Spotting Market Extremes…part 2

In the previous post, I told you how I intuitively know that if a stock in my watchlist is trading in an extreme range. Now, it is time to use some math, chart and science to confirm that gut feeling.
Charts and Indicators are your friends. Once you notice that a stock you are following has dropped or gone up way beyond its normal trading range and there was no special good or bad news to back it up in particular, it is time to get technical to confirm your “gut feeling”. TIP: I usually wait for days where the DOW drops 300+ points in a day. It could be our beloved president tweeting about something or the market could be spooked about an upcoming Fed decision or the ADP numbers came below expectations. There are plethora of these events happening all the time. In my experience, you get at least 1 such event every month. These kind of days are the golden days, because the market drags every single stock down with it. And when it comes to high beta stocks like the technology stocks I trade, the effect is even more pronounced. You will see stocks like Amzn, Goog dropping $50-$90 in a day with no bad news or event related to those stocks. On these days, you will have tons of opportunities to trade 90% of the stocks in your watch list. Just trading on these days is usually good enough to make tremendous amounts of profits. And it does work 80% of the time. But there are those times when the markets keep falling. 300 down today, 500 next day, 800 next. And if you put on trades on the first day, you are doomed! So, the key is to wait until the market is done falling and get in on the first signs of recovery. In the next post, I will mention the technical indicators I use to help me with that. To be continued…