Legendary investor Sir John Templeton said ‘Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria’
Buying and selling climax observes high online trading volumes
Every bull and bear market stands testimony to the above statement. A common adage in the markets is that when the shoeshine boy’s advises you on stock market tip it is time to sell. The underlying message in the adage is that when the talks of a bull market has reached to the lowest strata of the society there will be no new buyers as everyone is invested in the market. Every bull market bubble is witness to such scenario.
Similarly on the down side, when every loose hand has sold their last share does the stock market finds it bottom and starts reversing.
For a trader what is worth finding out is, if is there is a way to capitalize on these situations. Thankfully there is.
Also Read : Trend, Trend lines and rule of their breaking
Markets, especially at time of euphoria either at the top or the bottom end with a climax. This can be a one day phenomena or one lasting not more than a few days.
Climaxes are defined by a day or a few number of days which witnesses very high trading volumes and sharp volatility in market prices. These are normally not days which are trending, especially in case of a bull market climaxes. The tussle between buyers and sellers is witnessed throughout the day with the market closing either at the middle or lower end of the day’s range in case of a bull market climax.
A buying climax occurs at a time when there is positivity across the board. Companies are posting good results, newspapers are flashing so-called ‘experts’ as saying that the bull market has a long way to go and fund managers are getting huge bonuses for their ‘strong performances’. Mutual funds and online stock trading are witnessing inflows never seen before with retail clients, who confess that they are unable to pick stocks and prefer to leave it to expert fund managers. These are fertile ground for a buying climax.
A selling climax also witnesses heavy volume and occurs with sharp bouts of selling which is mainly led by brokers forcefully selling clients position who are unable to pay margin money. This last round of selling, which normally gets over in a day or two, creates a bottom.
Selling climax has nothing but gloom surrounding it. Jobs are lost, first in the financial world and later in the economy as a whole. Economic data is subdued and corporates are reporting losses. Those few ‘experts’ who are still brave enough to come on TV are taking of further down side in the market and painting an ‘end-of-the-world’ scenario.
Like Sir Templeton said under such pessimism is the birth of next bull market taking place.
In online share trading climaxes which occur on a single day marked by very high volume and a larger than usual trading ranges are called one-day reversals the same can be witnessed using trading platforms and various trading apps.
Chances are that these climax highs and lows might again be tested but a climax peak symoblises that the end of the bull or the bear market is near. It is an important milestone if not ‘the milestone’ of the end of the preceding trend.
Following are charts of one-day reversals of some stocks.
Notice the above average volume and the sharp move ahead of the peak. The climax day was marked by high volume and a closing near the centre of the day’s range. The stock opened at the low of the day touched a high and then receded to close at the mid of the day. The following day an attempt was made to cross the previous day’s high but ultimately resulted in big selling. A climax top was made which was by continued selling.
A perfect climax bottom is made with very high volume. The day saw the stock open near the top followed by continued selling, but this was soon met by strong buying which resulted in the stock closing near the mid-point of the day. The following day a meek attempt to break the previous day’s low was made unsuccessfully. In following days the stock did not look back at the climax bottom. In fact the bottom in this case was again tested three years later but it held on and stocks bounced back from these levels.
Capitalising on one day-climaxes
The first step in trading a climax or capitalizing on climaxes is to be able to identify the climax day. In doing so, keeping a track of the volume is important. If on any day the volume increases by 200 percent of the average of preceding 10 days it should be flagged.
After this filter is run we need to check the stocks which have moved up or down sharply before the high volume day. If stocks are trading flat ahead of the high volume day, the day cannot be called a climax. A visible and sharp move is important for the climax to work.
Part of the reason that the climax works is because it traps unsuspecting traders. As prices go down in a bull market, against the expectation of the trader who has bought the shares, he panics and depending upon his pain point he will sell the stock which adds to the pressure in a falling market.
In online share trading after the climax day is identified, the next thing is to get ready to trade in the opposite direction of the preceding trend. If it was a bull market climax a trader should be ready to trade on the short side and if it is a bear market climax, the trader should be ready to buy the stock.
For going short after the bull market the climax day’s low should be the entry point with a stop loss of the climax day high. For a bear market climax day’s high should be the entry point and the low of climax day should be the stop loss.
Capitalizing on other climaxes
Trading a climax that takes more than one day requires some knowledge of pattern recognition and technical analysis. One-day climaxes are not as frequent as one would like them to be, but the slightly longer term climaxes occur most of the times. Patterns like Head-and-shoulder, double top or double bottom, rounding bottom and rounding tops are generally visible at near the tops and bottoms. These patterns have their own trading strategies but have larger risk reward ratios.
For those trading markets on an intra-day level, one day reversal or in this case a single bar reversal is visible almost daily. This mostly happens in stocks which have some news or announcements during the day. Stock trading for beginners have best areas to practice the trade as the risk levels are very low, provided trade size is small.
In conclusion climaxes, as in any movie is the end of a story. In markets it is the end of a bull run or a bear market rout. The big money making opportunity is to stand against the crowd, but with the stop losses in place for protection and to choose the best stock broker to begin with.