Monday, December 17, 2012

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
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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