Some people don’t understand that stocks don’t go in a straight line. They don’t go straight down nor do they go straight up. They take a waveform pattern in order to get to their destination.
In this waveform pattern, there is a trend. You can take the highest of highs, look at where it is now, and see if it’s moving downward or upward. This is called a “trend” in simple terms, and it is showing who is in control…
Is it the bulls or the bears? Is it the people looking for the stock to go up, or the people looking for the stock to go down?
Once you have this trend, you will later have stock market pops after a major sell-off. If a stock is having a major sell-off and experiences a little pop, this is called a ‘retracement’.
You’ll get these little pops frequently in the stock market. They don’t go straight up or down. These retracements trace back to a certain level – maybe a 50% level, sometimes a 1-1 even.
Just because a stock retraces to a 50% level doesn’t mean the stock will continue going higher. It means the large amounts of people selling it are taking profit. This is how the market works!
A lot of people will think the stock is going higher (beyond what it was before), but it will likely roll back over…
Be prepared for the next leg to go down after a pop. It all comes down to cause and effect. Think of it as a balance beam – the more people on one side, the more it will snap to the other side. Know where the volume is!
If you know who’s in control, you’ll know where the momentum play is. If you don’t know who’s in control or can’t find the trend, skip it. Focus on the stocks that work for you.
You can look at the stock above and see the major sell-off and the retracement (pop). However, it then rolls over again and shows that the bears are still in control.
If you didn’t previously know why stocks pop after a huge sell-off, it’s because the shorts are taking profits causing the stock to ride up slowly.