Whenever the market moves into a highly emotional state where facts and good news are ignored, driving price down faster and faster, at an angle of descent that is unsustainable, traders need to switch mental gears from thinking only of selling short to preparing for the upside velocity move of the V bottom.
Many stocks are currently selling down not because their company is faltering or slowing down in growth, revenues, and earnings, but because panic and fear seized the markets and triggered High Frequency Trader formulas to sell short. Without the uptick rule, these millisecond heavy trading firms can initiate a super collapse that lasts for a few days, creating the downside first leg of the velocity V bottom.
As stocks drop into the trigger point for institutions looking for bargain stocks, the surge or orders quickly reverses the downtrend, this causes all of the high frequency traders formulas to reverse and start buying to cover, this fuels the upside Velocity V bottom pattern that can move very quickly.
To enjoy these huge swings of sentiment and heavy large lot trading activity, a retail trader must be prepared well in advance of the turn. Otherwise they will be chasing the run, rather than riding the run up.
The steeper, faster, and deeper the velocity run down is, the swifter it will reverse and move up. These are not slow moving market activity. Velocity is faster and more powerful than momentum runs which are quite different from velocity runs.
Chart 1
GNTX is in the auto industry as a component manufacturer. It has had great growth as the auto industry is reinventing after a long term cycle downward. GNTX reported solid revenue and earnings in late July even though the Japanese automakers had cut back production due to the tsunami and earthquake. That was quite a significant feat for GNTX to do and the guidance for next quarter is for continued growth.
Based on financial and fundamental data, GNTX is moving down not because the company is in a contraction phase but it is moving down because the market is moving down. This is a sentiment price action.
Sentiment action usually reverses very quickly and returns to the normal pre-sell down price.
Chart 2What this means is that this stock is likely to rebound and recover more quickly than a stock with a company in a declining growth or contraction of its business cycle. If the company was actually in a contraction of its business, then it would not recover quickly but would build a slow base or bowl bottom as we discussed last week in the SPRS.
Last week's bottom lesson was about slow developing bottoms this week is about the fastest bottom.
GNTX could conceivably go down to the high support level of $20 before commencing the V upside bottom. But it is not too early to start watching the stock for a reversal candlestick signal or candlestick buy entry signal with confirming indicators.
Remember that quiet accumulation and bargain hunting initiates the upside on a V bottom. At first quiet accumulation will not move price much, then as high frequency traders start buying the stock will run with momentum or velocity.
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
©2011 Decisions Unlimited, Inc.
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