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Hey it’s Sasha Evdakov and thanks for joining me here on another episode of Let's Talk Stocks, where I share with you how to evolve as a trader and trading psychology.
Now in this week's episode number 68, we’re going to hone in and focus on a Dead Cat Bounce During Bearish Market and Sell-offs, so I apologize the use for the term of the dead cat bounce, you know it does refer to a dead cat bouncing and there's a reason for that.
They actually use it in the market space in the marketplace, so it's a common industry term, I didn't come up with it that is just what it is. That's what we'll be covering is the dead cat bounce, what it is and spotting it in the current market conditions, in what's going on underneath in the market.
Then really how to spot them and how to look for these dead cat bounces, so first off to get things going I have talked about the market for multiple weeks already and those of you that have been following me, you know that we were discussing it and talking about moving short into the marketplace, when it was clearing in breaking the price level at 2000 on the S&P.
As you know I was short at that point and as you know I was talking about things getting very bad and very nasty at that point of that breaks, and if this level breaks at 1860, we could see things even much worse and you saw that come out just yesterday here on Wednesday, where those stocks went down a good five hundred and thirty points on the Dow and 50 - 60 points on the S&P.
We got down all the way in terms of price levels, we got down on the lows of 1812 on the S&P. Now today we had a slight little bounce or pop towards the end of the day. We had a little pop yesterday but we still were selling off quite heavily.
What does this mean and what does this tell me? You know we've already talked about this and i don’t want to keep beating the same thing over and over in your minds because the move has been made and now the next move can be made again if this next level clears on a clean break, which would be the 1858 to 1855 on the S&P.
If we break that level cleanly, meaning on a full bar break so that means probably you'll see 1834 or even 1816. If we break those levels you could see some other very bad massive sell-offs in the marketplace.
It's something to pay attention to and it's something to watch very closely.
If you look at it on a week-to-week basis we've been red bars for the whole month on a week-to-week. If you just color code the bars and put it on the weekly chart, last few weeks have all been red and that's really where the direction and the momentum is at the moment.
What is a Dead Cat Bounce?
We're looking at a few price levels but we do get some violent bounces in the market space and some of these violent bounces are called dead cat bounces.
The reason they call them a dead cat bounce and I can’t really draw on the screen at the moment, maybe this video would be better to do kind of like as a short lesson on what is a dead cat bounce but to make things simple as just say you have a Dow Jones building right here on top of a mountain.
We have a mountain top, where we have this is the Dow Jones or the S&P and when this is on top of the mountain, pretend that a cat is dying off of this building and when it's dead it continues to fall and the faster it falls from the higher up the bigger the bounce you'll get.
So, once it hits this side of this mountain it's going to bounce a little bit and once it bounces it'll just bounce a little bit because it's dead there's nothing there for it to jump up and be alive and it will continue to roll back over and fall down the mountain.
The part that where the bounce happens, this is the same thing in stock market terms, this is called a dead cat bounce and that's why they call it a dead cat bounce because there's no substance and there's no life, it just doesn't little bounce and then it continues to fall and head lower.
I don't know why they coined it that way but that's the common industry term, that's what it is and that's the way they discuss it. They discuss it on TV that way, in the papers, or wherever you read it's called a dead cat bounce for that reason.
Dead Cat Bounce in the Market
Looking at the markets here on a day-to-day basis, you'll notice that you see a few green bars that happen and these green bars right here, these are dead cat bounce bars. This is your dead cat bounce that happens in the marketplace and if you look at these other bounces right here like even the little bounce today that we got nine points.
I mean we’re up at thirty-plus point, at one point in the day we were up I think 30 points on the S&P here and even when we look at this later it continued to roll over. So, I like to look at the end of the day action at how things are moving and how things are happening and what's going on underneath.
And I noticed yesterday on Wednesday, that we had a slight little bounce at the end of the day then we started to pick things up on the momentum. So they spiked it, meaning they the industry hedge funds, spike the stock lower and then they brought it higher.
