Top Advisors Corner

Martha Stokes: $WYNN | The Sell Side Price Action of Stocks

Martha Stokes

Martha Stokes


Downside Price Action Is Distinctly Different From Upside Price Action

Most technical traders do not spend adequate time learning how to read the downside price action of stocks. Many assume it is the same as the upside, only going down. This is one of several assumptions that can cause technical traders losses in selling short, buying on what is perceived to be a “dip,” and buying at a low that is believed to be a bottom low.

The sell side price action has always been different from the upside action. However, since 2005, when the SEC eliminated the Uptick sell short rule and the automated algorithm trading of high frequency traders started gaining popularity, the sell side of stock price action has continued to mutate and change, forming distinctly different price action than forms to the upside. 


Commonly known candlestick pattern sell signals do not function optimally at times and can lead to whipsaw trades as various market participant groups clash more often on the sell side of the stock market.

To the upside, there are nine market participant groups that buy stocks for a variety of reasons through many types of venues, using a plethora of orders custom-tailored to their needs, and with varying access to information.

To the downside, only HFTs, professional human traders, and retail traders sell short. The bulk of the market participants are still long term fundamentalists that have recently switched from buying Hedge Funds to buying puts to mitigate the downside risk for the fund. With fewer market participant groups actively selling short, the price action to the downside is not the same as to the upside.

Without the Uptick rule, stock prices move without hindrance to the downside, fueled by selling short by HFTs that create extraordinarily long black candlesticks that often do not open with a gap up to sell down as they used to do. The Uptick rule affected mostly intraday trading; however, the lack of an uptick requirement also leaves open the potential for sudden huge gaps that do not rebound but continue the collapse, often taking the stock to a vertical angle of descent that is unsustainable. The result is more sudden bounces that start with a gap up but do not reverse the downtrend. Downtrends tend to have more gaps and longer tails on many candlesticks.   

Wynn Resorts Ltd., WYNN, is a good example of a stock that topped recently but did not complete what would normally have become a Head and Shoulders top. Instead it has formed several right-side shoulders that have recently begun to shape into an asymmetrical triangle formation. This triangle is currently compressing at a faster rate with smaller candlesticks and tighter price compaction. 

On a longer time frame in the stock chart below, we have Volume Bars, Money Flow Index, and an indicator that may be new to some traders, the Detrending Price Oscillator, an excellent indicator to add to your indicator tool box for topping action identification and confirmation.

DPO started out with small brief peaks and troughs that slowly lengthened and became extreme as the top formation developed. The DPO indicator became extremely volatile in pattern but is now tapering back to more normal amplitude. 

A huge Volume Bar spike in May is a High Frequency Trading volume pattern; however, the stock price did not move much, indicating underlying selling pressure. Overall, WYNN showed quiet distribution patterns from the end of January and continuing through July. This appears to be rotation by the giant-lot Dark Pools, which are quietly lowering the number of their held shares of stock for WYNN. Selling volume is significantly higher for several months over the buying volume bars. 

The MFI indicator has formed lower highs since the final extreme high in January. Yet, the troughs have not gone into the extreme level.  If MFI starts to rise and form higher lows this would indicate weakening downside selling energy. 

WYNN is developing an asymmetrical triangle after a failed Head and Shoulders topping pattern that did not break to the downside through the neckline. Instead, WYNN had plenty of buy-on-the-dip upside price action which created a higher low intra-range level of support that has sustained from May to July. The highs of the sideways pattern have been compressing into lower highs that make up the asymmetrical pattern. Support for the current price action is at the neckline around $190 at this time; a break down below that support would provide more sell side point gain potential to around $175. However, buy-on-the-dip investors have been able to sustain the stock price at the current $195 level for an extended period of time. HFT action could break this support level.

Technically, the pattern is setting up for the earnings report due out August 4th. Last quarter’s revenues were flat while earnings were up. Institutional ownership is at 75%, which is average for a company this size. 

Summary: 

Understanding how the downside price action is different from the upside price action can give traders insight into what is most likely to occur in the near-term price action of stocks. 

Trade Wisely,
Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com