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Hey it’s Sasha Evdakov and welcome to episode number 67 of Let’s Talk Stocks. This week's lesson is about stock market pops and direction changes.
Now we're really going to hone in on the current market, we haven't done an in-depth analysis on the market in quite a bit of time and we're going to go ahead and do that here in this week's lesson.
If you've been watching the critical charts and those videos, I typically do a more in-depth analysis on those videos, 30 to 40 minutes, sometimes twenty minutes on the current market as it is.
However, in the let's talk stock session on these Thursday sessions, I typically strive for more of a lesson whether that's an inner game, mental lesson about how you can personally improve or an outer game, something to teach you about charts or the market itself.
That is typically what I focus on but the majority of the time, a lot of it has to do with internal battles, internal focuses and the inner game of trading because the outer game of the trading with the technical analysis, all that stuff, you'll pick that up over time but it is more difficult and from what most people struggle with from what I've seen over the years, is those inner battles.
For this week I really want to hone in on more of the outer game of trading and more about just the stock market pops and direction changes and what the market has been doing because we did get a pop today, of a good 31 or so points on the SPX but the previous day we had about a fifty point drop on the S&P 500.
Let's discuss some of these pops, how things move, what are you looking for in this direction changes and how this really applies to the current markets.
Getting started with the overall market
Typically as we take a look at the overall market, the overall market what I look at is a few things. You look at the S&P and the S&P you got the SPY, which shows you a better indication of volume than the S&P 500, just because it's traded a little bit more heavily and the SPY is traded one-tenth of the SPX.
So if you buy one share of SPX, it's like buying ten shares of SPY then you also look at the RUT-X, the Russell 2000 and for that the baby RUT is the IWM, which again the charts pretty much like identical and again it's one tenth of the size and then when I also check is the composite and the market typically trades based on the composite.
I'm watching these composites because these are typically the leaders and what I'm looking at these leaders, I look at how they move, how they react and I also checked the volume of the leaders how they were moving for that day, so those leaders would be like Amazon, the Apple, the Netflix, those kinds of things, the companies that people really want to get into at the current time.
They’re typically the same companies, week after week, month after month but over a quarter or two sometimes they get rotated at one point. GoPro was leader but now it's in the dust, you know sometimes it just depends where the money flow is, where are people putting their money.
Then you know I'll scan the diamonds, which is the Dow Jones so you could do that as well but typically this is for the general public but most people in terms of the professionals, look at the S&P, the RUT, the composite.
That's really what you want to look at and I put more emphasis I guess on the composite or the S&P and then probably the Dow Jones and I'll check the IWMs or the SPYs for the volume because they just trade heavily on that.
If I look at IWM, today traded 69.1 million, whereas the RUT, on this on this chart you can’t even pull it up I'd have to go to my other screen to pull it up but it's just a lot easier to see the SPY volume 239.1, whereas the S&P is trading 749.4 thousand.
So you know less than a million shares on the SPX. Whereas, with the SPY you can actually see more real-time volume and it’s a little bit better more people trade it.
Looking at the SPX, when I do the analysis though, I will use the SPX typically but I’ll go to both to double check and confirm. Looking at this chart, on the current SPX chart, we’ll look at the weekly chart and when we look at the weekly chart I'm going to share with you the analysis of the support and resistance based on a regional range just do the confluence.
We've talked about that the market over the last year has been moving and trending here sideways, so that has been the major move of that market. Right around August of 2014 we were at 19.58 and right now we're at 19.21 in the S&P.
We really have just been moving sideways. So if you're with me on this sideways move right now, you're noticing that there have been a few bounces at that support around the 1900 level.
You had one in October of 2014, you had another one around August of 2015 then you had another one around September, October of 2015 and you're getting one right now. So what's happening to the market? and what does this mean and how am I looking at it and how do I find these bounces, when is it going to bounce and what am I looking for.