So they brought a higher and then today we get a slight little bounce, a slight little pop. Now can we still get a few more days of popping action and absolutely, because we're quite oversold in this smaller shorter term time frame so we can get a little bounds to let's say the 1900 to 1920.
Then probably more than likely, it'll roll back over and head lower so that would be a dead cat bounce but since things were acting weak, today what you may end up seeing is since tomorrow's Friday typically on Fridays you may get even more selling because people don't want to be long over the weekend.
They don't want to hold positions over the weekend. They're scared so they'll get rid of them specially the shorter term traders. So they'll get rid of them and get out of the position, so you may see further selling and further action to the downside.
Pay close attention, when you get these pops on these kinds of moves, you typically will see major selloffs coming later and you're watching the volume, the price, the action, the behavior of how the stock is moving and how it's breathing.
And the way it's a bending over, everything you're watching the way it's behaving in the marketplace and if you only see one part of that chart, if you only see one part of that stock and you can't see the way that it's moving, breathing, acting and behaving, the health of that stock chart then you shouldn't trade, you should not be in the markets.
You need to watch all of these things and understand how things are moving in that stock or in that space for you to take that trade.
Looking at it, if we look at the SPY and we look at the volume, the volume today on the bounce on that bounce today, we had a hundred ninety three million shares on the bounce.
Yesterday we had two hundred and eighty six million people selling their shares. The bounce before that on Tuesday, Tuesday we had a hundred and ninety five million to the upside, the day before we had 324 million selling.
Let's backtrack for this week, what has been going on? 324.8 million, selling on Friday on Monday on Tuesday, since Monday was a holiday 590 million bought some stock you know it was a bounce because of the shorts buying back some of the shares.
At 324 to the downside and hundred ninety-five on Tuesday, to the upside then we had 286 to the downside and now we have a hundred and ninety-three to the upside so to 86 versus 193, that's not even close.
That's not even close in terms of relative share quantities, so yes we did get a pop but I mean I'm still holding short some shares, I put on a few little long positions just for safety sake and they're very light.
They're very light and I will take them off very quickly if I see things rolling over but it's just a hedge, it’s just a way to protect myself if we get a little pop and then I'll take them off real quick.
Then as the market continues to sell off, I’ll add to my short positions and that's the way you play the game, you play with multiple things in the environment, in the market, it's a dynamic market so it's constantly changing.
Looking at these stocks, when you see these things bounce like this and then you see them taking things out, that's a dangerous spot and if you see things hanging around here for multiple weeks and it keeps pounding on this level, chances are it's going to break it and break it lower.
You want to be really mindful and if you look at the IWM right here, we had a slight bounce here yesterday and it is a green bar yesterday but we had so much selling on the previous day 94 million and now 65 million on a slight little bounce to the upside.
Even though that these colors are red and green and you had a green bar here, remember what happened on that Wednesday with a green bar, even though it's a green bar remember how much selling took place, look at the action, look at how things are moving, how are things breathing, right?
As you start zooming in you start looking at the cluster of shares, so that's the way they move and react and these terms that I'm using these are all common market terms when I'm talking about the breadth of the market, this is a common industry term.
When I'm talking about the health of the market this is common industry terms. When I'm talking about a dead cat bounce again common things, so we may get you know you got a dead cat bounce here on the Russell, on the IWM on Tuesday January 12 2016th and then we continue to roll over.
We got a bounce here on Thursday, January 14th but then again we continue to roll over. That's how stocks moved at all going to straight line down, they don't go in a straight line up, that's just the nature of the movement.
Let’s look at some stocks
Looking at some individual companies, what's going on and what's happening? Well here's what's happening we got to pop in Amazon today and we look at the individual daily pop, you start saying oh wow it popped you know fifteen to twenty points and then the stock rolled over.
