Boost in Swing Trading Courtesy of Market Breadth Improvement

Boost Swing Trading — The preceding year predominantly spotlighted the “Magnificent Seven” stocks, leaving many investors grappling with the challenges of aligning with market-weighted indexes dominated by mega-cap corporations. However, as 2023 drew to a close, a positive shift in market breadth emerged, redirecting attention to swing trading strategies.

Exploring Two ETFs:
The realm of software has been a persistent point of interest, particularly as numerous computer software groups climbed the ranks within IBD’s 197 Industry Groups in 2023.

Understanding Boost Swing Trading

The iShares Expanded Tech Software Sector ETF (IGV) has been a focal point for software enthusiasts. This ETF is rich in software heavyweights, emphasizing “targeted” exposure, with the top five holdings carrying approximately 40% weight for the entire ETF.

On the other hand, the SPDR S&P Software & Services ETF (XSW) takes a different approach. As part of the State Street family, XSW utilizes a “modified equal weighted index” to offer “unconcentrated industry exposure.” None of its holdings surpass the 1% mark, preventing the top five holdings from exceeding a 5% weight of the total ETF.

Key Facts and Analysis

The key takeaway is the significance of breadth, acting as a differentiating factor between the two ETFs. Around the Nov. 1 follow-through day, XSW wasn’t displaying strength, reflecting the ongoing struggle in market breadth. Given that relative strength plays a pivotal role in swing trading, XSW wasn’t deemed ready for prime time at that juncture. However, a few weeks later, a gap-up propelled the ETF well above its moving average lines, affirming its strength. This marked its entry into SwingTrader.

Broad Application of Swing Trading in Software:
An effective swing trading decision often manifests immediate positive outcomes. XSW validated this principle, delivering prompt feedback as the position saw a 2.5% gain within a couple of days. After consolidating gains, XSW found support at its 10-day moving average before experiencing another upward surge. This prompted the removal of another third of the position at a profit, with the remaining portion left to continue its momentum.

For the most part, XSW adhered to its 5-day moving average as it ascended, with occasional breaches along the way. However, by the year-end, it dipped below both its 5- and 10-day lines. As the new year commenced, the stumble persisted, leading to the decision to exit the swing trading position.

The Unfolding Narrative:
While the exit marked a conclusion to that specific swing trading episode, it might not signify the end of the narrative. The beginning of 2024 witnessed a decline in market breadth, despite recent index rebounds. If market breadth stages a recovery, XSW could potentially present another swing trading opportunity.

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Frequently Asked Questions

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