Market News 8-18-23
Big piece of news that will affect the markets today: Evergrande seeks US court nod for $32 billion debt overhaul as China economic fears mount.
Electric carmaker posts a record quarterly loss. Stock plummets -6%.
Market internals diverged a bit yesterday as a giant red candle unfolded in the #SPY. Not quite exhaustion but to be honest many people I’m speaking to are expecting it to be.
Also a slight uptick in the advance/decline difference.
If you’re not familiar with the term “exhaustion,” it’s also called capitulation. Essentially it implies that the buying or selling pressure is done. The big players finished the big order, and a large candle with above average volume, after a significant move shows up on the charts.
This is an advanced play. Not for those lacking discipline and it’s the reason I don’t teach stochastics or any other kind of indicator that implies a reversal is coming.
Most traders use it wrong, and enter trades before the actual reversal or exit winners too soon. They do this because of the “divergence.”
Here’s the correct way to play this. Yes, advanced traders will be looking for a reversal, especially if we get a lower open. But here’s the difference, they won’t be buying or exiting a short position until the actual reversal happens.
They see the exhaustion as more of an alarm, not a reason to act, yet.
Rookies get excited and get in nearly, before the confirmation. And without experience, many get creamed.
Lance Breitstein, a successful prop trader, shares his insights on this in a great post. He calls it “The Right Side of the V.” You can read the post here.
What if you’re short, and it’s a big winner? Do you exit? No. You use the exhaustion as a sign something might have changed and you start moving your trailing stop loss lower.
Many times exhaustion gives what we call an “echo.” A bearish echo implies that the stocks will get one last push, maybe a couple of candles. Ride it down but be ready for a V bottom. They are fast reversals that need your attention.
One quick note, this price action/volume pattern happens in all time frames. I can’t tell you how many amazing trades I’ve caught on a bullish stock with exhaustion after a quick decline that ended in exhaustion. (Typically profit taking in this case)
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