Take a look at what happened here today, so we had a pop and then the stock rolled back over, it finished only $3 to the upside. $3 to the upside basically what it did was re-test this line. It tried to get above it but it couldn't do it.
Tried to get above it and it failed so if things are failing that means they're not acting strong, that means they're acting weak. So can we get above it later? Yeah, absolutely but look at what today's volume is and then you start putting these things together.
You start looking at yesterday's volume on Wednesday, was eight million on Amazon and it sold off. Today's volume was 4.9 million and it kind of hung out at the same price level. So, is there strength? is there buying? No, not really.
So can more buyer step in? Yes, yes more buyers can step in but for the time being it is acting weak, so typically what happens is they retest at this level and then they continue to sell lower and further.
They'll see if there are any more people who want to go long, who want to take their shares and all these hedge funds and institutions are like “Oh yeah please let me out let me out. You want to buy some stock, here’s some stock and I'll give you some stock”.
That's what they do they give you their shares and then a few days later they rip that rug out from under your feet and you fall over hit your head and you start bleeding. That's the way it works and here you don't believe me this is what happens.
Look right here let's take a look at this little pop, this is what they do and it's not them specifically they're not looking too you know hit on anyone but that's how money is made. That's just the natural movements of the market.
We have a sell-off here, then what happens is you have two days of pop action, it moves to the upside and the volume here you can see is weak so they're testing the waters and then right there, that rug gets ripped out from under you.
They're setting up, and the rug gets ripped from under you. Then again get back in it right there thinking oh yeah might be a pop, the news it's not so bad and then yeah this could be a bounce, we’re overdue for a bounce and the news will tell you.
You know this could be a support level you know that's what they do they suck you win, if you watch that stuff and then again the next day BOM, they pull that rug out. Then again well you know we could be creating a base here you know we've been selling off for a while.
Then again lower that's what happens and by the time you know it, by the time you get there, it’s been already a month, two months, three months and you're all the way down here at 500 from 595, from the 650 level you're down to 500.
You're down twenty to thirty percent by time you even realize it because you’re getting sucked in into these pops and these are the dead cat bounces that happen in the marketplace. That's what happens, they take your money and they run with it because you know people get sucked into buying these things on you know trying to bottom fish, trying to get them at the lowest price share.
I know because i was one of those people. I got sucked into a lot of these and from time to time, I still for example on this bounce right here on Amazon.
Let's say Thursday January 14th 2016 I did buy some protection for safety reasons, you know right here because it was a pretty strong bounce, we had a 1.3 million share bounce versus the previous day selloff, it was 1.2 million on the S & P.
If we look at the SPY, you can see right here we had 221 million shares to the downside on Wednesday January 13th and then 240 the upside. So for me I bought a little protection right there you know, just in case stocks continue to move higher.
I was really cautious there and then again stocks continued to roll over and then to me that shows weakness and then today the buyer started to dry out. So, to me this still tells me it's weak and I talked to a handful of people here over the last week when I came back just to catch up on things.
Then some people give me a call either asking me for their password to be reset or this or that or just had a question about a course and you know it's kind of funny we have the conversations and I won't reveal everybody's you know last name or anything like that but you know I talked to a guy named Jim.
Me and Jim were talking about it and we had like, I think we're talking right around this area where we had this dead cat bounce and I told him you know right away on this area, right here when we were popping a little bit we were talking and I kind of laughed because he was wondering what my thoughts were on the markets and that same week we talked about it in the recaps of this let's talk stocks.
And I said you know things are going to get really nasty, things could get really nasty and especially they can get really nasty if we break we break that next support level and they did, they got really bad right here within 11 points off on the SPDRS, or if we look on the S&P we had a major hundred and thirty points sell off.
If we look at the Dow Jones, we had a thousand point dip on the Dow Jones since that conversation and I kind of laugh at that because you know some people are studying and learning the markets at different points and if you're learning the markets and you're studying the markets during this bearish selloff here.
