Sept 23, 2011- Understanding the Nature of Selling Climaxes

“The reader may have become dismayed at this point by the frequent recourse to such qualifying adverbs as usually, ordinarily, and the like. It cannot be avoided if one wishes to present a true picture of what actually happens.” – Edwards and Magee

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Barry Ritholz wrote a timely post “What Should Investors do now?” last night.  The main problem of most traders and investors is that we are often in a reactionary mode, rather than in an anticipatory mode.  Instead of asking what should investors do now, it should have been “What should investors have been doing in the past to prepare for an event like today?”

Some useful words to remind ourselves:

The bottom line remains that investing is a proactive — not reactive — endeavor. If you respond to every twitch, every news story, each turn of the wheel, you will become whipsawed. – Barry Ritholz

Just like Ritholz, I strongly believe that many people are capable of doing this for themselves (And, you don’t have to necessarily pay anyone a fat fee for that). All it requires is a little intelligence, some home work, and a bit of planning.

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This will not be an “I told you post”, because frankly, that’s not a sign of a matured trader.

This post will discuss about the possibilities to restructure many kinds of portfolios, considering the current scenarios.

1.) Scenario 1 : The Ipit Trader Turned Investor

(This is most common, so if you hear many people touting fundamentals, listen from the words of the ipits)

I’m still “ipit” in my positions, they’re mostly bought at the high end of prices.  Despite the fact that I know the market is in turmoil, and entering very difficult resistances, cutting my losses proved very hard.  Now I’m way in the deep in my losses, nursing 15-20% losses already.  I’ve given back most of my gains in just 1 week.  What should I do?

2.) Scenario 2: The Cash Rich King

I’m thankful that I listened to the tales of the tape (macro, price action) and got out of the market before it dropped.  I was able to preserve my gains.  Now, after an extensive decline, I’m looking to buy back but would like to know how to determine when an advance is yet to come, and possible indicators for it.

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For purpose of clarity, I shall cite MA as an example for both scenario 1 and 2 candidates before explaining the entirety of the market situation:

Assume initial cost of MA at 70 cents, (didn’t cut when it moved against me).  Also, I bought and averaged it down when it hit 60 cents, but didn’t sell any when it bounced. Now it’s running at near 50 cents.  I still have ammunition but I’m already so scared if I should buy more at current levels, my cash will become so tied up already and concentrated in a few mining stocks.  Am I still acting rationally or emotionally?  Please help.

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Perhaps you have never been in either of these situations. Perhaps your own reactions wouldn’t, in such cases, have been the same as those we have indicated. But, if you have had a fair amount of experience in the market —have some knowledge of the psychology of the “average investor” — you know that the pictures described are typical. 

I sense desperation in the tone.   The reader may also be so dismayed at this point that he doesn’t want to open his account anymore.  This happened during 2008, and he wants to go on Rip Van Winkle mode again.  I say Wrong!  Face the situation.

Now’s the time you stalk the markets.  Now’s not the time to sleep. Watch closely the charts and the volumes to see what pattern of price action may follow and be prepared for the worthwhile move when it comes.  Let’s talk about the creation of bear raids.  This will cheer you up.

The Nature of Selling Climaxes and Signs of Bottoming Out:

(Reference: Edwards and Magee, Technical Analysis of Stock Trends 9th Edition)

1.) Most true Selling Climaxes, if not all, have been produced by distress selling. They have come at the end of rapid and comprehensive declines which exhausted the margin reserves of many speculators and necessitated the dumping of their shares at whatever the market would bring. This process is progressive — feeding upon itself, so to speak — with each wave of forced sales jeopardizing another lot of margined accounts, until, at last, millions of shares are tossed overboard, willy-nilly, in a final clean-up.  

2.) It is a harvest time for traders who, having avoided the bullish virus of people at the top of the market, who have funds in reserve to pick up stocks available at panic prices. (Scenario 2 candidates).

3.) Panic Sell offs- obviously offer EXTRAORDINARY opportunities for a quick turn to the trader who’s smart (or lucky) enough to get in at the bottom.  He could cash in a few days later with exceptional profits.  The main problem is that recognizing the climactic nature, isn’t as easy it sounds in our discussion.

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Signs of Bottoming Out: 

1.) Macro Indicator- Watch the Dollar! The mommy of all short squeezes is probably ongoing in the dollar since about everyone and everything trades against it. Watch USDPHP, USDSGD, AUDUSD, USDBRL.  Yahoo finance provides charts for all of them. (Real time-even).

