Trading with Conviction
Markets made new all-time highs while both long and short trades were working.
Do you struggle with buying when markets are at all-time highs?
What about when they are in full decline?
You are not alone.
All it takes is buying one “falling knife” to learn a very tough lesson.
Every trader has this experience at one point. You let hubris get the best of you, break your rules, and get sliced wide open because of it.
A lot of money can be lost in a short amount of time trying to time the top or find the exact bottom. It can be expensive to be the hero.
But learning how to trade either scenario correctly can lead to massive gains.
There are signals you can wait for to help increase your probability of success when it comes to buying near points of reversal.
Not at them, but near them.
We could see more upside for the stock market next week, but will it be what we are looking for or is it time for selling to take over?
Let’s dive into what to look for to help improve your odds and reduce losses.
The Power of Support
When you try to catch a falling knife, you are effectively betting against the market.
You’re saying, “I know better than the market” and more times than not, the market has the advantage when it comes to information.
Instead of trying to catch falling knives, I prefer to wait for a bounce off of support. I say this often.
Support represents a level at which buyers have stepped in before, indicating that they may do so again.
When a stock bounces off of support, it's a sign that buyers are still interested in it at that price level.
It's a signal that the stock may have found its near term bottom and is ready to start climbing again.
By waiting for the bounce, you are not just guessing where the reversal might be, you are seeing real evidence of it.
And volume is a key component of the analysis as well.
If a stock bounces off of support on high volume, it's an even stronger signal that buyers are stepping in.
The same can be said at resistance. If a rejection happens with a large spike in volume you know that sellers are putting up a wall.
High volume indicates a high level of interest in a stock, which sounds so obvious when you say it out loud.
Significant volume, well above the average, could be a sign of big institutional buyers making moves.
When these whales are buying, it is often followed by additional purchases to round out positions. This can continue to drive the price higher.
And yet another signal to watch for is a change in trend.
If a stock has been in a downtrend and suddenly starts making higher highs and higher lows, it's a sign that its trend may be reversing.
This is especially powerful if it happens right at key support levels and bolstered further when trendlines are broken.
Higher highs and higher lows indicate that the stock's momentum may be shifting from bearish to bullish.
Add in strong volume and the stock will get my focus on a trade for more upside.
What to Look For
Look no further than one of my favorite picks for 2024, CRSP, for a great example of waiting for the bounce and increased volume.
Shares were in decline until the end of October 2023, which is exactly where you will see the first big spike in volume for CRSP.
Notice the average volume picks up from that point forward, something that could have been identified early on.
A pull back gave an opportunity to buy again in November, after a clear reversal was underway and volume remained elevated.
Either of these points would have been excellent entries for an upside trade.
There was another huge volume spike further confirming this move off of the lows was going to be sustainable.
After a period of consolidation, shares are now moving higher again and I like the look of CRSP for 2024. I think it continues to move up.
Taking a look at identifying a top, CCL gives a recent example.
While there was clear resistance at 19.00, you got a clear confirmation of the downtrend just a couple of weeks after the rejection when shares dropped below prior support at 17.63.
There was an attempt to get back above this level but it failed, establishing a lower high and the likelihood for more downside to follow.
Forming a lower high near a prior support level is a signal I look for when considering a short trade and it is a perfect example of not trying to time the exact top while still getting an opportunity to jump in the trade.
Have a great weekend ahead and look forward to more trade ideas for upgraded subscribers!
-Nate
When you are ready for TrendSpider, please use the link below to sign up!
Anchored VWAP is just one of the many top notch features TS provides.
Check out TrendSpider and let me know if you have any questions.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.