Sellers versus Sell Short Traders

MetaStock SPRS Series - Week 99 - TechniTrader® Stock Discussion for MetaStock Users - Sellers versus Sell Short Traders - December 17, 2012
By: Martha Stokes C.M.T.

Sellers versus Sell Short Traders determine who is in control of the sell side of the trade. Many traders want to learn how to Sell Short to make profits.

They often assume that the sell side is simply the opposite of the buy side, and that is why so many traders do not make the profits they hoped. There are many factors that make the sell side price and volume action different from the upside.

First stocks are like airplanes, they need lift to move up so lots of volume or buying is needed to maintain price moving upward in a trend.

But to the downside, stocks can and do drop in price with very low volume. Think of an airplane again, when there is no air or lift the plane stalls and falls. As a plane moves upward into the sky, the angle of ascent is critical because if the plane goes beyond the point where air or wind is lifting its wings, it will stall and the stall will be dramatic and swift.

That is now stock prices behave. Without volume and buying going on, there is nothing to hold the price up so if price slips on lower volume it doesn’t always mean that selling short has commenced.

The first move down for a trend is not traders selling short but profit taking by traders who have made a nice profit and have decided to exit the stock. These are savvy institutional investors, wealthy private investors, and fund managers who have decided for a variety of reasons to sell the stock.

Often retail traders mistake this profit taking mode for selling short opportunities only to get thoroughly whacked as smaller funds, investment groups, and less savvy investors and traders “buy on the dip” that is created as the big funds and smart money are rotating out of the stock.

These institutional investors are very careful as they sell out of a stock for profit taking to not disturb price much so they tend to take several weeks to sell out.

This creates the up and down price action you see below. Savvy institutions, funds managers and traders are rotating out while smaller investors are buying the stock “on the dip.”

This is not a good scenario for a retail trader to make profits selling short, because there is insufficient points gain to make decent profits and the risk of a whipsaw trade is very high. This is a high risk trading scenario but many retail traders try to trade these patterns with dismal results.


Chart 1

The TechniTrader® Quite Accumulation TTQA indicator is showing with the gray bars how the institutions are carefully exiting this stock while smaller funds are moving in. Volume also shows that the sell side is more dominant than the buy side.

But the range is only a couple of points, far too small for a retail trader to get in and out with profits to cover expenses.

Other indicators that help you see the institutional profit taking selling, are Flow of Funds and Volume Accumulation. Both expose the weakening upside action. In this stock example the profit takers are in control of price. Flow of Funds are moving out of this stock and the volume is weakening to a distribution pattern rather than an accumulation pattern.


Chart 2

Since this is a sideways action RSI and Stochastic are ideal indicators also to study, and both are showing the lower highs and lower lows of a weakening sideways price action.


Chart 3

So who has been in control of price during this sideways pattern? Not sell short traders, but large lot and institutional funds investors taking profits.

Why are they selling for profit at this price level? Because the stock has hit a yearly high resistance level and so they are rotating out of this stock. They are controlling price by selling incrementally and slowly over time. They know that each time the stock drops to the weak support level, more small funds and small lot investors will rush in to buy on the dip. This is a controlled price pattern that is dominated and ruled by the institutions who are selling for profits.


Chart 4

If you want to be a profitable trader selling short, you must wait for the confirmation of the professional, high frequency, and institutional trader selling short as these are the traders who can drive price down with velocity and momentum.

If you try to sell short during the profit taking and buy on dip period, you will get whipsawed out of trades with little to no profits, and risk a huge loss on a sell short as the stock suddenly moves up rather than down.

Knowing who is in control of price before entering a stock will help guide you as to when to enter, how long to hold, and when to exit.

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
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Price Action

MetaStock SPRS Series - Week 98 - TechniTrader® Stock Discussion for MetaStock Users - Price Action - December 10, 2012
By: Martha Stokes C.M.T.

Traders tend to think merely in terms of up or down or momentum. What they often fail to consider is who is driving price and why. If a trader understands who is driving price and why they are moving price, then they will be better prepared to anticipate what price will do next. In trading successfully, it is not what happened today in the stock chart that matters as much as what will happen tomorrow, especially for short term traders.

