The "Controlled Selling" Phenomenon

Hey folks! 

It's now been exactly 8 weeks since the market topped out, back in the 3rd week of September... 

The market has been rather tricky to trade lately but it's becoming increasingly clear to me why that's been the case. The markets are usually most volatile and challenging to trade at major turning points as the balance of power slowly shifts from the "old guard" to the "new guard" ..... 

Picture a gigantic cargo tanker ship doing a 180 degree turn in the middle of the ocean....

 

These "major market turning points" takes time and effort to accomplish and along the path, there's going to be a lot of brutal battles ardently fought out between the bulls and bears, each side fighting it out for every twist and turn, support and resistance levels on the charts.... 

but after a little while, you take a step back and look at the chart action, a more clear picture starts to emerge of what's happening.... 

I think we are at major crossroads here and i find this extremely fascinating since it's been over 9 years since the "FED induced" bull market was born in March 2009.... and now the FED seems intent on reversing their course. 

A famous hedge fund legend from the 1980s, Marty Zweig was famous for saying: "follow the fed". 

In my humblest of opinions, I believe we're in the early phases of a bear market here... 

Now, bear markets come in all sorts of shapes and sizes, some are swift and dramatic and some are of the slow motion downwards grinding, "Chinese water torture" types. 

Will this one be another 2008?! I have NO IDEA!... nobody knows! Nobody can tell you with absolute certainty how far down we go? or how long it lasts? 

All this will be known in hindsight once we look back on it! 

Having said that, as traders, we do not care about terminology... The actual terms "bear market" or "bull market" isn't important since we only care about trading price action, up or down... all we want is a trend to trade. In an up-trending market, most of your trades and gains will most likely be focused on the LONG side and in down-trending markets, most of your trades and gains will be focused on the SHORT side. 

**Expect to see more and more AOT trade alerts being made in ETFs(such as that XLE short we made earlier this week for example). 

At any rate, these are just some quick thoughts on the current market conditions I've seen up to now and if proven wrong down the road that this recent big pullback ends up merely being a bull market correction and the bull market resumes down the road, surely the charts will lead us down that path and we'll shuffle our feet to readjust! 

Trade the charts, not opinions! 

So the main purpose behind this weekend post was to discuss how come despite the big pullback in the last week or two, why is it that the NYMO(NYSE McClellan Oscillator) is nowhere near oversold?!  The Dow Jones fell almost 1,200 points this week, the Nasdaq fell almost 4.5%!! 

So how is it that the NYMO and NAMO are still stuck in "neutral" and not closer to "oversold levels"?! 

Now, that's a GREAT QUESTION! Does the NYMO work in bearish markets?! 

The answer is YES!!    NYMO does work and works well actually! 

However, since the tape has turned decisively more bearish, we need to look at the NYMO(or NAMO) in a slightly different angle. 

As far as I'm concerned, the more meaningful signals we're going to get from the the McClellan Oscillators isn't necessarily from looking for "oversold" readings to go long, like we did during the last 8 to 9 year bull market..... in bearish tapes, the more meaningful signals will most likely come when the NYMO overshoots into "over-bought" territory and hence start looking to increase SHORT positions. That's when this tool is going to become quite useful. Just like what we saw in late November during that very strong market bounce and the NYMO went into "extreme overbought" territory and we started to look for short positions accordingly.

 

As you can clearly see in the above NYMO/NAMO charts, the market has pulled back quite aggressively ever since early November as the bears reasserted their dominance since that "extreme over-bought" signal. 

Now, that doesn't mean that we're not going to get some useful signals when the NYMO get into "oversold" but since the tape has turned decisively bearish, the better signals will have to come on the rare occasions when the NYMO and NAMO get into "extreme oversold" and then start looking for hints of a snap back bounce(short squeeze rally).... 

The NYMO might not get into extreme oversold often, even though, the market can and and has gone down big for multiple days in a row. 

A great example of this phenomenon took place this week actually!! The markets took a BIG hit this week, Dow Jones fell about 1200 points, Nasdaq fell almost 4.5% yet the NYMO and NAMO remained in neutral and barely budged?! Weird huh?

This happens for TWO reasons, in my humble opinion... 

