Professor’s Comments – Response to Student’s Question 2/16/2021

Posted by OMS  at February 16th, 2021

Yesterday, I received an email question from Tom Z. that I thought I’d share with you this morning.  Tom’s question had to do with a Top Stock (DDD) he purchased early last Wednesday, and saw it drop several points.  He wondered what happened.

Here’s some of what I told Tom in my reply and because it applies to all Top Stocks, I thought I’d share it with you.

If you look at a chart of DDD, you can see that it has been on a tear recently.  It went from 36 to 56 in a week!  And whenever a stock does something like this, you can assume that many traders who are involved with DDD begin placing stops to protect their profits.  So, by the time Wednesday rolled around, there were many stops placed on DDD.   Then once the price started to pull back, it triggered an avalanche in price as stop after stop was hit causing the stock to sell off rapidly.  This is what always happens in stocks like DDD after they have been on sky-rocket rides.  This is the reason I continue to tell students to lighten up on the Top Stocks after they have had big runs by taking a few bucks off the table.  When stocks like DDD move up so quickly, you should assume that there are many protective stops in place, so if you put your stop in, it will likely not do any good if stops start to trigger in rapid succession.  Stops are almost useless in this situation.

When I trade a stock like DDD, after it has had a big run, I shorten up on the time period using the 30 min bars or less.  Most times I’m using the 10s or 15s.  If you look at a 30 min chart of DDD you can clearly see that the trend ended late TUESDAY…when the ST Momentum Indicator moved out of the Trend Zone.  So clearly, WEDNESDAY was NOT a good time to be buying DDD.  Wednesday’s early pop gave traders a good time to get out.

One of the things I have found about trading Top Stocks is that its always best to get in at the early stage of a rally.  So once the ST Volume Indicator tells me the market is moving higher, I then go to the MWL to select the stock(s) I want to trade.  The is always the best time to enter and/or add to existing positions.  Once you get to the late stages of a rally, remember DDD was at 34 when the volume trigger turned positive, so once it got to the 56 level it was EXTREMELY vulnerable to a sell off. (Remember, stocks, no matter how good, NEVER go to heaven). If you’ve been watching TSLA and DDS, you saw the same thing happen… there were way too many stops in place after a big rally.  BTW, same thing happened to GME on the way down.

One more thing…. you also MUST understand where the overall market is when you’re trading Top Stocks.  And right now, the market appears to be in the final stages of wave 5 up of Wave 5 up of Major Wave 5 up.  This is NOT the time to be aggressive.  That’s why I continue to tell students to be cautious, take profits, trade smaller positions, and protect themselves.  I believe stocks are only a small rally away from the start of the next Major Bear Market.

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BTW, if the above is all Greek to you, do yourself a favor and get the ST Class.  This week three new students signed up for the Class. Don’t be penny wise and pound foolish. Get the Class. If you do, you will be invited to all my future free training sessions.

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.