After the recent well known events in the financial market and the crypto market I recalled a quote by Baron Rothschild: "Buy when there's blood in the streets, even if the blood is your own." I would say this is very true; however, in the world of trading "Timing is Everything", don't just go blindly with the old saying, this is like the other saying "Catching a Falling Knife".
Bottom line, we all have to stomach the ups and downs in the market, this is not for the faint at heart. The downturns are really good opportunities to buy cheap if you pay attention to the Market Structure, trust your indicators, and are disciplined with the money management policies.
"Buy when there's blood in the Street ..." I would just wait until the blood is not fresh. It is not about catching the bottom, it is about buying at a discount, which is not the same. I personally use three main variables to time my entry and my exit, (1) Trend, (2) Momentum and (3) Volume. You don't really need more, although each trader has developed his/her own style, I show mine here. I sometimes use more indicators, but basically they measure the same variables from a customized perspective.
For the sake of clarity, in this example I use regular popular and publicly available indicators, I use the simple Volume, the RSI, the MACD and the Madrid Ribbons.
1. Trend. "The trend is your friend until that freaking bend at the end". When we see the price structure we determine as simple as it is if there is an uptrend, downtrend, or trading range, the Madrid Ribbons is a very friendly indicator that visualize the direction of the trend at a glance, as long as it is in the green it means uptrend, if this turns from green to red it signals the end of a leg or a reversal of the trend. In this example there's a visible downtrend coming from 2019 when the Energy sector started its decline and a full working economy didn't need as much oil as when it needed a jumpstart. We can see from December 2018 until April 2019 there was a leg to the upside, this didn't last long, on May 2019 it didn't remain above the trendline for long and it kept on slowly bleeding until on January 2020 it collapsed and it broke down. The red ribbons continued until November 2020, when it visually showed a reversal. As simple as that. Follow the trend.
2. Momentum. In this article I use two momentum indicators, the popular RSI and MACD. There are tons of momentum indicators out there, I have coded myself several customized momentum indicators. The idea behind momentum is that momentum precedes the trend. Watch out, it is not "predicting", usually this tells that the direction of the trend is exhausting and it could possibly reverse. We must pay attention if the direction of the momentum is the same of the trend, and if it isn't then raise a momentum divergence flag. This is good to time the entries and exits.
a) RSI. Let's look at the RSI on December 2018, it went from Oversold to reach Overbought levels on February 2019, this trip out from oversold signals a trend reversal, entering the trade on January 2nd, 2019 it would have been a great entry. The blood of the downtrend can weight in, trust the indicator and ride the leg. The RSI signals an exit on March 15th, 2019, with a juicy 15% in the leg, not risking to remain longer and not risking a falling knife in the downtrend.
b) MACD. This indicator is on the negative side, which means there is a negative momentum going on. We're in a downtrend, remember?; however, it performs a crossover with the signal, which can be seen in the histogram, making it positive. We have a downtrend plus a positive momentum divergence. At the time the price crosses the trend we have a positive trend plus a positive momentum convergence, the Bulls are in control. this signals another entry. Riding the leg from the histogram crossover until the MACD histogram crosses down the Zero line gives us the same performance as the RSI on the same period. Look at the signal from MACD, the trend is still up, but the histogram is already negative, this signals a negative momentum divergence, it would be the time to take the money and run, preventing the main downtrend could continue.
3. Volume. Usually the volume is displayed in contrasting colors, green when the price bar goes up, red when it goes down. It's tricky, in order for the volume to exist there must be two sides, a buying and a selling side. I see it as volume is volume, and it denotes the interest of the market at a certain price level, I'm not too worried if it's red or green, I'm focused on whether there is high or low transactional activity.
As you can see on December 21st, 2018 there was a volume peak that was increasing from the 13th and after the 18th it slowed down. There could have been a lot of sellers willing to take the exit when the prices declined, however there were not buyers to take their "garbage" and all of a sudden there are buyers at the lowest level willing to enter the trade on its way down, like kamikaze traders. The relative volume means those were not retail traders, but institutional traders who can get liquidity following the simple rule "buy on weakness, sell on strength". Another volume pattern is "Volume precedes momentum", a higher relative volume is needed to reverse a trend.
So far we have this pattern, a downtrend with a low climatic volume, it's a No Go, it is still bleeding a lot. We wait until the relative volume increases meaningfully and the next sequence in the process is an exit from Oversold on the RSI or a Zero cross over to the positive side in the MACD histogram, next in the sequence is a trend reversal. Last but not least, money management, setup the entry - target - stop/trailing stop levels and ride the leg.