1: This bearish trend is taking place via ROTATION. So basically the exact opposite of the phenomena we witnessed that kept the bull market going strong for 9 years, sector ROTATION! So for example, Energy sector tanks yet the Semis bounce. The Financials take a hit one day while Retail sector rallies.... it is this type of action that makes the market go down without affecting the NYMO much. The NYMO will usually make a material move one way or the other when we start seeing BROAD BASED moves in one direction but obviously when the selloffs are happening in a ROTATIONAL manner, the broad based aren't taking place... it is this very phenomenon that kept the bull market running, STRAIGHT UP for many years and that's what's made the market so impossible to short in any consistent manner in the last few years! 

We are now witnessing ROTATION type selling, organized, controlled selling(distribution basically) without seeing much panic in terms of big mega spikes in the VIX(fear gauge).... it is this type of "controlled selling" that makes me think that we are for a prolonged pullback in the stock markets.  

2: And this second point, just comes from years and years of watching the tape and seeing multiple bull and bear markets through out the years... I have been telling AOT members in the private twitter that "in strong downtrends, the bulls control the open but the bears control the close" .... and this week was a perfect illustration of this! 

Notice in the above chart, the 5 day, intra-day charts of the SPY... notice how the market does NOT go straight DOWN.... (if it did go STRAIGHT DOWN, that's when the NYMO is most likely to get into "oversold" territory)... instead what we see is the market makes early morning or mid-day bounces, the market makes these almost pathetic attempts at rallies/bounces, usually at the open via a big gap up or early morning bounces but most of the time, these weak bounces end up dumping hard into the close..... these weak bounces in downtrends, only help to relieve oversold conditions from the previous bout of selling which only helps the bears sink their teeth in deeper just a little more each time... 

It is these weak bounces that allows for the "controlled selling" to take place... these bounces will often make traders believe that the market is bottoming which sucks in longs only to pull the rug from underneath them and leaves them sitting on failed long positions. 

All that small these small intra-day bounces end up doing is help relieve "oversold" conditions just enough from the previous bout of selling before stock prices roll over to the downside again... it is literally the EXACT OPPOSITE of what we witnessed during the +9 year mega bull market. We are now seeing this happen on downside. If you literally flip your charts upside down, it will be as clear as day light! 

This "controlled selling" phenomenon was present during the 2007 market top and thru out the 2008 vicious bear market as well... the NYMO only got into "extreme oversold" only 2 or 3 times in 2008!! 

Important to emphasize, that this does NOT mean we're in for another 2008!! I'm not claiming this at all! But we appear to be in some sort of a deeper and/or perhaps even longer stock market correction phase than we've come to get used to in recent years. Trading opportunities, on long side and short side will be abundant and many opportunities will be created for traders and investors of all sorts in due time!   

I hope you found this post helpful! 

Happy trading! 

AAPL Trade: Step-by-Step !!

Hey folks !!

Earlier this week, we made a SWEET trade in AAPL and today i wanted to go over HOW and WHY we traded this one... 

So here goes.... 

Ok, so first of all, AAPL made an amazing BIG run up recently but it did get way too hot and needed a pullback... so kept telling AOT members to be patient because we will get a good trade in AAPL sooner or later and the time has come this week in the form on a "HOLY GRAIL" setup !! 

A 'Holy Grail" setup is basically: a setup where a stock that's in a VERY strong trend, in AAPL's case, an UP-TREND, pulls back, tests and holds the 20 day MA.... In my experience, it's best to buy the 1st and/or 2nd TEST of the 20 day MA in a strongly trending stock.... 

Long time AOT members know I've been sharing the the "HOLY GRAIL" setup for YEARS and it's definitely one of my favorite setups! 

When AAPL first tested the 20 day MA... AAPL was already down 4-5 days in a row, which made this pullback INCREDIBLY appealing for a risk/reward point of view and couple that with the fact that i was expecting the market to bounce this week(as i tweeted numerous times and i'll do a separate post on why i expected the market to bounce this week) .... 

This is what AAPL chart(daily chart) looked like when it caught my eyes ..... 

So the first you should notice about the AAPL chart above is the fact that this a stock in a VERY strong uptrend and just pulled back 4-5 days in a row and TESTING the 20 day MA.... Now, once i saw that, i then quickly zoom into the 5 minutes charts and, like a good mechanic, you wanna look "under the hood" .... I'm now looking for "hints" this stock is looking to "bottom" or reverse so i can establish a long position...

