Sector Rotation Reversal

Entry Logic

• Enter long a stock in a sector that is starting to outperform the broader market.
• Confirmation is a breakout of the sector ETF on a relative strength chart.
• Use a daily timeframe for this setup.
• Entry should be on a pullback to a key support level.
• This setup works best in a market that is rotating between sectors.

Exit Logic

• The profit target is a 20% gain in the stock.
• Scale out 25% at a time at 5%, 10%, 15%, and 20% gains.
• Trail the remaining position with the 50-day SMA.
• Exit if the sector starts to underperform the market.
• Exit on a confirmed bearish reversal pattern.
• Exit if the trade is not profitable within 3 months.
• Exit if the MACD shows a bearish crossover.

Stop Loss Structure

• Place a hard stop below the entry support level.
• A soft stop is a close below the 50-day SMA.
• Maximum dollar loss is $2500 per trade.
• Maximum percent loss is 5% of the account.
• The structural stop is below the low of the pullback.

Risk Management Framework

• Risk 3% of the account per trade.
• Daily loss limit is not applicable for this timeframe.
• Weekly loss limit is 10% of the account.
• Maximum drawdown is 45%.
• Minimum risk-reward ratio is 3:1.

Position Sizing Model

• Use a portfolio allocation model for this strategy.
• Allocate a certain percentage of the portfolio to the outperforming sector.
• No conviction sizing is used.
• Do not scale into trades.
• Scale out at predefined profit targets.

Trade Filtering

• Avoid trading this setup in a bear market.
• Requires a clear rotation into a new sector.
• Trade only the leading stocks in the outperforming sector.
• Avoid trading this setup during times of high market correlation.
• Do not trade in markets with no clear leadership.

Context Framework

• The weekly chart should show the sector breaking out on a relative basis.
• The economic cycle should be favorable for the sector.
• The setup should occur after a period of market consolidation.
• The monthly chart should show a potential long-term shift in leadership.

Trade Management Rules

• Do not move the stop to breakeven until the first profit target is hit.
• Scale out at predefined profit targets.
• Do not add to winning trades.
• Be patient, as sector rotations can take time to play out.

Time Rules

• This setup can be identified at any time.
• The entry is taken on a pullback.
• The trade can last for several months to a year.

Setup Classification

• A+ setup: Strong sector rotation, leading stock, favorable economic backdrop.
• A setup: Clear sector rotation, strong stock, neutral economic backdrop.
• B setup: Weak sector rotation, lagging stock, unfavorable economic backdrop.
• C setup: No clear rotation, avoid.

Market Selection Criteria

• Trade sector ETFs and the leading stocks within those sectors.
• The sector should have a clear catalyst for outperformance.
• The stocks should have strong fundamentals.

Statistical Edge Metrics

• Expected win rate is 75%.
• Average win is 5R.
• Average loss is 1R.
• Profit factor is 3.75.
• Expectancy per trade is 3.0R.

Failure Conditions

• The strategy fails if the sector rotation is false and the old leadership reasserts itself.
• A common failure is picking the wrong stock in the right sector.

Psychological Rules

• Have the patience to hold through market corrections.
• Do not get caught up in the hype of the moment.

Advanced Components

• Use intermarket analysis to identify the flow of money between asset classes.
• A fundamental analysis of the sector can help confirm the rotation.
• Avoid having too much exposure to a single sector.
• The monthly chart must confirm the long-term shift in leadership.

Location

• The setup is strongest at the beginning of a new economic cycle.
• The setup is weakest in a late-cycle environment.
• The timing of the sector rotation is critical to the success of the trade.