Watchlist 11th May 2022
The CPI data which is due to be released today could help shape the rest of the year. If peoples fears are unjustified we’ll see an immediate rip and a lot of short covering. Lucky for us this is due to happen pre market.
As it stands the scanner is barely pulling up any charts with almost everything below key MAs.
I have mentioned the extensive research in regards to the 50ma, which is for overall direction. Yet I’ve mentioned little about market flushes and what we want to see. I know we’ve discussed multiple times how much was made from Covid lows but never really talked about how.
Firstly I joke about this “being the bottom”, whilst it’s possible it’s also impossible to say with accuracy. All I can use is my knowledge, experience and and excessive obsession with data. I am also not a fan of SPY as you know and have that as a hedge which I’ll sell far sooner than anything else.
Svenny bought up the following comment yesterday “The largest sums of money are lost trying to time a bottom”. For traders this is true, 9/10 you’ll get fucking destroyed.
Before we jump into a couple of things I want to start by asking you a question.
Have you started to research the bottoming process on previous sell offs, so you know where you have an edge? If not then why?.
This goes back to the announcement a few weeks back of how you need to treat this like a business if you want to succeed. You have to put in the work.
Now I want to go back to the basics of how the market operates. For this example we’ll keep it simple and say there are 1,000,000 market participants. Each market participant in this example has man equal sum of cash. We won’t take into account HFTs or short sellers. Just the pure basics of how the market operates.
There are 20,000 people buying and selling EVGN, the stock may trend higher or lower depending on the proportion of buyers and sellers. If suddenly some good news comes out which attracts 60,000 more buyers what happens? Demand outweighs Supply and the price goes up.
This is obvious right? So obvious you could place it in a textbook for 6-7 year olds. Which begs a question, when this takes place why do people attempt to short it?
During every crash there’s one key component that doesn’t change. There are more sellers than buyers. I know what you’re thinking, that’s so obvious, so how is it helpful.
For this example let’s say we’re leading up to the market highs of 2021, a time I sold almost all my long term. 985,000 of the 1,000,000 are already fully invested. A few days go by and 10,000 people realise there’s no buying pressure left and start selling. Even though there’s 985,000 people invested, those 10,000 people will cause the price to drop because there are almost no buyers left. This is why, at the peaks, volume gets very thin. Check the chart below on the SP500 highs and the volume.
Now as more people join the selling side there’s still very few buying so the pace increases. One day 20,000 the next 80,000. Things begin to speed up, people freak out and the bias turns to sell, sell, sell. Names are already down 30-40% and only 200,000 have gotten out. The rest resort to dump mode and we flush, liquidating many who wanted to hold. As this takes place 30 – 40,000 people try buying the flush with little effect.
Again the above is obvious yet once again most fail to remind themselves on the very fundamentals of how the market works. What causes this to happen doesn’t really matter, nor does what you think about the event.
There’s a famous story about Joe Kennedy ” JOE KENNEDY, a famous rich guy in his day, exited the stock market in timely fashion after a shoeshine boy gave him some stock tips. He figured that when the shoeshine boys have tips, the market is too popular for its own good, a theory also advanced by Bernard Baruch, another vested interest who described the scene before the big Crash”
Now most shrug this of as insignificant due to its simplicity; yet simplicity is key. If everybody is long there’s nobody else to buy. If nobody is buying you can’t go higher. Somebody has to buy somebody else’s shares for a premium in order for the stock to move higher. If they are only willing to pay less than current price then the market moves lower.
This is why so many penny stocks create so many bag holders. In this example we’ll take RIVN as an example and use our example of 1,000,000 market participants. I know it’s not a penny stock but it will be eventually.
If a name that usually has the attention of 5,000 people has 100,000 enter in a single day the price goes absolutely parabolic. However what happens if 90,000 of those intended to sell after the initial pump when only another 20,000 plan to chase it the following day? Simple maths and very obvious. You still require more buyers than sellers to keep moving in an upward trajectory.
Next example and we’ll use MU. There are 200,000 people with a position in MU.
100,000 plan to hold for the next 10-15 years and the other 100,000 plan to slowly sell.
Over the course of 4 days 25,000 new buyers step in because they think it’s a good buy due to the increased demand for chips. After 4 days all the shares being sold now have new holders. You now have 200,000 people in MU who don’t plan on selling.
The following day another 25,000 people want to enter MU but nobody is willing to sell for $70. One guy says he sell you some for $70.10, another $70.20, you get my drift. The price BREAKS OUT and the stock price moves higher.
Now all of the examples are super basic and don’t take into account short sellers, HFTs etc. Yet at a fundamental level all the market is based upon is supply and demand. Much of which is driven by fear and greed.