Basics of Support and Resistance
All these questions will be answered for you in this video to a base level. I could probably talk about multiple hours about this one topic alone but as far as the base level I’m going to discuss this support and resistance pops and direction changes right here at these swing points and levels.
Rather than drawing lines on support and resistance I'd like to do something a little more fundamental and it is to draw a rectangle and the reason I draw rectangle and I think it's better, oftentimes if you're just getting started in trading or you're a beginner because it allows you to not jump in too early or not get too anxious or excited in the trade and pull the trigger at the wrong time.
Now I still do it from time to time and you still will continue to do it from time to time because you're always looking for the lowest price to turn your stock long and you're always looking at the highest price to sell it short.
Here, what I'm going to do is drive a few rectangles at the support and resistance area, so now on the S&P I have at 2150 to 2123 or 2120, resistance level and that basically is a 30 points spread. That means you got to give the S&P 500 about a 30 points spread of wiggle room in order for watching it for a clean break out to the upside.
If I was to enter the S&P for a long trade, I would enter it right around here above the rectangles. So meaning if the rectangle high is 2140 and it goes down to 2120, I would enter it right around 2155 so it gives me another 10 to 15 points beyond that rectangle that I just drew.
If I look at the downside here and I draw a rectangle, now these things won't be perfect and they won't line up but you can see how they kind of touch and lineup. So here we were hitting some points and this rectangle on the support level, I have fun 1920, let's say 1930.
I’m going to draw a little bigger so we're going to have a 1930 all the way down to about a 1895 level, so that's a huge support region. The reason it's huge is because when things selloff they typically will go violently.
That's why you will see certain prices, similar to back here in October of 2014, it continue to go past it and it went past the to 1823 - 1820 and then pop and then you get violent pops.
You have the same thing that happened here on August 28, 2015 we go down to 1866 but popped then we hang out right around that 1920 level. So this rectangle really holds a lot of substance to our bounces and this is what you're watching for when you're looking for potential bounce.
The way I drew this is by finding swing points, resistance points and where is the stock really being held up at the equity being held up at the most points possible, with the most volume as possible. It’s basically a change in direction.
Now we go into let's say a two day or a one day, you'll start seeing this unfold a lot more and you'll start seeing these change in directions and the rest of this noise is static. So to simplify things if you're a longer term trader you basically want to only enter the S&P based on this chart right here above this region would be 2155 because our area's 2142 to 2115.
On the other hand, if you're looking to short it, you want to wait till right around the underbelly of this rectangle which would be right around 1862 – 1865, you could wait to 1850. If you really want to play it safe you wait until this clears right here on the swing points that were hit in the 2014 level which was that 1820 so you would wait all about 1805.
Now that's a large spread but that means if that clears, you're basically looking for a very nasty market selloff and a nasty market selloff could take it down to about 1560. That's about a four hundred-point drop from where it is right around now.
If you're waiting until about 1820 that'll still give you about 300 points to the downside, even 200 points which is quite substantial.
Pops and Direction Changes
Getting back to the pops in direction changes once I have identified the region or the range in the market of where it's been bouncing, where it's been holding up, I start looking at the action that previously happen.
If we break apart the most recent action of the last few days, I look at the speed that the market has been trending lower or where it's been going and how fast it's been going and we've been moving lower really quickly, especially after that first of January.
We talked about that market being toppy and we've talked about it just moving sideways not doing much and you know I still think it's toppy, relative to where it is but for the short term, we are oversold or we were oversold.
When I look at the market coming off the 2080 S&P and then selling off for a 190 points, we sold a 190 points and now we bounce for 32 points.
Understand and remember that, what I always like to say is that one day does not make a trend so when we have these bounces, just like we had a hundred and fifty point selloff all the way till January 8th 2016 here and then we had a pop on Monday on that Monday for you know is just a green bar it wasn’t really a major pops, 10 points as consolidation and then another 25 points on Tuesday here on January 12th.
Then we had a major sell-off, that was just consolidation of about 50 to 60 points on Wednesday and now today Thursday, January 14 2016, we had a pop of 32 points. We really had a pop of about 40 points but then a slight pullback.
