The best traders can adjust to whatever the markets throw at them. Rather than focus on what they think or expect to happen, they plan for multiple scenarios and adjust as the opportunities present themselves. As a trader, it is important to not lock yourself into only one possible outcome, as the markets are not always rational or logical. Fear and greed are two of the most powerful emotions we have as humans. If you think of the markets as a huge pool of extreme emotions, than you can understand why the markets often move in ways we would deem improbable or illogical. A stock chart shows price objectively, but traders in turn must be objective in reading them.
Even when the market is in a strongly trending environment, it is still good practice to run through alternate scenarios so that you are not caught by surprise in the event of a reversal. This becomes even more important when the markets are at inflection points that could be resolved in either direction, much like where we find the current market. The current rally has pushed the indexes to resistance levels that may be difficult to overcome, but they also have yet to show clear signs that the rally is over. This is a tricky spot to trade in, as traders should always honor the trend, but we must also be cognizant of support or resistance levels. There are many different ways to trade in this environment, but one simple tactic is to always have a list of strong and weak stocks at your disposal. This way if something dramatic happens due to an unexpected event (not uncommon nowadays), then you don't need to scramble to take subpar setups or find yourself liquidating perfectly valid long setups because you were unprepared
While we presented some strong stocks in the event that the markets continue to move higher and weak stocks if the markets fail, there is no rule that states either setup will fail with the opposite market. By finding weak stocks, there is still a good chance they stay weak even if the markets do push higher. Strong stocks may hold up on a pullback and even continue to rally if the pullback is shallow. It's important to be prepared for either scenario and thus be a step ahead of the competition when it is time to act.
updated 20 th July
While the technical picture for the markets is certainly looking much improved over last week, traders should be aware that there are still some flashing warning signals. While the MACD histogram indicator has turned positive, it is still making lower highs as the markets trade higher. This warns of slowing momentum, and highlights the fact that the markets have yet to stage a healthy correction since the rally began in March. Keep an eye on the resistance levels mentioned, and whether a move above them can be sustained. The possibility still exists for a bull trap to be set, much like the recent failed head-and-shoulders bear trap. If these levels are cleared decisively, they should become important support levels moving forward.
Updated 27 July
The markets continued building on the impressive rally they staged last week. There were many mixed earnings developments this week, with some stocks beating expectations, while other offered disappointing numbers.
Despite the mixed earnings reports, all the major indexes were able to clear their recent highs established in June. This move above resistance suggests that the markets are beginning a new leg up. While this is certainly a bullish development, it makes sense to step back and see how far we have come and where the markets may run into roadblocks moving forward.
This week, rather than looking at daily charts, we will be scaling back and viewing weekly charts. Typically, the shorter the time frame a trader uses, the noisier and more riddled with false moves a chart becomes. Weekly charts can offer a fresh perspective for a trader solely focused on the daily gyrations of the markets.
While the near-term focus has been on the failed head-and-shoulders top on the daily chart, the chart for the Diamonds Trust
The key theme this week is that it's always important to put things into perspective. While the markets have cleared important resistance and may have room to continue the rally, reviewing the weekly chart offers a different perspective. Stepping back, it's quite apparent that the markets are still in a downtrend, and there are other levels of resistance that need to be watched. By having the proper perspective, a trader can better manage risk and plan ahead for whatever the markets do next.
Market conditions are subject to change and what you do to grow your money today is no different. While some situations call for a focus on saving, more likely than not, you do not want to stop investing.
Many believe that investing inherently carries more risk as opposed to general saving. Investing does carry more risk – one can lose all or more of one’s investment. However, over the long-term, being at least three years, typical saving vehicles are subject to erosion of buying power. Savings in the form of cash, certificates of deposit (CDs) and money market accounts can provide short-term liquidity, but chances are that over time any interest earned on those monies will not be enough to compensate for increases in taxes and inflation.
Updated 29 july
There are many myths perpetuated in the trading world. One such myth is that if you know how to trade the uptrend or the buy side of the market, then you can easily switch and trade the downtrend or sell side of the market. All too often, Retail Traders assume the two are mirror images of each other. Unfortunately, this often leads to problems for traders who want to sell short.
The downtrend is significantly different in price action than the uptrending market. Here are some aspects of downtrending price action every trader needs to understand and recognize to improve their sell side trading:
The Market Participants who trade the downtrending market are a different mix than those who trade the uptrending market and do so for very different reasons. Since the late 1990’s, the levels of Market Participants have expanded and we now have 8 groups of Market Participants each with their own agenda for investing or trading stocks. On the uptrend, the Institutional Investor dominates price action. During a downtrend, the Institutional Trader controls the action. Since each of these groups has entirely different buying and selling agendas, price action is impacted often in dramatic ways. Understanding this phenomenon helps the Retail Trader know what kinds of entry signals to look for, the patterns to watch for in institutional indicators, and what kinds of exit signals and strategies to use for both stock and option trading.
