Last night i was at a company event and i had a chance to meet up one of my friends and we talked about the stock market. He told me he lost about $25000 in the stock market trading based on news and i felt sorry for him. $25000 is a lot of money if you ask me and if i were to use it, i will trade wisely and invest mindfully. My trading style does not involve in reading any news, and yes, i read none of the news in the media. Those news that i read, it is only for reading leisure to know what is happening around the world and will never be used as one of my trading basis point. I asked him, since he trades on news, what news will determine his entry/exit point and since there are so many news published everyday, which news will be the deciding factor to execute a trade. He could not answer. Remember the best news is no news and treat all news as bad news. If you can understand that, then you are on a highway to success. We were chatting and we mentioned about Bank of America stock and so i decided to give him a lift and study the big boys operation of this stock.
1. BofA had been sold down quite heavily since it reached a high of $19.48. I wont go into details on what happen during the selldown phase but instead channeling my focus to the highlighted areas. BofA found it's first support around the price of $12.15 and that's where the first sign of buying was detected. Big operators were buying this stock around at this price. The psychology was simple, the stock was sold down heavily and they felt that the price was a bargain then so buying took place, however the condition was still not ready for a big up move yet. So, the stock went up till $13.87 and starts to range.
2. Ranging is a difficult thing to decipher as it can move up or it can move down. From my years of experience, i was able to guess that this trading range was going to be a flush down and so it happened accordingly as to what i predicted. This trading range was a preparation to redistribute more stock so that it looked weak, breakdown and produce panic selling. You might ask, so if the price was going down further, what happened to those stock bought at $12.15 by the big operators. Well, some of them took all their profits around the $13.50 range and some of them were keeping it to buy more to average up their holdings. The big operators are smart guys, they knew what was the target price they were driving the price to.
3. And so true enough, the panic selling sets in and the share price plunged further. A lot of people were looking to sell and get out of this stock as they were afraid it might go lower and cost them more. Psychologically, this panic selling maneuver is created to flush out the weak holders so that the big operators can force those who were still holding onto this stock to liquidate. Therefore now, the stock is transferred from the hands of the weak holders to the strong holders, and that is the main objective. Think about this, wouldn't you liquidate if you had bought the stock at let's say $12.50 and now the price is $11.01 and you are not sure if it might go lower? That's the whole idea, get you into a panic stage, so that you sell and they buy.
4. Saw them buying the second time? They revealed their true colors. If that whole panic selling was real selling, why would they buy back again? This time round they were still not convinced that the weak holders totally flushed out. There might be some leftovers.
5. So they created another stage where the selling was not so strong, but emotionally stressful enough for you to liquidate your holdings. Moreover, the price dip further below $11.01 and reached $10.91. By this time, a lot of bad news were in the press. Analyst started to downgrade this stock and the public seemed to be disappointed with the company. I saw the CFO and some directors were also selling this stock at $10.95. It was this time that the stock was going to sky rock.
6. The reason i said this stock was going to sky rock was because it went into a new low and did not dip lower. The selling was not so strong as compared to the first panic selling. The fact that it reached 10.91 was something to be on alert. The next few days of action was something to watch out for. If it continues to dip lower then all the analysis earlier on should be erased. However, if it holds, this might be accumulation for a breakout.
7. The stock did not dip and instead there was an influx of fresh demand. This was the time to buy as this stock had been depressed 2-3 times and the big operators decided that this enough as all those who panic sold had sold off and its time to mark the stock up.
8. And so you see today, prices were up. BAC is definitely on its highway to record new high and by that time good news will set in and you will see the media advertising about it.
9. Today prices were in the range where we first saw demand came in a point 1. Big boys are checking to see if the selling is still strong around that area. If it is strong, they are willing to absorb the selling and it might take some time, else the stock is poised for a further up move. Observe the rectangle drawn, that might serve as a long accumulation area on a wider view of a bigger trend. What it means is instead of those points highlighted in ovals, the whole rectangle serves as an area of accumulation for a bigger up move. And the story goes on.
By understanding supply and demand, market psychology, we are able to see the footprints of the big operators, follow them and profit from them. :)
Ronald K