Here's the 5 minute chart and what i was thinking thru-out the day while watching this stock: 

Please take your time and really study the chart action as well as the commentary on the chart.... 

We kept raising/trailing the AAPL stop loss every +$1 increment(for example, once AAPL broke thru $219, raised stop to $218... once it broke thru $220, we raised stops to $219 etc etc), reason why i wanted to trial the stop loss so tightly as it kept ramping higher the next day is because AAPL had a product event the next day and didn't want to be holding the shares thru such a thing it could be a volatile hold.... 

Ended up stopping out of at AAPL at $223.00  for a +$5.55 gain in 2 days!!  

Fast forward 2-3 days later and here's what AAPL is looking like now... 

I hope you found this helpful!! 

Happy Trading !!

ArtofTrading.net

 

3 AOT Members Share Their Progress!

Hey folks!

I got these 3 emails from 3 different AOT members recently and I wanted to share their progress with you thus far!! 

So if you've been struggling lately or going thru a frustrating phase or perhaps feeling like you're hitting a "plateau" in your trading career right now.... Please read these 3 letters below!

If they can do it, YOU can do it too! 

No excuses! 

So here you go!! 

Hi stewie,

I've been a Member for around 6 weeks.  I was fed up with taking entries on break outs, following sensible and recognized criteria, then watching the price turn around in the chop and getting stopped out.  So I was particularly looking tor a service that would help teach me swing trading, rather than longer term trend following, to be able to make money in all markets, even choppy markets such as we've experienced over the last few months.  Boy, has Stewie met my expectations and more!

Separating the trading results from the education, the results have been very good - high probability trades with smaller draw-downs on the losers.  I would have made very good money but have been taking modest positions while I build my trust in the service.  Given the great return on risk that I've seen I'm now ready to move up my position size to what I regards as full positions (I'm a cautious chap!).

Turning to the learning, that has been no less impressive.  Stewie seems to be on a mission to share all he knows and educate his Members in all aspects of his craft.  What I especially like is how uses the actual trades along with subject specific emails to get his message across.   I love how simple and straightforward he keeps his teaching.

Since I started trading (rather than investing) last year I've read and heard countless times from greatly respected traders about how essential it is to be patient and wait for the high probability trade in the right market.  I have nodded sagely to myself and then gone on to snatch at whatever has taken my fancy!   However watching how Stewie makes such good money while making fewer trades, waiting not only for the right trade but for the right trade against a backdrop of a favourable market, has hopefully brought home to me the Jesse Livermore statement that:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

If this takes hold in my trading then everything else I learn from Stewie will be a bonus!

Thanks for all you do and your generosity in sharing what you know.

Jim

Hi Stew,

Hope all is well! My apologies in advance for this lengthy email! Pls read when you find time.

I wanted to take a moment and thank/update you for all the fantastic trades this month. In spite of the chop, staying patient and taking the best setups has helped me tremendously this month. 

In a nutshell, I'm up $5,000 this month in profits. I cashed out 3K out of this account after taking this snapshot below. This is the highest payout I've received from the market ever and am very grateful I'm having a good month.

Over the past 4 months, I was literally in a CHOP in terms of performance. Had some great trades here and there, but losing in commissions overall and no real gains overall. Kept giving them gains back. There were 2 main reasons. 

1) I was taking WAY TOO many day trades (not per plan/no setup/getting stopped or wiggled out of positions).

2) Expecting a huge % win in a short period of time, and holding trades longer than needed. 

Risk was defined, so I didnt blow any accounts, but definitely didnt make any money net.

I have learnt a TON over the past few months from AoT compared to what I've learnt in past 6  years of trading struggle. To put this to use finally without giving up, I added some trial capital into Robinhood to execute my options trades. No commissions and max 3 day trades in 5 days helps my case. 

My equity curve looks like this since I started trading here on August 1st. Initial capital: 2,000 (trial). Today its at $7000 (I have withdrawn $1500 over the past 7 days as I was seeing gains, $1500 after this snapshot). So account is literally up 250% (dont mind the % in snapshot, its basically a bug). This is not the usual for me and I don't want to get greedy, so I did take cash out to keep myself humble.

I played all of AoT recommendations as well as small positions in many charts that you posted but didnt play (GOOGL, PYPL, NFLX etc.). 85% of these were 2-3 day swing trades. Robinhood has made it difficult for me to journal since it has to be manually, but I'll show you the journal based performance stats once I have it ready!