You might be wondering why am I learning the markets, or why my studying the markets but the beauty is if you learn to trade to the short side or to the long side, it allows you to trade in both directions and if you learn to trade options you can collect premium from stocks that are moving sideways as well.
So when you learn to trade you can trade to the upside and to the downside, and the market you just need market movement and you're playing with managing your positions.
You're not really concerned what the market does in retrospect because you're managing and moving your positions around because you're not a buy-and-hold investor forever you're managing and riding momentum.
And even if you're looking for long term opportunities what you’re doing now is if you're even if you are a buy-and-hold investor, right now I mean you probably sold some right there and now you're waiting. You probably should wait three to six months or eight months right here until stocks come back to about the 14,000 level.
Once they come back, that’s where you can get into the stocks, and that's when you can buy more and if they get down to 10,550 right around this swing point area, then you can buy a little bit more and if we get to the 2009 lows right around the seven thousand then you should be pretty good, right around that level.
People say wow that's really low but you know for me something that I've really learned about the markets over the years is it doesn't matter how high something gets and how low it really gets.
What happens is people get sucked into these things and even if markets are great for multiple years, it can still go really low in much lower and much higher than what you think. Just because we were up here, just because we were up here at this 13,000 - 14,000 level, didn't meet we didn't take a price cut to half to 7,000.
Just because we're here at 18,000 doesn't mean we can't come back to 14,000 that would be quite healthy and if you know and understand what I've talked about before on the angles, the degrees of the angle of the steepness of the curves you know that I've talked about that.
This angle right here is more of a healthy angle; this is probably a 30 degree angle. If you're trending at a more accelerated angle, something like this like a 45 you’re little more accelerated.
If you’re trading at even more accelerated right here, this is really unhealthy and you can see here what happened at this angle right here that this market pulled back.
Look at how the health of how it's pulling back and how it's moving. So if the market moved right here at this level coming back to right around 14,000 wouldn't be unreasonable for the market and then it can continue to move higher but the pull back to about 14,000 is not unreasonable.
Relative to where we are already right now, things have gone pretty nasty and we did have a lot of selloff, I wouldn't be surprised if we get a bounce similar to what we had in September which was coming back and it bounced that 16,070 on the Dow Jones or if we look on the S&P a bounce to about the 2000 level.
I wouldn't be surprised but the thing is, is we are acting weak and I say that because I really thought we would get a bounce today. I thought we would get a bounce today and the reason I thought we'd get about today is because it's Thursday people will typically bounce it on Thursday and then sell it back off on Friday because they don't want to be long and holding them shares over the weekend.
Plus it's a shortened trading week, so I really thought we'd get a bounce with more day traders coming in but now we didn’t get that, we didn’t get that bounce so for me you know that Friday is a little bit concerning in the sense of you’re a long holder instead I would expect things to roll over tomorrow just cause things were acting weak.
However, anything can happen, it really depends on China, the markets, the oils, all these different things and all these factors play a huge role but right now we're acting weak and you can see that the bounce here today was a weak bounce.
We had 194 million on the S&P traded and 285 to 286 traded yesterday to the downside on the SPY, on the SPDRS. So when you watch these markets, when you start evaluating these markets they really starts sucking you in, in these bounces, these dead cat bounces and you always have to be asking yourself is this a dead cat bounce, is this a bounce that's real or is it fake.
Is it there to suck me in and then take my money and that's what you have to always be thinking about, is what is my risk, what if it goes against me and once you start creating a plan for those situations and scenarios you’ll start being better off, you'll start raiding a little bit better and you'll start seeing your risks and areas where you may be struggling at.
Whether you look at Amazon or Facebook or anything, you start looking and you start seeing things are rolling over.
You see that here we are moving in this 20 day moving average and now we're rolling over. So even when we get a little pop it's pulling back and this will allow you to buy these stocks at lower prices.
On Facebook even if we come down to about 72, it’ll be a great opportunity for you to buy some shares.
