Reading Psychological Events Helped Us Nail The Market Bounce
Reading Psychological Events Helped Us Nail The Market Bounce
A Quick Breakdown (FREE)
Hello Traders,
I want to reflect on why the market bounced and how you can use this as a potential lesson for next time if you did miss this bounce.
The way I view charts is I read charts from a psychological viewpoint. It is almost like a mathematical formal I suppose.
I alerted our paid subscribers of this bounce on Sunday evening with a key emphasis on the $360 area.
Make sure to get on our paid reports. We are focused on quality only.
As you can see, Fridays price action broke down below support on high volume.
One thing you must realize from a psychological standpoint is that anytime a stock breaks out or breaks down below a key support/resistance level, it opens the door for a ‘trap’.
What does this mean?
For example, the SPY broke down below $360 on Friday which caused a few events to trigger:
Weak hands got shaken out
Short sellers shorted more
If the SPY reversed back over $360, then it will have ‘trapped’ the short sellers who took positions Friday, and it could cause weak hands that got shaken out Friday to buy back.
This is why failed breakouts/breakdowns are usually meant with strong reversals because of short covering and weak hands buying back their positions.
Now, going into Monday we knew:
The technical conditions were oversold.
$360 was a key area because it was a prior support area and a potential ‘double bottom area’.
Now, predicting the psychological behavior of traders, we were able to conclude that:
If the price of SPY 0.00%↑ reclaimed $360 then the 'double bottom' narrative is still in the cards.
Over $360, short sellers would be pressured to cover (creating more demand)
Over $360, the weak hands that sold Friday will probably look to get long again (creating more demand)
As a result, the probabilities for a bounce were raised if the price crossed over $360.
Now, there are other events that helped raise our conviction such as a new month.
Historically, September is a bad month for the markets and Monday was the first day of the new month.
Reading Charts…
It is easy to draw lines on charts but, to be a great chart reader you need to be able to tell a story.
I challenge each and every one of you to really tell a story.
For example:
Stock X is at support.
Instead of saying, “I am going to buy it because it is at support”
You should think:
“The stock is at support. If this breaks the support line then it could shake out weak hands and cause more short sellers to come in. As a result, if it returns back over support then I could look to get long because shorts may need to cover and more demand could flush into the stock because the failure to breakdown shows exhaustion from bears and once bulls see that, they will start buying”
You see, how my thesis was all about the potential action of other traders?
Technicals don’t move prices, buyers and sellers move price!
So find reasons and tell a story why buyers and sellers will move price in this area other than being lazy and saying, “it is at support”.
I hope everyone enjoyed this quick read.
For more, make sure to get on our paid reports.
Ciao
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