Things I will do moving forward:

1) No setup = No trade

2) No revenge, chase or overtrading

3) Reduce expectations - more singles than home runs ( i see home runs will come with some of your best setups automatically!)

4) No need to grow account to actually make money from the market

5) Reduce day trades as much as possible since I cant monitor the markets (this is NOT my time frame)

5) Stay humble, keep greed in check and rinse-repeat 1-6

A HUGEEEE THANK YOU to you for getting me back on the right track. You are an fantastic trader, excellent mentor, great entertainer (cooking + soccer + trading + handling the trolls lol) and more importantly, a good trading buddy :). 

Will keep you posted.

N.C. 

Hi Stewie,

Just wanted to give you a quick update on my progress now that I’ve completed 3 months at AOT.

First, want to share the reason why I’m doing this: 

This is my granddaughter Alanna(not going to share Amy's picture of her granddaughter of course!). She’s almost 3. I lost my job in April and have been agonizing over whether or not to take another time consuming, travel-intensive job. I’ve made the decision to spend these next couple of years with her instead with trading for income. I’m excited and a bit terrified but my gut tells me that this is the right decision.

So, onto the progress! What I’m most happy about is that I’ve increased my trading skills, pattern recognition, and discipline. I still make some stupid mistakes but they are getting fewer and with less disastrous results.

I don’t keep track of percentage wins because I’m trying not to focus on P/L but rather focus on the skills learned. The money will come as a result of good, consistent trading. For the past three months, I’ve been able to wire cash out to my bank account an average of $3500 each month. Still not where I want to be but I know that will come if I execute the trades correctly and gradually increase my risk as I gain confidence.

I can’t thank you enough. Your guidance has not only helped me improve my performance but more importantly, it’s given me the gift of time with my granddaughter. That is incredibly precious and I humbly thank you.

You rock! If you’re ever on the East Coast, I owe you a huge hug!!

Amy 

Hope these 3 letters have fired you up and motivated!!! 

Happy Trading!! 

ArtOfTrading.net

How to Use RSI and MACD Divergences to Spot Big Reversals

Hey folks, 

I wanted to do an EDUCATIONAL post on how and why SPY and QQQ rallied so hard on Thursday and why i was so convinced the market would rally hard despite the market's initial very big gap down open on Thursday morning. 

As many of you who were following my tweets on the @AOTtrades private feed and also on @TraderStewie public feed, i was very bullish on that day and I'm going to walk you thru it, STEP BY STEP.... 

Ok, so coming into Thursday morning, we were already long NFLX and FB.... so coming into Thursday's open, the market was gapping down big at the open due to some new "Tariffs news" blah blah blah....... Remember, the news is almost always irrelevant, it's the REACTION TO THE NEWS, that interests me most!

***Coming into the day, the Dow Jones was going to open down about 175 points, SPX was opening down 20 points*** 

Ahead of the open, i took out my "SPY Road Map" chart(see below) to see where we were going to open.... 

I quickly noticed that SPY was opening down near the $279 area which has been strong support on numerous recent tests.... 

However, what made today's weak open so interesting so that not, only was it opening at exactly the $279 support area but also, that the RSI and MACD indicators were HIGHER  than the previous time SPY tested the $279 area... since RSI and MACD were higher than the previous time, that right away told me, they were making a HIGHER LOW hence telling me, that today's down open is WEAK and UNSUSTAINABLE therefore odds of an upside reversal were very high..... 

I actually tweeted this out shortly after the open: 

"Today is a good test for the $SPY, $QQQ... as they RETEST support.... Note... ..on this RETEST, we need to watch how the MACD and RSI behave here... if RSI and MACD continue to form a HIGHER LOW as $SPY, $QQQ retests support, odds increase for a strong bounce phase soon."

A few minutes after the open, SPY, QQQ started to bounce, they wasted no time... so that increased my confidence that a big reversal and rally day was brewing here.... 

Note the mini HAMMER candle in the above SPY chart shortly after the gap down open and right off $279 support.... the RSI and MACD higher lows were very visible at thus point and firming up even more aggressively... 

A few minutes after the open... i started to notice many of the big stocks started to reverse to green, despite the overall market still well in the RED.... Stocks like FB, MSFT, GOOGL, NFLX were starting to go from RED to GREEN... that's when my confidence of a reversal went from 75% to 99% !! 