2.) For Short Term Patterns: Look for one day reversals, spikes, hammers , hanging men (Please wikipedia the terms if you aren’t familiar with what I’m talking about).

3.) Watch for Huge, Extraordinary Volumes: Panics are USUALLY met with HUGE volumes.  Note usually and likely doesn’t mean that it is always.  There’s no panic if you just have paltry selling but if price action is wide ranging, normally we’re near.  Volume is important. Volume confirms we are nearing the short term bottom, that all the hands are shaken out, scared of their wits.

4.) Be Cautious.  Just Play the Bounce. Note that a One-Day Reversal is not a dependable Major Trend indicator.  When you see one, you need your targets and exit points.

5.) Prepare for Volatility and Opportunities: Of course the non technician probably is suffering from nausea at this point. It’s an ill roller coaster which bodes ill for everyone. And note well, a completely tradable situation for the alert short-term technician.  There is no cavalry coming to the rescue. In the Greek Comedy and Italian tragedy, the Chinese Kungfu Panda will not save the day for a happy fairy tale ending.  Live with it.  All traders are out on their own. Do not become too bearish. Stocks with good dividends and high yield corporates might become the only game in town.  Jeremy Grantham wrote an excellent report. He’s my favorite Macro hedgefund manager.  I always love reading his reports.  He says, most of us cannot handle the truth.  Read him.

No Market for Young Men – by Jeremy Grantham

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When the market rallies, not every boat will rise. This is not a rising tide that lifts all boats.  Don’t bother with penny stocks. As for some gold mining stocks, I honestly cannot comment on them, except that.. the entire market participated in it, so just like the gold asset, it can stay in doldrums (and not rally as much as one thinks) because there’s too much people in the selling department. Know your supports and resistances.

Stick to high yield blue chips.  Top of mind are the MBTs, AGIs, ALIs.  (I’ll research each company in detail, but these are the ones I’m planning to load my boat with, on just a gut-reaction bargain hunt, no technicals, no fundamentals but just guts.).  Personally, I find Philippines not in capitulation mode yet, but with the cheap valuations awhile ago, one is tempted to do the strategy of peso cost averaging.

Don’t worry, money has to flow somewhere. Once all the panic selling and margin selling concludes, some stocks will be the destination du jour.   I offer those stocks to research analysts, as you can see, I’m just a market timer.  I care about the leaders in technical strength, as well as the market direction.

If you are the 99.95% that don’t stare at flickering ticks all day long and call it work (yes, I know I’m a pathetic non-value creator of this world), the markets can offer you long term returns, so long as you do the long term average costing method (at a time when fundamentals are on your side). You have a chance to participate right now.  Short term- patterns will help you out.

Let this chart from 1937 (courtesy of Edwards and Magee) provide a good path to profit from.

When a clear-cut technical pattern of unquestionable significance has been completed on your charts, do not let some apparently contrary development that occurs shortly thereafter lead you to forget or neglect the previous plain signal. Give such situations time to work out.

 

– The Faceless Trader hopes that this post has helped you.  Please comment below for further inquiries.

 

 

 

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9 Responses to Sept 23, 2011- Understanding the Nature of Selling Climaxes

  1. Marvin says:

    Before my idol was Jesse Livermore now it’s Warren Buffett! :p

    Hello FT! Thanks for your posts… Laking tulong talaga. 😀

    Like

  2. rey says:

    Cheers! I love reading your articles.

    Like

  3. Pingback: Sept. 25, 2011- A Little Common Cents Corner #16 – The Shopping List & Personal Accountability | Faceless Trader

  4. Ipit Investor says:

    Thank you for your “Little Common Cents Corners” that are actually Big Cent Corners for a relatively new “Ipit Trader Turned Investor” . I was awakened by your, ” Wrong! Face the situation. Now’s the time you stalk the markets. Now’s not the time to sleep. Watch closely the charts and the volumes to see what pattern of price action may follow and be prepared for the worthwhile move when it comes.” May I ask, should I join the panic sell off and zero out my portfolio now to preserve what’s left of my capital so that I will have more cash reserve to pickup stocks at the bottom? I will trade at my own risk.

    Like

    • I cannot answer for you because the prices where you are ipit can already be in stocks which are very near their bottoms. For instance, if you held on LC from 1.80 to currently 1.12, telling you to sell your positions at 1.12 and hoping to buy it back at 1.00 isn’t a certainty. To each his own? I’m sorry because bottoming out stages take a long time. Also, it depends which stocks we are talking about. – FT

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      • Ipit Investor says:

        Thank you… keep posting to help us analyze and decide what to do.. your posts and the comments of others keep me on my toes.

        Like

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