Stocks require strong volume patterns to move up, so a continued increase in volume is necessary for the uptrend to sustain. On the downtrend, stocks can and do fall even on low volume patterns. This is especially true during the secondary and final phases of the downtrend. Retail Traders need to adjust their volume indicator settings to accommodate the variances between the uptrend and the downtrend. Volume bars should be used with a sub-indicator, either a moving average or rate of change and the settings need to be significantly tighter on the downside to achieve an accurate analysis of volume to the downside.
To the downside, the angle of descent is far more vertical and occurs more frequently than the angle of ascent. The angle of descent can maintain a vertical drop longer than the angle of ascent. When a trader understands this phenomenon and is expecting it, then they are able to make adjustments to their exit strategies and indicator analysis to keep them in the trade for higher point gains. Since the angle of descent is steeper, the sell side tends to move faster with far more momentum, even on lower volume. This creates different Trendline Patterns to the downside. Traders should expect to see tighter consolidations with dramatic stairstep patterns that are longer than upside stairstep patterns. The runaway trendline pattern will also occur more often to the downside than to the upside.
Traditional textbook theory on bear market trends identifies 3 phases of a bear market; however, today’s bear markets tend to have more than 3 phases. Bottoming patterns are more complex and gaps are more common. Retail Traders also need to watch out for more frequent bounces. During the first phase of a bear market or major correction, price action will be at its steepest. In recent years, the final move down of major corrections tends to fizzle out rather than the huge dramatic drops that occurred in prior decades.
The initial downtrend phase is an important area for retail traders to recognize to enter just as the topping action completes. Often Retail Traders are not aware of the topping action and miss the highest point potential of the downtrend. Conversely, during the early stages of a market bottom, Retail Traders are often attempting to sell short while institutional investors are quietly accumulating.
Here are a few tips to help you with your selling short trading:
o Whenever any financial market, whether it is stocks, bonds, options, or forex go vertical and sentiment has gone over 90% to the upside, start watching for one of the 5 topping patterns and shift your mindset in preparation for selling short. Choose 1-3 sell short entry signals, adjust your indicators, and start setting up for selling short. Wait for the drop in volume on the final move up.
o The Institutional Investors tend to exit the stock, index, or other instrument prior to the final move up. The small investor and late comers create that vertical extreme peak pattern on falling volume. If the stock, index, or other instrument doesn’t make a higher high and higher low on rising volume, then you have an initial topping pattern developing. Be aware that the late buyers coming in will “buy on the dip” with ‘market orders’ rather than controlled orders and this can cause a big bounce. Watch for this pattern.
o Do not keep your stop loss too tight, allow for normal overlapping that forms in downtrend price action. Falling price action tends to overlap far more than upside price. If you keep a very tight stop, you will get whipsawed out of the sell short or option put prior to the major move down. Overlapping on downtrending stocks occurs because even as the Institutional Traders move in to control the downside action, late uninformed small lot buyers are rushing to buy with ‘at market’ orders. This creates a surge of pre-market orders allowing market makers to gap price up at market open, then as the large lot sellers move in, price drops quickly. The more popular the stock, the more overlapping of price action there will be when small lot late buyers meet Institutional Traders selling short.
o When a stock drops below 50, it has less profit potential for selling short. Retail Traders need to be vigilant during the final phases of a downtrend to monitor the activity of the Institutional Investors who will move in quietly without disturbing price much. Once their counterparts, the Institutional Trader, finds out about the quiet accumulation, speculative bottoming action will occur. Often times Retail Traders have delayed selling short during a downtrend and jump in just as the stock is about to begin a bottom. If a stock has fallen 40%-50% or more, then it is usually not an ideal candidate for selling short.
o Keep a 3/1 Profit Point to Risk ratio when selling short. The sell side offers a much higher profit potential per trade than the buy side, however, the risk is also greater as bounces can wipe out profits quickly. By choosing only optimal picks with a higher profit to risk ratio, you lower your overall risk and raise your profit potential.
o Do not choose weaker picks with lower profit to risk ratios simply to have something to trade. If you can’t find ideal picks, then stop and accept the fact that the market is telling you something important. Often when you aren’t able to find picks with good profit to risk ratios the market is right on the cusp of a major upside shift.
The sell side is different than the buy side of the market. It has a much faster moving price action in the early stages of the downtrend, but it also has overlapping patterns not seen as frequently when stocks are trending up. The matrix of Market Participants—who is buying, who is selling, who is buying to cover, and who is selling short differs on the sell side to the buy side and impacts price action. When a trader understands these often subtle differences and can see the patterns on the price chart, they are on their way to mastering the sell side and becoming an expert trader.