A Look at the 12 Most Recent Failed Sell Signals in the SP500
With today’s break to new highs both in the Dow and the S&P 500, I thought it would be interesting to take a look at the 12 most recently “failed” or “busted” sell signals in the S&P 500 to see if we can note a pattern.
Reference back to my prior post on “Recent Failed Short-Sale Signals and Short Squeezes in the SPY” and “If History Repeats, Will it Mean New High for SP500?” (answer “yes!”) for more perspective.
These will be simple sell signals that the majority or ‘public’ will see and this is meant to be an interesting comparison.
First, let’s list the basic sell signals starting with the July lows.
1. Failed Head and Shoulders pattern (was even discussed on CNBC)
2. Doji candle at upper Bollinger Band at prior resistance at the 960 level
3. Two dojis at the upper Bollinger Band
4. Doji and bearish candle
5. Bearish break and close beneath the 20 day EMA
6. Doji outside upper Bollinger Band
7. “Tri-Star” doji outside upper Bollinger Band
8. Large Bearish Bar and close under lower Bollinger Band
9. Doji at upper Bollinger Band
10. Doji at upper Bollinger Band
11. Bearish Engulfing Candle at upper Bollinger Band
12. Doji at upper Bollinger Band
Each of these signals was a basic “exit long” and “sell short” signal using classic/standard charting.
Each of these signals failed, and in most cases, resulted in a strong “short squeeze” rally as stop-losses (from the sellers) were triggered (buy to cover) which mixed with new buyers to create the “positive feedback” needed to propel the market higher.
I’m reminded of one of my favorite quotes from Mark Douglas in Trading in the Zone which states “Anything can happen in the market” and “Each moment in the market is unique.”
The main idea is to trade and learn from your experiences in the market and make changes accordingly. If you are using a particular strategy that works well but suddenly stops working, step back and see if you can figure out why that strategy has stopped working.
Does it have something to do with the market itself?
Might the market structure or environment have changed?
Is it something personal (emotions) that is causing you to employ the strategy improperly?
Sometimes you see something happen so much (or a particular signal fail so many times in a row) that you realize it becomes more profitable to “fade” that signal (or trade against it). In everything we do, there is information to be learned.
This continuation of busted sell signals will not continue indefinitely, but for now, it appears to be the new rules of the game for as long as buyers continue to have the upper hand.
Remember, from each busted sell signal comes opportunity; from each loss, there is a lesson.
Take time to pause and reflect on the current market, opportunities you are seeing, and your ability to maximize those opportunities to the best of your ability and trading strategy.
Also check out my prior posts entitled
“Lessons from Failed Sell Signals and Popped Stops,”
“Opportunities from Popped Stops Intraday,” and
“What Happens when Key Resistance is Broken?”
The “Popped Stop” strategy is one I’ve developed and come to love in the current intraday trading environment, and it came only through observation and experience with a market that I realized was blowing through every sell signal given.
It won’t last forever, but it serves as a lesson in how to assess the market and shift strategies accordingly.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade
wow, I think i traded on about 7 of those failed signals. nice article !
Of course, no chart pattern always works, Corey. It is a question of statistics. So even if you count “12 failed patterns”, these patterns might still hold predictive value if you can prove it through longer term statistical analysis. In my research, I wasn't able to prove statistical significance, but maybe I did something wrong 😉
Your perspective and what signals are you using matter. I see one buy signal only; when it crossed the 50 day EMA. in July.
These were all valid sell signals – that's the weird thing. Under 'normal' circumstances, I suspect most would have played out, and some played out for small scalps, but the overarching buying pressure invalidated these signals. Very strange.
True – I'm not saying these patterns are forever busted or trying to make the case never to short sell off a doji at a Bollinger again, but that – for the time being – the current environment has an unusual (unnatural?) bullish bias which continues to be more powerful than the selling pressure these sell signals generate.
In other words, buying pressure has been sufficiently able to overcome selling pressure from those taking these signals… cluing us in that something else is going on for the time being.
Right, and when price tested the 50 EMA in early October for support.
Trend followers have had no problem whatsoever in terms of price being in a solid up-trend. It's those employing mean reversion strategies who have been caught in the bullish cross-hairs since July.
quote
“step back and see if you can figure out why that strategy has stopped working”.
I know why my strategy stopped working. It's the unique nature of anything can happen when Goldman Sachs play quantitive easing games with computer faster than roadrunner and soon to come the random timing of repos on no signal whatsoever
Just don't counter trend trade – this highlights the dangers of trying to be 'smarter' than the market and trading your ego instead of what the market is telling you. I would not short that chart until we'd had a significant trend line break on strong momentum and then a test of that break with a higher high or higher low from underside of the broken TL. If you keep to this method it will keep you out of trading against the trend because you could be trading with the new trend once you have a TL break and test!!
The MAs are all nicely stacked on top of one-another so there's another clue as to the market direction should you need one. Traders must trade what the market is telling you and what you THINK you know is going to happen (based on news etc). You will become a better trader if you drop all the thinking baggage, ignore all newspapers, email scams etc. Just trade the price action that the chart throws up. Sometimes the best trades come from fading what you think you know – look at Cable on Forex – loads of people stayed out of the initial rally as they 'thought' that the UK pound was heading for hell – I was one of them – yet if I had FADED what I thought I knew and placed a long trade on against my so called intuition, I'd have made a profit!
Who said this business was easy 😉
Great blog Corey
There were not 12 failed Sell Signals. Number 7 was followed by three consecutive lower lows and Number 11 was also followed by two lower days.
Why do you called numbers 7 and 11 , failed signals?
Please Advice
There were not 12 failed Sell Signals. Number 7 was followed by three consecutive lower lows and Number 11 was also followed by two lower days.
Why do you called numbers 7 and 11 , failed signals?
Please Advice
There were not 12 failed Sell Signals. Number 7 was followed by three consecutive lower lows and Number 11 was also followed by two lower days.
Why do you called numbers 7 and 11 , failed signals?
Please Advice
There were not 12 failed Sell Signals. Number 7 was followed by three consecutive lower lows and Number 11 was also followed by two lower days.
Why do you called numbers 7 and 11 , failed signals?
Please Advice
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