Has this ever happened to you?
You find a great stock with good MACD or other indicators and buy it only to have it move down the day you entered or the next day. Discouraged you either sell out or your stop loss gets hit and you are out of the stock.
Chart 1
Chart 2
THEN to make matters worse: the next day the stock runs up strongly. You are NOT in the stock as it runs.
At this point you are probably very frustrated, confused, or blaming the “Market Makers” for deliberately pushing the price down to take you out.
This is one of the most common occurrences for many retail traders: finding a great pick, getting taken out only to see the stock soar later on.
Sure, you can waste your time blaming market makers and grumble and complain while continually facing this scenario, OR you can learn how to determine WHO is in CONTROL of PRICE and with this knowledge, learn to trade stocks successful day in an day out, avoiding the common gottcha in the above example.
This lesson is about teaching you how to learn to read charts beyond the basics of buy signals, indicator crossovers, etc. To really be consistently successful trading stocks, you need to understand why price moves, who is in control, and how to anticipate the next price action.
Last week we talked about the 4 different trades occurring in stocks at any one time. Today we are going to examine how to determine if Buyers buying to go long or buying to hold OR if it is Buy-to-Cover traders who are in control of price.
Each leaves a different “footprint” on the chart that helps you determine whether buyers buying in anticipation the stock will move up for short term or long term profits OR if it is a sell shorter closing their sell short position with a buy to cover.
By understanding whether you are seeing buy-to-cover rather than buy- to -hold buying activity can help you determine the continued move up for the stock.
Buyers:
There are many different groups of buyers:
1. Institutional Funds buying to hold for charter requirements for a long term position.
2. Wealth Private Investors buying for long term positions.
3. Institutional TRADERS, High Frequency trading Firms, Pro Traders buying for short term profits.
4. Corporations buying either to invest in the company OR for short term profits.
5. Retail Traders (YOU and others like you) trading for short term profits.
6. Small Investors, investment groups, tiny funds buying for long term investments.
7. Odd Lot investors buying because everyone else is buying.
8. Various small to midsized funds buying for both short term profits and long term investments.
Each group has a different agenda. Some are short term trading for upside profits, some are buy and hold investors. Each impacts price in a different way and each buys at a different time in the trend.
Some buy with controlled bracketed orders that contain price in a range, while others buy with "At Market orders" or "Limit Orders" which create opportunities for the market to control price rather than you the trader controlling price.
Secondly, we have the balance between large lot buyers and small lot buyers.
Small lot buyers in any market participant group listed above can and do move price BUT the sustainability of their price action is what matters.
Moving Price and being in CONTROL of Price are two entirely different things. Moving price simply means speculative emotional trading. Controlled of price means those investors and traders are in a position to shift price up or down or maintain the trend.
Large Lots tend to control and dominate price action.
If you learn to read a chart and determine who is controlling price action rather than just how price is moving, you will be able to have far better trading results.
So let’s go back to our example DTG which had a gotcha pattern.
Chart 3
The stock had been running out of a bottom with momentum energy, and moved right on through a resistance level created by the gap up in September. Volume was consistently to the upside with accumulation by pro traders, and institutional trader activity. Institutional investors move in before price begins running as they tend to use bracketed controlled orders and buy in bottoms not during fast running price action.
The entry signal is on lower volume with is not ideal and suggests a weakening of the buying energy. The retracement prior to this entry signal was profit taking NOT selling short. So the large lot buyers were in control all of this time, even during the retracement which concluded quickly.
The problem with this entry is that a tight stop can’t be placed because of the risk of being taken out in a another profit taking retracement.
Chart 4Flow of funds has eased meaning the large lots are not moving in aggressively into this stock on this buy signals but they are not sellout our either. They are simply enjoying the ride because they got in early.
TTVA shows that the consistent large lot activity has dropped during the past few days. Buyers now are smaller lots.
MACD reflects momentum that has been building in the stock buy shows no warning signal of weakness. It hasn’t reversed or dropped back which can lead to a whipsaw entry. MACD is a fine indicator but it must be used properly. This is not the appropriate price action to use MACD.
Chart 5Summary of indicator analysis: volume is not strong on the entry suggesting a weaker price action following, Flow of funds is flat, indicating no further large lot buying, so this is smaller lot activity. TTQA shows institutional trader activity holding, and TTVA confirms larger lots are not buying on this signal.
We have smaller lots buying on emotion while larger lots are sitting waiting.
Let’s look at the weekly chart:
The weekly chart analysis is something most traders forget to study before they buy into a stock that has been running. Clearly we can see that institutional investors have been selling out of this stock quietly as it formed a short term bottom. The reason they are selling is because this stock has reached all time highs and they bought in at the bottom. Fundamentals may be weakening also.
Chart 6So who is actually in control of price for DTG at this moment in time?
Institutional investors rotating out of this stock. They are allowing smaller lot traders and investors to push price upward briefly, then they move in and sell for profits. Large lots control price small lots are simply pushing price up into the large lot sell zone.
Chart 7The resistance of the all time high is going to be problematic for this stock unless it really can show that the company has sufficient growth to have higher revenues and earnings above last year AND throughout 2011.
For this stock, the angle of ascent to this level was too steep to sustain and your entry point was higher risk. Even though the stock moved up, it continues to be under selling for profit pressure.
Who is in control of price: Large lots. If you bought this stock you were trading against the large lots and with the smaller lots. Not a good idea for consistent profitability.
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
(c)2011 Decisions Unlimited, Inc.
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