There is Strength in Weakness
Stockscores Foundation for the week ending March 3, 2020
In this week's issue:
In This Week’s Issue:
- Stockscores Market Minutes Video – Stock Market Crash Update
- Stockscores Trader Training – There is Strength in Weakness
- Stockscores Feature Strategy – Trading a Volatile Market
Stockscores Market Minutes – Stock Market Crash Update
The Coronavirus has brought on what many believe is a long overdue stock market crash. This week, I will show you what I think is going to happen next and how to make money from it. Plus, a look at my day trade of the week on BIOC.
Click here to watch this week’s Market Minutes
To get instant updates when I upload a new video, subscribe to the Stockscores YouTube Channel
Commentary of the Week – There is Strength in Weakness
Simple approaches to any practice usually work the best. Finding the simple solution is not always easy, doing so can take the most experience. This is true in trading too and one simple concept to keep in mind when trading stocks is that there is strength in weakness (and weakness in strength).
What do you do when you are optimistic about a stock? Assuming you invest in stocks at all, you probably buy. When you are pessimistic, there is a good chance you sell.
Suppose there are 100 people who can trade the stock market and approach the market in this rational way.
If 30 of them are optimistic about the market and 70 are pessimistic then there are 30 potential buyers and 70 likely sellers. The sellers are stronger and will likely push the market lower.
What happens when a pessimist sells or an optimist buys? The seller no longer has shares to sell and becomes a person who is more likely to buy in the future. The buyer now has shares and is a more likely seller in the future.
If most people in the market are optimistic, they are also likely owners of the market and less likely to buy in the future. The more optimistic the market, the more likely people will sell in the future.
If most people in the market are pessimistic, they have likely already sold and are therefore likely to be future buyers as prices fall.
Market strength is driven by optimism that is likely to turn to pessimism once prices get high enough. Market weakness is driven by pessimism that will eventually turn to optimism once prices get low enough.
That is why weakness brings strength, and strength brings weakness.
Keep this in mind when analyzing a stock. It is why I don't like to chase stocks that have been going up for a while. I prefer to buy just when stocks start to go up. I also like to sell just when upward trends are broken rather than sell after a stock has been going down for a while.
You can apply this thinking with a very simple chart analysis method. Use trendlines to define who is in control of the market and then look for a change of control. A downward trend means the sellers are in control so watch for a break of the downward trend to indicate the buyers are going to come in off of the sidelines and turn the market around.
There is strength in weakness as long as you get the timing right.of fact.
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With the major sell off of last week, I want to share with you how I analyze the overall market in volatile conditions. This is a trader's market and a lot can be made if you get it right. However, a lot can be lost as well if you are on the wrong side of the trend.
Understanding the trend is essential. Since the market is so volatile, I like to watch the 13 or 30 minute chart of the SPY. You can view that on Stockscores.com.
The trend coming in to this Monday was down but that was broken Monday morning (as I discussed in this week's Market Minutes video https://youtu.be/Y-tMXKP38Fg . The market is now trending up in the very short term. Draw a line from Friday's low to now and you can define a new short term upward trend line.
So, if we are trading with the trend, we should favor buys right now. However, that is only in the very short term because the longer term trend is still down. The next thing this market needs is the formation of a rising bottom.
The low of the last downward trend was made on Friday. Since then we have been moving up but what I want to see is another pull back that does not go to new lows but, instead, makes a rising bottom. Until that happens, the little upward trend that started on Monday is just a blip in the longer term downward trend.
If you want to buy bargains and did not enter anything on Monday, wait for another pull back, the build of a rising bottom and then a break through resistance. I will keep you updated weekly with the Market Minutes video, make sure you subscribe to the channel and turn on notifications so you can get updates when I upload a new video.
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