So does this tell mean that there's going to be a major change in the market conditions? the this one day change everything for me? No, not necessarily. All it's telling me is that we could have another pop similar to what we had in September - October and then we had a sell off again further.
Now this upward pop in September of 2015 that we had, lasted about a whole month so we can have it coming back to the 2000 level on the S&P and then we could have it reject prices. We could have it come up and then reject it. That's possible for the S&P to come up to 2000 and then reject it.
Keep in mind them more frequently and the more often that we keep pounding at these bottom levels, right here the more often we keep pounding, once, twice, three, times, four times, five times. The more we keep pounding on it it's like I drill going into a piece of wood multiple times or a jackhammer going into a roof.
Think of something pounding a hammer, pounding from the second floor down below. The more pounding you do the more likely it's going to break. The same thing goes to the upside so if we're pounding to the upside let's talk about this 2100 level that we were trading before.
The more we were pounding here at this level, the more likely we were to break higher. Now if we can't break higher or we can break lower if we can't get past those resistance or support points then things unfold and its building.
This is building cost, when we move sideways for so long and we don't get through it builds cost for one direction or the other.
Now in August September of 2015 that cost was to the downside. Now again for the 2100 level that we were doing in November - December again cost to the downside we weren't ready.
If you were going to go long this market, I would wait 'til 2150 otherwise if we get back above the 2000 level you need to see a nice sideways move for about a year or two, a few years to digest that move because the move when we bring it back from 2009 had a 1514 hundred-point move to the upside so you need a pullback for things to be healthy, for things to be normal.
Here let’s backtrack a little bit. So when I'm looking for, when are things going to pop, I always assume that a swing point that has been hit multiple times, such as a support or resistance line, I always take profits into those areas and I always assume it's going to go in the other direction because it can do it multiple times.
The reason I assume that is because it allows me to take my profits. So for those of you that have been following me and you know we talked about this 2000 level on the S&P breaking to go short, I told you I was adding to the short side and then what did we get that last few days those days are just yesterday what do we get?
We got right here a 40 -50 point more move. Also from that two thousands you know and just review the episode 66, you know I was talking about being heavily short, right there and we gained sixty points there, we popped a little bit higher that's an opportunity to add to the short and then you add to the short and you take some profits in the strength and now did I get some back today, absolutely.
Absolutely you lose some on these pops and you get out but you're already taking profits as these stocks continued to move lower. Review the risk episode, I believe that's episode 65 or 64. So go ahead review that risk management, money management episode right around that time frame.
Review it because when the stock is moving in your favor you take some profits and then you're out most of your position and you still holding on a little bit because I know that these one day pops, most of the time do not last because I look at the bigger picture but do I prepare for them? Absolutely.
Absolutely, you prepare for them and will you give some back? Absolutely, but I'm also getting ready and preparing for when this region breaks because this is kind of no-man's land. The region between this 1910 level that we will had this bar or box on 1925 to the 1991 thousand eight hundred and eighty level kind of no-man's land.
However, when we break that when we break lower to the downside then you see a huge open space to go another 200 points lower. So until that time you’re trading extra cautiously when you're in that range so that's how I approach it.
So, I am always expecting a pop and direction change and that's why I'll still keep some shares short at this point because I understand that we can get up to this 2000 level and roll back over. So we may pop to the 2000 and roll back over.
I'll still keep some shit shares short for a longer period of time until that point. However, what I also do is I will go long, maybe let's just say you're short on the S&P and you’re short let's say 100 shares to make numbers easy.
Then you take profits into strength right around this nineteen hundred level of 50 shares, so now you have 50 shares remaining, what you may do is trade the Russell or the IWM or the SPY, so you tried something similar and what you may do is you’re getting ready for a bounce.
When you see that bounds on that day or the day before, depending on how the market ends, the day before which you do or the day off, once you see the direction rolling over, you may trade 30 or 40 shares to the upside in like SPY, whereas S&P or SPX if your five shares right because of that would be fifty SPY.
