Technical Analysis 101: Why Technical Analysts don't catch falling knives!
"A Technical Analyst and a Fundamental Analyst are chatting about the markets in the kitchen...
Accidentally, one of them knocks a kitchen knife off the table landing right in the fundamental analyst’s foot!
The fundamental analyst yells at the technician, asking him why he didn’t catch the knife?
“You know Technicians don’t catch falling knives!”, responded the technician.
He then turned to ask the fundamental analyst: "Why didn’t you move your foot out of the way?
The Fundamental analyst responds, “I didn’t think it could go that low.”
When we enter a position or investment not only do we have to know when to enter we have to know when to exit too!
If you remember from our early blog posts or are new - PRICE is what gives us the information we need to make decisions in the market.
It can be hard, we need to IGNORE the media, thew news, the CEO's. They all lie and price doesn't. It's hard evidence that tells us what ANY market in the world is doing.
Thankfully, for us we don't care what Elon Musk's relationship is like with Sergrey Brin or if Fed Chair Powell is thinking about raising rates or if Nancy Pelosi has her broker buy stock in NVIDIA. Price will tell us what we need to know and gossip will lead to us wasting time when we can be making real money in the market.
Today, we want to look at when price is telling us to STAY out of a market that is in a downtrend and how we can use this as opportunities to even short the market.
What better stocks than the Social Media stocks that have been getting obliterated?!
Snapchat ($SNAP) and Facebook, renamed Meta ($META) have been two Social Media darlings that held up very exceptionally well after COVID, until they did not. So how could we avoided being long names in downtrends that have been going lower since they reached there peak in September?
A falling knife is when a stock consolidates for a period of time in a range, also known as a distribution pattern), these distribution patterns occur at tops in the markets we investors and traders start taking profits on there stocks, therefore the stock can not resolve to the upside and fails to move any higher.
We can see the first one occurring in the chart below of SnapChat, $SNAP, where the arrow shows we have a huge gap from that pattern below the 200 SMA. Eek! This is a 'falling knife' where price action slices through a chart to break lower.
This is a huge tell, and if you have been following us you know that anytime a stock breaks below this level or cannot break over it price is telling us something. Afterwards, the relative strength indicator (where the three yellow arrows are pointing) shows the weakness in the move of the stock at each point. Each range in that pattern is shown with trend lines and we can never break upward out of those ranges.
This is a simple approach to defining a strategy of whether you should be long/short a stock and can keep you trading the ranges as a trader or shorting it every time the rend line breaks or fails to hold.
The great thing about price we can see it on EVERY chart, we don't have to read an 8-ball, don't need to read a million articles. The data is there and it's consistent across every asset class, commodity and even in Forex.
Let's take a look at the distribution pattern in $META's stock that preceded this falling knife pattern. We got a diamond bearish pattern as we have talked about before, failed, ran up to the 200 SMA (yellow arrow) and had the biggest one day decline in Facebook's stock ever. That's how we know we could have been taking profits as investor/trader. The market was forewarning us of the crash before it even happened.
Even in this chart we can see how we get the distribution pattern and then subsequent selling in the stock all through out this year in Meta. Price tells the story and it's the only one we need to follow.
Great! so now what are we doing?
We only like $META long if we can hold $160, if we can on the earnings announcement today than we like it long and will give continual updates on when we are exiting our position so that you feel comfortable investing along side us. Sign up for our blog, follow us on our socials and reach out to us so you can start profiting and trading confidently in the market today!
Miguel Ferreira (@wizdaytrader)
Essex's Trading Quote of the Day (QotD)
“No, no knife catching for me. I don't mind picking 'em up off the floor, but catching 'em!?."