Friday, October 3, 2008

Staring Into the Abyss

I know its getting pretty hard to be forced to be a long only trader during a huge market decline, but there is still hope in buying low and selling high. As I've come to find out over many years of trading, when a stock goes down a lot it almost always overshoots. By that I mean that the stock will always go down more in the short term than it ends at the end of the day. Take the case of State Street (STT) as pictured below:
After the bill passed, the market took a huge shit. STT and all the other financials got sold like there was no tomorrow. While I still have no idea why we sold off, it is a fundamental property of the market that when a stock experiences a huge decline it will inevitably overshoot and correct itself to some degree.

Here we see STT doing just that. This killing allowed for 4 possible quick buy points. The first came after the initial 4 point decline from 52 that occurred in five minutes. Any time a stock moves down with such velocity the chances are good for at least some reversal. Buying on the bid meant you could have flipped your stock for a point profit several minutes later. The second buying opportunity occurred when down velocity picked up on the drop from 50 to 47. Within twenty minutes the stock had made the rebound back to 50. The third chance occurred after STT broke though its old lows at 47 and crashed to 42. This was the hardest to catch, because how would you know when it would stop? You will notice, however, that the decline was an almost unbroken string of red bars downwards. If you had bought after the stock stopped falling and began a rally, you could have caught several points from 42-44. The final buy occurred when the stock dipped back below 44 in one minute. Ten minutes later you have a point profit.

While it can be very difficult to make money buying dips in a bear market, hopefully this example can show you where to find short term buying opportunities even in bad markets.

2 comments:

Dragonsbane said...

As an employee, I can tell you the real cash to be made here was if you bought on Sept. 18th at $29. :P

moneytrack said...
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