So, if you have five shares in the S&P you may go ahead and do as SPY and you may trade just half of that to the upside. You could do the same thing with the IWM or RUT, you can even trade these because they all kind of move together, they're not all exactly.
If you want to do the exact same one, then I would trade the SPY and that's the beauty behind trading these two large traded ETFs and indices, not to mention you get a huge 60-40 tax break on those by the way, you can check with your accountant on those kinds of things on the taxes.
I'm not an expert on taxes but you get to trade the SPX and then let's just say your trading five shares here then that would be fifty on the SPY, you might trade twenty or thirty to the upside and just hold them for a week.
If it pops for a few days then you're holding it as a hedge, that's what hedging it is all about and then if you see it roll over with weakness, you see it rolling over you get rid of those SPY shares and you keep your SPX shares.
It's all about being prepared for the move and it's all about learning the regions and giving these regions and the tighter that you have these regions like if you have a really tight thin region where it's heading it perfectly, you know everybody's watching those then you need to be extra careful in some things just are perfect setup like that.
Other times when the markets nastier acting volatile like it was here at this nineteen hundred level which is the 1925 to the 1875 level, you have to be extra careful cause it’ll whipsaw at any given time because you have this pop or direction change that you're planning and expecting for.
Hopefully this this gives you some insight to these directions changes.
The overall market conditions
Now let’s look at the overall market conditions and where they're at and what to expect to happen. On the S&P and this goes along with the SPY, it goes along with the RUT or IWM, all those kinds of things. So what do I expect to happen? We were oversold at this level, whether it's a correction, whether it's a pullback the terminology definition is irrelevant.
What's happening is more important, so when we look at the market at 1880, 1920 to 1925 level I'm watching what's going and on what's happening. I watch the volume those of you been with me you know I watch them volume and this can be a little bit confusing here on what's going on what's happening here on this bounce.
Previously we trade 221 million shares to the downside of volume. Today we traded 240 million shares to the upside, this is on the SPYDERS, on the S&P you had 1.2 million to the downside yesterday, which was Wednesday and today you had 1.3 to the upside.
Again, 1.2 versus 1.3 today, you had more of volume which is what you want to see from a bounce but there is one thing you want to also watch, you want to see does the previous price or does that same price region actually break the last price.
The fact is even though we had more trades going off, we didn't actually break the previous day's bar on the price, the price value was weaker meaning you had volume but you didn't have the price. You didn't have the price and when you don't have the price that means there is less things in your favor.
If this bounce today instead of bouncing from here on the lows of 1878 all the way to 1,934, if it bounced to 1960 and it finished at 1960 and above that then I would say yeah we got some volume, we got we got volume got price, things could hold up better if I saw higher prices.
However, because we saw a pop and it ended kind of in the middle of yesterday's major sell-off and you got to remember out of the last 15 days, we got 12 trading days and we have basically four bars that are ending green and two to three of those are basically sideways action bars and then we have one bar to the upside.
One bar, doesn't make a trend, so should you be happy going in all in for your stocks or for your trades? I would not recommend it, I would be patient and watch for a second or third day to confirm the move and the problem with this on this a little trend here by the time you hit the second or third day you're going to see how it reacts at this 2000 level.
Once it gets to the 2000 level there's a few things that can happen and we discuss this back in October on these Let's Talk Stocks and Rapid Recap sessions that if we get back above it we can do a few things again we can move sideways for quite some time which is what we should probably do.
We can move sideways and then break out we can move sideways and break back down or if we break above that 2000 level, right over here the same thing in today's market, we could continue and break past the 2100 level but if we do that, that means everything is phenomenal and fantastic and the stock is overextended.
The market would be overextended and then I would look for a very major selloff, if we broke the twenty-one twenty-two hundred price level in the S&P because that's very dangerous or the other option is we get to the 2000 level and sell back off and then we'll see if this nineteen hundred level holds again.