Amazon the same thing, if we come back to right around 450 again it’ll give you a good opportunity 411, I'm not sure we'll get there that quick but if we have some action on the pull back to about 500 you know it may happen.
So, always be prepared for these things because if you get complacent in the sense of you’re just buying stocks, oh it's not going to go down or I'll just buy more these things oftentimes can go much lower than really you anticipate and then only to snap back in the other direction.
That's what happens with these bounces, is you'll get these few days where the stock goes higher, you get sucked and it’s changing direction, the sell-off isn’t real and then it continues to sell off further.
One of the reasons you're watching these signals at how things move, how things act and how things behaved because the better at it you get, the easier to spot and they’re subtle signals often times.
Such as this one, we talked about this before and then you start seeing huge clusters of volume coming in right here and then you'll see those coming like right here this is a red flag that’s screaming for you, telling you “Yeah there's a major sell-off coming” and then when we break that level, we continue to move lower.
If you would have gotten in at that point, even if you got in late on Amazon, on this sell-off right around let's say 625 you still would be up 55 points on that move to the short side. So, that's quite a large run to that downside.
We talked about Apple. I talked about Apple where we were talking about these highs at 133 – 133.50 rejecting those prices. The signs were there, they’re there, subtle.
You don't have to trade large on subtle signs, you can trade lightly and when the signals are screaming at you then you can go bigger.
Here you can see we're getting higher and we reject it and you can see these pops, look at the white line on the volume. This is the 20 day moving average of volume, why do we use twenty day because there's 20 trading days in a month.
You can see the bars that are above that 20 day average volume are red bars. There's only one or two of them that are green within that range, within this range of movement. There's only like one bar that's a little bit above it while every other one is a selloff.
So then what happens? Well, it breaks that 120 level right here on that stock on Apple right around August. August we break that 120 level we continue to go lower, we get down to 106 - 105 there's that flash crash, let's just call that a blip.
It gets higher, tests the 120, rejects it then gets back down to that 105 level and now breaks it. You know how much energy and momentum it's going to take for it to really continue and get back above it? It takes a lot of energy and that's a lot of shares that's the billions of dollars.
Over the last month we wiped out billions upon billions of dollars from the market and it'll continue to go in that direction until we get major buying and you can’t get there because so many people were on the long side that now they're taking profits off or they’re in the panic or they want to keep their profits, it becomes a cycle.
Kind of like Oil where we talked about this which is again quite interesting and quite funny that people over here we're screaming about $3 to $4 gas prices and then we get a sell off then again 3 $4 gas prices oh no, we got problems and now what do you see?
You see some places selling gas for 67 cents, $0.97 or a $1 it's in the news. They're talking about it there's price wars you know I think over here where I don't really pay attention to much but I think it's around $2, maybe 1.70, per gallon.
I mean when you compare that to the $3 gas you know it's going to take time it's going to stay at that 1.70 to 2 dollar range for a while now. I would say at least a year or two.
I’d say at least a year it’s going to stay there because it takes time to shift that supply. Now we do use a lot of gasoline and you know a lot of oil, so it's going to take a little bit of time between all the refineries.
There's a lot of things in the process but it'll take time to shift that supply and demand and get back above certain levels and we may get a few bounces which will pop the gas prices to 2.20 to 2.40 but as far as seeing them at 3.75 you know in the next 3 months I mean that's unlikely things move slow in the marketplace.
Summing up our lesson
Start looking at these things, at how they move, how they act and how they behave on a longer-term view and when you see these one or two-day bounces, these are dead cat bounces, these are short lived, these are just pops from people who were short they’re taking some profits only to reenter again to the short side and that continues to accelerate things.
Be mindful, be careful and trade them well.
Hopefully you got some good insight from this video. We talked specifically on the balances in really honed in on the S&P 500, typically you want to watch the composite. I like watching the composite because that's where the leaders are.