Let's take a look at the second example, we still see the trend goes down. There are still some recover legs, that fail to break the trend to the upside, we see also the relative volume is low, so here the institutions are not committed and they patiently let the retail traders to consume themselves until the bid side dries up and the ask side has to settle for lower prices.
Watch the period between January 2020 and the end of February 2020, the prices are in free fall, but the volume didn't react immediately, until the last part of February and early March, there was a peak that momentarily stopped the free fall and created a weak support, this was broken again, the number of sellers still overwhelm the buyers, and the climatic volume increases. This is the period when the institutional bulls are stepping in and they're buying the "garbage" that creates the kind of panic liquidity the institutions are looking for. At this time also the Bears are switching hats, they're closing their short positions and taking profits. Once the selling volume dries up, which can be seen when the relative volume slows down. This is the point when the bleeding in the market stops and we look for the signals in the Momentum indicators, we see at the end of March 2020 the RSI indicator escaped the Oversold area and the MACD histogram made a crossover the Zero line, in a very strong histogram. Both indicators flash a strong buy. This is the dry blood we're looking for. Emotionally it takes a toll, we just came from a strong downtrend and the fear that this it's not over yet is there. The fear that the heal is temporary and we're just stepping on a weak support is there. If we set the emotions aside and we trust the indicators and a good set of rules of disciplined money management, we can exploit the opportunities of a downturn.
_____________________________________ “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
"...if you pay attention to the Market Structure, trust your indicators, and are disciplined with the money management policies." These are ABC of trading... learn these first and everything else will follow.
Thank you for sharing...
TheOracle101
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Well Im all puts prove me wrong
A-shot
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Tabbed this to give it a thought , and have a question on the chosen event - i think it would be better to base assumptions on a normal flow of events. Cause Corona is a Black Swan event, and doing a parallel of a normal time to a black swan may not be correct? I am not saying that it is not what is the reality - maybe you are 100% correct. I am just thinking how much correctness can there be of drawing an example analysis on a black swan high volatility event + one analysis. Maybe you can show this at work on Index or orther stocks? Just curious not criticizing - i dont have Pro to check the same setup as you have on the chart with the waves of MAs.
veelayudannair
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Excellent article Bro. Appreciate your sharing.
rebelvolt
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That was a lot. XOM is a buy and hold for what's looking like years to come. They will be coming for the yield soon enough. Until the 10y is larger than the Dividend yield (which is more than double where we are now) We are safe.
Madrid
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@rebelvolt, I used the symbol XOM for education purposes only and because it recently showed very interesting swings along with the Energy sector. In educational material this note is implicit: "this is not as a buy/sell recommendation for a particular security or financial instrument".
Osinkosampo
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@Madrid, So which way are the markets going now and where do you see the buy the dip?
Madrid
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@traderx3000, I won't go into the specifics of the individual motivations the traders had to sell their stock, it could be because of the virus, because of the Fed meetings, because they feel it's time to cash out, because the institutions are shaking the tree, because of Ukraine, or other yet to be discovered. Bottom line, the indicators signaled an exit from the Overbought levels and there was an increase of volume on its way down. That's defined as a selloff and it has to be traded as such. It just hit a support level where the Bulls stepped in and caught the downtrend. This is a support level that can be called a dip, is it "buyable"? well, that's on each trader's wisdom and goals. This could be a kamikaze trade since it is in a correction still in the downtrend channel, so for investing I don't think it's a good idea, for a quick trade of a couple of days, probably, since the SPX index is still above 4200. These are my thoughts about a short term trading in the Daily time frame. Each trader has his/her own points of view and I can tell that this strategy only fits my own trading style.
Osinkosampo
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@Madrid, Exactly my point. There is no indicators that tell you whats gonna happen next! Short term investing is always high risk and you are basically guessing. Sometimes you are lucky and sometimes not. Long term investing -> markets are always going up in the long run with minor corrections randomly happening.
Acient1
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@traderx3000, This is true, but when oil was selling for $0, and XOM dropped to the low 30's and was paying 10.5% dividend, XOM was a no brainer. When it hit $99, I just tripled my money, so I sold. It may go up, and it may go down, but taking profit is good. I lost money trading CGC because It became emotional, as I watched it go from $57 to $5.
Thank you for sharing...