across multiple timeframes.

Bottom Line: When RS leadership shows up in every timeframe, and across 11,000 plus tickers, it is not random. Biotech and metals and mining have been the real leaders all year.

This is why I rely on Relative Strength. Leadership is obvious when you measure it.