We're trading in this region and range and you're playing those ranges for the Pops and for the bounces and what's going on, now until today most of the most of the volume until today has always been showing me weakness, we've been showing weakness all the way since December and we've been showing that things have been weak and the market's been toppy.
Until today the market has hasn't really shown some strength not today's bounce did show me a little bit of strength, now I don't know what the exact root cause of this is because we can never pinpoint that, there's multiple causes and effects.
Some say that its oil like Marathon Oil but these oil companies like Exxon Mobil, like Marathon Oil, all these companies they are not the direct cause and effect of one thing, it's like gold back in the 80s and 90s that people discuss and talk about.
It's not one thing that causes markets move and react, there's always a funny little headline that says you know one week the newspaper would say stock market, is heading higher due to oil prices rising, the other headline next week stock market heading higher due to oil prices tumbling.
In this situation here, you know we got a little pop in oil here previously right there but look at the August of 2015 and you can see we're actually at much lower prices, so was there a bottom, was there a bottom in oil prices, I wouldn't say so because the bottom to me is it comes down, it pops and then it's above it.
Right now, what's happening is actually since August, we've been consolidating in oil so actually what we've been doing is going sideways and this sideways action, you know what happens when things come up to a certain level, these stocks what they can do is come back up and then rejected again because there's so much overhead supply.
This happens with just like Marathon Oil, when these things, right now trading at 907, if it comes back up to 13.78 to 14 dollars it'll come back up and it has a high potential to reject it. These things do not last just one or two days these things typically last for weeks or months, we started that selloff in these oil companies for at least Marathon Oil in September of 2014.
We started in September 2014 and this was in the ABCD pattern, those of you that have took the courses you know this, you saw this you knew this was coming. Now what's happening now, we got another potential, that's right.
Think about that for a minute and it happens in all the stocks you look at if you can't find it an ABCD pattern in the stock that you're watching move on to another stock. It doesn't matter what company it is.
Now sometimes you will have some ABCD patterns that are a little bit harder to telland this one's really moving but in reality they’re there when you watch for them and what's fascinating is if we’re looking at Twitter here from the highs here's a forty two-point sell-off then when we go to the A to B it's a forty two point.
The pop on B to C is 21 points and then here we’re 31 points, 42 points would bring us down to about ten to nine bucks. So if you get Twitter at nine bucks that's where you can start nibbling some shares if it starts bouncing.
In the final analysis
Looking at these market pops direction changes you're looking at these areas you looking at the weakness, you're looking at the strength, you're looking at what's going on what's happening underneath it and right now even though we have a little bit of volume coming in one day does not make a trend.
Watch for a second day watch for a third day, or watch for a fourth day and see how things react on those things. If they're moving higher but they're moving higher weekly, meaning in a week fashion they're not powering higher with strength then that’s going to tell you that things are going to roll over.
If you don't see 30 – 40 points pops, 20, 30, 40 point pops and the S&P over the next few days or the next week then that's going to tell you things are weak. If you see a five-point pop tomorrow and you see another three-point pop the next day or another five point pop that's weak.
What you want to see, if you want to see a full change in direction 20 to 30 point pop in the S&P maybe fifty point pop look at August 26, 2015 that pop of that day for the S&P was a 67-65-67 point pop. The next day we had forty four-point pop and even then we had a rollover for two days of 72 points and then another hundred and thirteen point roll over.
It still took time at least a month to consolidate, will things be the same? No, things are always a little bit different but they still play a huge role in decision-making, they still play a huge role people are going to be watching that 2000 level that's going to be really critical because we broke it and we had resistance there.
Pay close attention, when you're watching these bounces watch the next few days of how things move how things react, how they're moving on that bounce and today we had a little bit of strength, will I go long this market? No, I'm still more heavy short but I have some long positions for a smaller time frame.
Meaning, I have temporarily long positions, which I will sell within a day or two or maybe four days or if I could hold him for a month and then I'm waiting for the market to roll back over so I may hold these long positions for the upside for a few weeks, for a few months and then when I see it rolling back over then I like go of those positions and I let my shorts kick back.