There are 4 positions that are within a stock at any one time:

1. Traders and Investors buying stock to go long either to swing or intraday trade, or to hold for weeks, months or even years as an investment.
2. Traders and Investors who are selling the stock to close out their position, either for profit taking or to use the proceeds to buy other stocks.
3. Traders Selling Short are short term trades based on the anticipation the stock will move down and they will net profits on that move.
4. Traders Buying to Cover are short term trades to close out a sell short position, either for profit taking or because the trade is going against them.

Each group has its own agenda, time frame, goal or target price, entry order, stop loss, and reason for their purchase or sale of that stock.

Which group or groups dominate determine the energy, velocity, and duration of the short term price action and volume action.

Below is a great example of how the 4 different groups buying and selling alters the price action, volume and energy, angle of ascent and descent, trendline pattern, and entry signal and exit signals. The changes over time as to how price moved in this chart example is directly corresponding to which of the 4 groups above were at any period of time, in control of price or dominating the price action during that period.


Chart 1

As a retail trader, the more you understand about what price and volume action corresponds to which group or groups in control of price, the better you will be able to determine and anticipate what price will do next in the short term. In today’s market the institutions dominate and where, how, when, and why they are buying or selling dramatically alters price movement.

Whenever you are buying a stock or selling short, it is imperative that you also consider who is in control of price at that moment, even if the stock is in a consolidation or platform pattern, because who is in control will govern what direction the stock will take next, how long the move will last, and the potential profits whether you are trading up or down.

Many traders just want to find a stock that is going to move when they are still at the beginner level. But as you advance and gain more experience, you realize that understanding the movement is even more important than finding a stock to trade. Once in a trade, this understanding will help you make wise decisions rather than impulse decisions. The more you understand why price is moving and who is moving price, the better trader you will become.

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
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Volatility Part 3

MetaStock SPRS Series - Week 97 - TechniTrader® Stock Discussion for MetaStock Users - Volatility Part 3 - December 3, 2012
By: Martha Stokes C.M.T.

As we discussed in the past 2 weeks, volatility is not a random event. As with everything in the market, there is cause and effect involved. Many traders are surprised by volatility and get whipsawed out of a trade unexpectedly. Understanding the what, when, where, how and why of volatility can help you anticipate and prepare for volatile price action.

We studied “what” is of volatility in week 1, and “why” volatility occurs and “where” it is mostly likely to show up in week 2 of these discussions.

This week we are going to study the “when” of volatility. When can you expect volatility to erupt in price action causing major fluctuations and wildly speculative and unpredictable price action.

Volatility is tied to the collision of diametrically opposed forces:

1. Dark Pools selling or buying incrementally huge share lots over time.
2. HFTs, smaller funds, and the Sell Side Market Participant Groups.

Volatility tends to occur at 2 primary locations on a chart:

1. As a Top is about to commence
2. As a Bottom is about to commence

Therefore recognizing volatility early allows you to identify a top or bottom early. This means you are able to trade with more knowledge and understanding of who controls price.

Dark Pools have the largest sums of money to invest. Dark Pools are both Buy Side and Sell Side institutions. They can include mutual funds, pension funds, hedge funds, market makers, and banks.

High Frequency Trading Firms have the fastest trading platforms, trading on the millisecond creating huge volume surges. BUT they do not have the vast sums of money at their disposal that the Dark Pools have.

So invariably it may look at first as if the HFTs are controlling price and will maintain the integrity of the trend up or down but in fact, the Dark Pools always have the advantage over the extended period of time. Eventually HFTs will abandon the stock in their constant quest for fast moving stocks.

Dark Pools are so dominant that they are the primary cause of a stock topping or a stock bottoming.

Dark Pools as an example, were rotating out of AAPL months before it reached its final all time high and then collapsed.

Volatility entered AAPL as Dark Pools took advantage of the speculative environment surrounding AAPL, as gurus and recommendation services promised investors that AAPL would go to $1,000.00.

As the Dark Pools sold incrementally, it placed more and more pressure on the downside. Retail traders and independent investors buying, could not keep up with the steady outflow of money from AAPL by Dark Pools, so eventually a top formed and the stock collapsed as retail buyers evaporated and more and more selling started.

Understanding the cause and effect behind volatility is crucial for successful trading and investing in today’s complex market structure. With a full 9 Market Participant Groups in the market today, identifying WHO is in control of price is most important.

When you are able to do so you will earn higher profits, avoid weak trades and whipsaw trades, and will be better prepared for corrections and bottoming action.

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
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.