So what happens when we have a massive sell off and the 990,000 people who were once in are out? Whether they were margin called or sold on their own accord? Firstly they scream and shout about it. They’re angry, bitter and will sure as hell not be quiet about it. They’ll be sure to let everybody know that you shouldn’t touch the stock market.
In this example what happens if the 10,000 people left in say “Go fuck yourself I’m not selling a cent at this price”. What happens when the 10,000 people who sold near the top start looking and going “Hmmm prices look juicy here I’ll just pick up a few shares”. A bottom can start to appear because they must pay a premium to convince the holder to sell.
This is the basics of supply and demand. This is why when Warren Buffet says “Be fearful when others are greedy and greedy when others are fearful” he actually means buy when everybody has sold and sell once everybody has bought.
Lastly. Shares don’t disappear into thin air, somebody has to buy your shares in order for you to sell. An exchange always takes place, so when we get close to lows and the volume is still high, somebody is buying all of those shares. If you think for a second, that these aren’t some of the same people joining in on the fear parade, to convince you to sell, you’re naive.
Do you really think for a second that all short reports are people shorting? Imagine if you could convince your car dealer to knock off $1,000 due to a tiny scuff on the wheel. Or convince somebody to sell there home for less because there’s a damp patch. I mean nobody would do that right? Right?
Just like the housing market right now, everybody has been scooping up these low initial rates and buying homes like crazy. At some point a few people will want to cash in. Once a few list, a few more list, then more and more and more. Suddenly everybody starts listing and they have to drop their prices.
Supply and Demand.
So why is this so important and why do 90% of losing traders ignorantly ignore it? Why do people research interest rates, the fed, OIL prices, geopolitical issues? The market will take care of that for you. Those 1,000,000 market participants will decide for you. Once they’ve all made and ACTED upon that decision collectively, do the complete opposite. If you do just this you’ll never have to worry about money again. (Long term)
Do you really think for a second I had any clue that the last quarter in 2021 was the top due to political and economic issues? I’ve only just learnt how to spell the word quiet and I don’t even know who’s in charge of what in my own country. Let alone the grammatical errors in this post alone. I of course, understood , the basics which helped, but , it was more the hyper extension , and , lack of buying , that made me pull the trigger.
All I knew was everybody was long, which means I’m cashing in and running out the door.
To summarise the above:
Keep It simple and don’t build a bias. When there are more buyers than sellers we’ll go up and when there’s more sellers than buyers we’ll go down; regardless of economic and political matters.
I’ve been going over charts for the past week, this morning I set my alarm early to churn through hundreds more. Key names and indexes from some previous market crashes.
What was clear and apparent was the 5ma signalled potential bear rallies and sometimes a potential bottom, this is nothing new and the reason I added this to my chart last month.
When the market/stocks push over the 5ma AFTER a significant pull back, 80-90% of the time it gave enough room to enter and move to break even. The bursts over the 5ma after a considerable downturn have shown to be extremely aggressive in the past for obvious reasons.
This is important if you don’t want to miss the initial consolidation and breakout from lows. You’ll NEVER get the bottom nor should you try, as the bottom will always be under all moving averages at the time of taking and represent nothing more than a gamble; Instead you need to wait for..
A BREAKOUT SET UP, then approach it with rules to fit current conditions. You then back test those rules to make sure you have a statistical edge.
The 50ma moving average is the key in all market conditions, if you only trade breakouts once they’re over then you’ll fair very well. I have now been well over 1,200 charts checking this and speak from experience.
Looking back it can take an approx 2-4 weeks to reclaim the 50ma from lows and in covids instance a 40% avg move to do so. With that said sitting out isn’t a bad thing, in fact I’d recommend that approach to most.
If you’re trying to take the breakouts from lows then the 5ma break and moving to break even aggressively is the best approach, based on the approx 300 charts I have reviewed this morning and personal experience (It’s hard to remember without reviewing). Including the trades I took at covid lows.
It’s important to also note that the names most over extended bounced a lot cleaner than the less extended. Secondly, in a bear market rally, do not expect continuation beyond 3/4 days. A lot of these moves fail in 2-3 days but can give ungodly R/R. My MGM trade provided approx 54rs in under 24 hours. I doubled my account on Wayfair in 3 days. Got fucking wrecked by AMD for after holding a winning position for 19 days then getting gapped down on for a 4% loss. Why do I like AMD for fuck sake.
The cleanest moves are when it breaks the 5 and 10ma. If both are broken the hit rate increases.
Your job as a trader is to trade set ups. That’s it.