... and that's when I tweeted this out ... 

"$SPY bouncing here as RSI and MACD are carving out a HIGHER LOW .... This is setting up for a wicked bounce...."

....At this point, SPY was pretty much almost FLAT(see chart below).... while the clear cut leader was QQQ....

Meanwhile, i noticed that "trader sentiment" on twitter was still surprisingly bearish or skeptical at best(not many bulls), which only further increased my confidence that this rally day was only getting started and that's when i tweeted this out.... 

"$SPY ... up a cool +$1.5 since this posting tweet/chart and i suspect, this could be just starting!"

Note the STRAIGHT UP move in QQQ after the initial gap down open.... 

....Fast Forward a few hours later.... 

Our NFLX position was up a good +$8 points since our entry and FB was up $6 since our entry .... 

SPY was now up a good +$3(see chart above) since tweeting out the first SPY chart with the RSI and MACD bullish divergences playing a key role in pinpointing a reversal and rally.... 

I tweeted out this: 

"How bout that $SPY chart, folks?! Up almost +$3 since posting this SPY chart at the open! Learn to spot those RSI + MACD divergences! Especially on indices, this pattern is as strong a buy signal as you ever gonna get!"

This is 100% true, LEARN TO SPOT these RSI and MACD divergences on the indices!! 

 

RSI and MACD bullish divergences are as strong a "BUY signal" as you're ever gonna get, especially when you're analyzing the indices.... 

I hope this educational post will help you spot these divergences going forward!! 

Happy Trading!  

Join the ART OF TRADING community today! 

Art Of Trading Member's Inspirational Story!

Hey fellow traders and readers! 

A few days ago,  i received this email from an Art Of Trading member who's been on board for about 5 months! 

This story was so powerful, so incredibly moving, so inspirational, that I just had to share it!

Enjoy! 

"My dear Stewie,

I just want you to know that as of today, I am officially “green” in all three accounts YTD (one trading account & 2 IRAs)! All 3 suffered horrendous losses over the past few years, including a company that went bankrupt & I lost 100% of my $250,000 long-term IRA investment. But that’s truly nothing, compared to the annual losses I racked up in all 3 accounts for the last 5 years while ALL off my closest loved ones (3 family and my 3 closest friends) passed away. Seriously! From January 2014 thru last December, it’s been pretty unbelievable that everyone who I had roots with--who actually know who I am--are all gone. I should have gone on a long vacation, but instead, I tried to trade my way thru it every day, by myself, and absolutely every trade I made became a loser. In a few years I lost everything--my loved ones, my financial security, my ability to dig my way out of a deep hole, and my confidence as a person and as a trader. ALL GONE! I was pretty much at my darkest place after the holidays when I wrote to you to inquire about your special AoT holiday offer...just out of curiosity.

Without my ever telling you my situation, you reached out and showed me with your generous AoT gift that you cared and you believed in me. I don’t know why you did! But I am thoroughly convinced that you were inspired by an angel to help me when and how I needed it the most. At first, all of the AoT trades I took got stopped out & somehow I missed getting into those that ended up being really big gainers. It also took me a while to understand your process, your trading tempo & pace, and that I needed to buy more than 100 shares at a time if I wanted to make any money! It really wasn’t until the end of May when I realized that you and the amazing AoT camaraderie had become quite medicinal and healing for my grieving soul. In addition to learning far more than I ever expected, I started joking around again, laughing again, feeling a part of something again and yesssssss! making money again!!!!! I am trying to take the kindness & encouragement you’ve given to me and pass it on to others. To pay it forward. You are truly one of a kind, Mr. Stewie! You are an old soul with a generous spirit, yet you have a youthful energy and a zest for life that is truly motivating and inspiring! Plus, you are so much fun to trade with every day. I adore your Pop Quizzes!

I owe you so much for your encouragement, teachings, trading skills, experience, time, patience and the genuine caring you have given to me. I fear I will never be able to repay you. How do I put a price tag on helping me to let go of my regret? Helping me to get grounded & disciplined & more self confident? These are PRICELESS GIFTS you have given to me. No words are big enough for me to describe how grateful I am to you…How full of loving gratitude I am…Overflowing, really.

I pray that you and your young family are all blessed with love, peace, good health and long lives. And I thank you for being a blessing to me.

Shannon V.”