Monday, November 28, 2011

MetaStock U - "Indicator Extreme Patterns when Selling Short"

MetaStock U Article SPRS Series - Week 44 - TechniTrader® Weekly Discussion for MetaStock Users: SWKS "Indicator Extreme Patterns When Selling Short" - November 28, 2011
By: Martha Stokes C.M.T.

Last week we talked about failed oscillator patterns. This week we are going to discuss indicator extreme patterns when selling short.

Right now the market is moving down due to overseas selling and concerns about the Euro risks.

Selling Short in this kind of market condition allows you to take full advantage of all of the trading opportunities available in stock trading.

Selling short however is not just a mirror opposite of buying long. Once again, the Market Participant groups and who is in control of price makes a difference on how price moves, how indicators behave, and how you should enter and exit a stock.

Your goal should be consistent profitability over time. Most traders settle for inconsistent results that at the end of the year end up being either a tiny profit or a loss for all the time and effort you put in.

Let’s take a look at an extreme pattern on TechniTrader® indicators for MetaStock.

We have SWKS which has been in a downtrend since early 2011. It had an acceleration of selling over the past few days. The angle of descent is at an extreme and the number of down days exceeds the normal number for this stock.

But the truly telling signs are what is occurring with key indicators.

Chart 1

TechniTrader® Volume Accumulation TTVA and TechniTrader® Flow of Funds TTFF are at the lows of their respective charts. These are extreme patterns, indicating an oversold condition. TechniTrader® RSI/RSI, the appropriate price oscillator for these market conditions is within striking distance of its lower line and the angle is steep.

TTVA and TTFF are lower on the chart, at extreme lows well beyond the lower range for both indicators. This means this stock is way into oversold territory.

The TT RSI is hovering just above an extreme reading.

Chart 2

The risk is not that the stock won’t move down another small amount BUT that when it bounces and moves up, the bounce could either be a gap, or a big early morning run either of which would wipe out most of the profits of this lower end trade.

All that needs to happen to have a gap or long white form is some good news before market opens. Since this holiday was a sell down prior to the holiday and on the half day Friday, this increases the risk of a bounce for stocks selling down into extreme oversold territory.

Extreme indicators warn of an impending bounce or run up. The support level is shown on the weekly charts.

The goal is to exit a swing trade BEFORE the bounce or run up, not after the bounce has occurred.

Chart 3

The proper exit day to insure control over the exit price was Friday, holding until Monday in hopes of another half point to point gain on this trade is gambling. The indicators were already into extreme mode.

To risk many points to gain possibly half a point is simply poor trade management.

Watching the indicators, calculating risk versus profit potential based on support levels, and exiting the trade while it is moving down is the ideal way to exit a swing trade sell short.

Summary: We have a different market structure than we had even a few years ago. Without the uptick rule, sell side action goes into extreme mode very quickly. Being able to see the patterns and exit as the stock is continuing to move down but is in an extreme mode is the proper way to capture profits.

Otherwise you will be frantically trying to get out of the trade while the markets run up.

Sure, this trade could go down a bit further, but the risk exceeds the profit potential. Always trade with the profit potential at 3/1 or 4/1 ratio.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2011 Decisions Unlimited, Inc.

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