It's basically a way to not lose money for my main term play because you remember I was putting into short positions at the 2000 level. Now if we break the 2000 level and we get back above the 2000 level then what's my plan welfare me what I'm going to do is all cash in those longer positions, for the long side where you make the profit.
If I see huge strength coming in then I will get out of my short positions or maybe get out half depending on how things moving or I could add more to my long positions, for the temporary move, so it just depends how we come in to the 2000 level.
If we break it very weak then then you know I probably will not add to the long side, if we break it with strength I may add more to the long side but still hold on to some short positions for the longer term.
You have to have your plan in mind for a few different situations before you even take that trade, so have a plan in mind before that stock gets there and if these things roll over to the 1861, I’m out I'm cashing out of my long positions, I'll take that as a loss then I still have my short positions and I'm going to add to the short side.
I mean, you have to have a plan for where you're going to execute your trade and what you're going to do. If you don't have a plan then you're going to be you know one of those people that sends an email or wondering how was the market doing what is the stock going to do you know you know I’m twenty thousand shares of this company but it keeps you know selling off, I just don't know what to do I'm at $300,000 loss.
I get those emails, I get those emails but that to me tells me you didn't have a plan or you were trading too large for your account.
Alright hopefully this gave you some insight on the Pops on how things bounce, we didn't get into full detail of looking at exactly the bars on the intraday days and things like that but you know it's just a little bit of a taste of how to really look at these regions rather than just looking at the lines of the market.
You’re looking for these pivot areas rather than pivot lines for a directions change and as you start getting into those levels you're taking profits into strength. So as if you're in a long trade right now and you're getting into the 2000 level.
If we get there next week or in a few days then you'll take half of your position off or you'll take maybe seventy to eighty percent of your position off and see if it breaks higher and if it breaks higher with strength maybe you'll add to that again but if it gets there it starts rolling over then you should be out of your full position and just cash in your position for the long side whatever profits you made.
Always have that plan in mind because these stocks they like testing these levels multiple times on multiple occasions and you know right here on this chart between 2014 and 2015, we hit this 1900 - 1870 level on the S&P at least 6 times here and if you're looking at the day marks you’ll probably hit about ten twelve times.
We’ve hit it multiple times and more times you hit it, the more of that base of bills and once those things break the one way or the other you could see serious trouble so you know if it breaks to the downside you could see some major trouble, if it holds up here it's just holding, it still needs to base for a while.
I would say I wouldn't even go long this market until it’s past 21.51 which is you know not that far from here but why trade in the sideways markets, it's still two hundred points away from that range but why would you trade you know until that point because if you're looking for further upside, the upside is unlimited whereas if you're trying to trade within this hundred fifty points it makes it much more difficult to find those lows and highs.
Be patient wait for the setups have a plan in mind for a few different situations so that way you can trade properly based on your account, your style, your risk management and systems strategies. So have that plan in mind and when you do you trade a lot less with emotions you trade more systematically, you trade more focused you’re more disciplined on what's going on with your trades, with your account with your stocks and you start taking many things looking at things a lot differently than when you were just a beginner or just getting started in the market.
Thanks for joining me thanks for sticking with me hope I you had a great week so far and you have a wonderful weekend ahead a long weekend ahead. We’re actually going to go do some painting this weekend it's one of those get-togethers where you get to paint a lesson and get some creativity going.
Spend some quality time markets should be closed there on Monday, NYSC is closed on Monday, I don’t know if you’re international trading then they may not be but for us have a nice holiday break and you know enjoy the weekend make the most of it.
If you’re in the snowy area go play in the snow, if you're in the more warmer area go enjoy the beaches and enjoy the activities around you and you know make the most of your surroundings. Thanks again for joining me, remember do what you love contribute to other people around you but most importantly go out and live life abundantly because life is short.
Thanks again and I’ll see you next week.