Top Advisors Corner

Martha Stokes: 5 Key Elements Of A Bottom

Martha Stokes

Martha Stokes


How To Properly Assess Which Market Participant Controls The Bottom Formation

Bottoms and Tops are critical junctures in a trend reversal. Technical traders often miss the most important signals present on stock charts that indicate early on whether a bottom is completing or whether the stock will continue downward.  

In addition retail traders should start exploring the potential of Day, Swing, and Position trading small caps because the Securities and Exchange Commission SEC has a test pilot program underway this year for the small cap stocks.  The SEC test program was backed by the largest institutions on the Buy Side, and was set up to see if a wider spread on small caps would provide more liquidity for small cap stocks in general. Professional Technical Traders and High Frequency Trading Firms HFTs have been activity trading the 5 cent spread, enjoying the higher profits that come with a wider spread as well as the velocity and momentum runs their activity tends to create.


Today the stock chart example below is Wix.com Ltd. (NASDAQ:WIX) and it is a small cap, with approximately 58% institutional ownership based on NASDAQ.com data. What makes this particular small cap interesting for technical trading is the fact that in the top 15 institutional holders there are 4 giant Buy Side Institutions and 2 giant Sell Side Institutions, and that is a surprising number of giant institutions holding a young company that IPO’d just last November.

Technical analysis for WIX begins on the left side of the chart and goes across to the right. The following are the 5 Key Elements most retail traders miss:

1.    The first extreme pattern on the indicators MFI and RSI is often mistaken for an overbought condition that would cause most technical traders to buy to cover their sell short positions or buy long for a short term swing trade. Although the stock moves up meagerly, sellers are still in control of price. At this point smaller funds are dumping in earnest and some smaller lot investors are also in the mix. The control of price is in the hands of smaller lot sellers, selling as the stock heads to its final low.

2.    The final low is signaled by a combination of three things. The combination is a decline in Volume, MFI has a U shaped bottom, and RSI has a second extreme pattern that is a W bottom all of which is followed by a stronger run out of that low.  Often times technical traders who mistakenly assumed the first “oversold” was the end of the downtrend, now ignore this much stronger bottoming Volume, MFI, and RSI combination indication. Where Volume on the first oversold pattern was low, the Volume is significantly stronger in the white candlesticks out of this bottom.

3.    Resistance out of an extreme bottoming pattern is often missed or ignored by technical traders. The initial run up at the end of May quickly encounters profit taking by Professional Traders who were in control of price out of the low. The resting candles are quiet accumulation by giant institutions, that are planning on holding for a longer period of time. Their activity triggers the gap up on High Frequency Trader HFT volume. Now the Shift of Power™ and control has gone from smaller lots to large and giant lot Market Participants. This Shift of Power and control is seldom recognized or understood by most technical traders.

4.    The bottom formation itself is all accumulation, revealed by the fact that price is tightly controlled at the lows and highs. This is outlined on the chart as a rectangle. Anytime a rectangle can be easily drawn around a sideways action with highs and lows this precise, quiet accumulation by the giant institutions is underway.
 
5.    The final often missed pattern is the HFTs attempting to sell the stock down in November with a huge extreme Volume spike. The result is an indecision day draw, but the giant institutional buyers are in control. This is a signal for Day, Swing, and Velocity Traders to get ready to enter early, as these failed HFTs attempts often precede a sudden move up to the first level of resistance which is the black line drawn on the chart. For Position Traders what is most important is waiting for the bottom to complete with a sustained price action above the first strong resistance level as shown by the red line. At this level many stocks with prior quiet accumulation will turn sideways and form a Platform pattern.

WIX is a good example of a young company under accumulation by giant institutions, which is the most common pattern technical traders do not recognize until it is concluded and the stock has runs with momentum. When a trader can recognize that a Shift of Power is about to happen or has just happened, it is far easier to prepare for how price will behave as the dominance of control shifts from small lots to giant lots.

Trade Wisely,

Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com