If you have trouble spotting the movement, the action, the behavior just change it to a weekly chart and just look at the color of the bars, if you still have trouble change it to monthly chart and look at the monthly bar and it’ll show you the direction.
Just look at the color on the monthly bar and that month is red, and then it tells you something, it tells you who is in control. It tells you the bears are in control of this month.
That's what you're watching in this marketplace and yes right here we’re coming into potential support but we bounced and we spiked it lower and now we’re hovering around it and if this wipes out, if it just hangs out here and it continues to hover its building and you could see it go.
You could see it go again another move just like this so be ready be prepared. If you want to be safe then wait for it to break this 1805 level for the short side on the S&P.
If you want to go short and you want to give it room and cushion to the 1870 to retest for a dead cat bounce because you'll get violent bounces off those levels but you know we could get a little bounce if we bounce here and we hold here again you're going to see consolidation and we won't be moving higher unless you see consolidation for probably a few months.
Again then you would get sideways action just like we had sideways action here for the last year or two so that's really what was happening.
If you look at the Dow jones the last two years since 2014 to now you pretty much had sideways action and there weren’t a lot of moves to the upside. So that if we get higher you’re going to see the same thing moving sideways until things can move higher.
Otherwise, it's more likely and it's better actually if things go lower so that way you can either add to your position. That way you can create a new position or make some money on the short side so be flexible on your trades and positions.
Thanks again for joining me this week. I hope you had a great trading week, a shortened week here on Martin Luther King Day. Enjoy weekend ahead, for me lately I've been filming a lot more on the option videos, option course.
I think just a few of the modules are just few hours long and we have like a 40 or 60 modules so I'm actually quite scared at how detailed this course might get but it's better I guess more details than you know a 45 minute DVD from other people that may just try and sell you some kind of product, where there's not a lot of substance.
So, I'm trying to get as detailed as possible into these options as we go into it, so that's my main focus now. We're just doing a lot of filming every night. I try to film some lessons and put it all together to wrap up that course and just a few of the modules alone are just multiple hours long and we're getting into iron condors, vertical spreads, you have calendar spreads, and diagonals spreads.
I mean there's just butterflies, so many things to cover and if you want to cover them right and in the right detail between the adjustment it's a lot of work and a lot of time so we'll probably split that course, it'll be multiple courses and that way you can take them in stages, just in case you want to break things down and it also give you time to digest and practice the concepts, that way you're not overwhelm.
So we'll probably split up into three or four courses. That's kind of what I'm working on besides that I mean just continuing to make a few more videos. I have some new surprises coming up with some free training and free mini lessons and mini courses that will be coming out, absolutely for free.
As far as the main course that I'm working on, still working on that options course and just filming with it probably two to three times a week I try and do a lot of filming for it and just last night I was up until about 12 a.m. and 1:00 a.m. just wrapping up some more filming for it and getting a lot of that done in completed for you guys.
Enjoy the week ahead, enjoy the Friday, and watch out for a potential selloff on Friday. If you get a little bounce it'll probably be short lived but just pay attention to the volume and understand that these dead cat bounce can happen and they can last for a couple days, they can last for an hour, they can last for a week and then the market can roll over.
So always watch in the health of the market and seeing how your positions would be affected.
Those of you in the critical charts, who have been watching the videos, who have been watching the charts themselves you know where I stand and you know how what we've been looking at on the markets and many of you have wrote to me saying you've done phenomenal over these last few weeks and that's because the market was acting exactly as it should and the signals were there.
There was actually good signals that were showing up and even in these let's talk stock sessions, even in these are Thursday lessons, you know many of you have even got profited and capitalized on this move to the downside just from watching these videos.
Thanks again for sticking around, thanks for watching and writing in your comments and positive responses, it's really great to hear that the lessons actually transform into action and actions are transforming into positive results.
Thanks again. I'll see you next time, have a great weekend ahead and trade them well!