Recent Popped Stops Again Reveal Character of Market

Mar 16, 2010: 9:51 AM CST

Aaaand we’re off!  Buyers pushed prices higher to trigger yet another round of ‘popped stops’ not only this morning, but over the last few trading sessions.

Let’s take a look at the recent ‘popped stops’ rallies and how they reveal the character of the market… and what that matters to you more than indicators or anything else.


(Click chart for full-size image)

I started this chart on March 8th to today, showing recent false breakdowns that have resulted immediately in a sharp rally that triggered the stop-losses of the shaky bears.

The “Popped Stops” phenomenon occurs when two conditions are met:

1.  An ‘obvious’ (or at least reasonable) sell-signal is given

2.  Sellers place stops at roughly the same (tight-stop) levels

The ‘trigger’ comes when buyers – in whatever manner – step in to overpower the sellers and thus drive price higher (often with surgical precision) and then create (manufacture) a rally due to the bears (short-sellers) buying to cover their positions.

These are always temporary plays, but can allow quick profits for those traders ‘in the know’ when these set-ups (situations) trigger.

We had a trendline break and overnight downside gap to start March 9th, drawing sellers in and then buyers immediately popped them out all day long in a massive short squeeze.

Price fell later in the afternoon and then into the next day, where an almost identical short-squeeze formed (in equal proportion).

See my prior post for a detailed summary:

“Measured Move AB=CD Example March 10”

Price then consolidated into two triangles, a smaller and a larger structure:

“Get Ready for Range Expansion Play in SPY Intraday March 11” (a great lesson in breakout tactics)

Second SPY Intraday Triangle Forms March 12

Price did expand/breakout as expected, and then formed a mini-exhaustion gap on Friday, marking the high of the day and then trailing off into the close.

Monday’s action gave us a “Rounded Reversal” that was a perfect mirror image and then a “Bear Flag” and second trendline break which triggered in the short-sellers…

only to pop them out violently into the close and into today’s session, which has broken above the key 1,151 level on the S&P 500 which could set off sparks, triggering longer timeframe swing and position traders (who are short) to cover, and cause others – who have been on the sideline so far – to ‘capitulate’ and buy this market, driving prices higher.

Finally, why is it important to understand the current market character, which is ruled by ‘popped stops’ and almost making a mockery of short-sellers and sell signals?

Simple – if you put too much faith in sell signals and bearish positions and even classic sell signals, you will likely continue to suffer the same fate in terms of ‘popped stops’ and losing trades.

If you are aware of this reality, you’re far more likely to profit from it than someone who is not (who keeps taking the same short-sale set-ups, keeps calling this market overbought, and keeps stopping out).

To brush up on this concept, study my prior posts:

Lessons From Failed Signals and Popped Stops

What Happens when Resistance is Broken?”

Opportunities from Popped Stops Intraday

Those posts summarize the “popped stops” lessons.

For application of the principle and to further your knowledge, review the prior “action” posts:

The 12 Failed Sell Signals on the S&P 500

“Recent Bull Traps and Sell-offs in the S&P 500?

Recent Failed Sell Signals and Short Squeezes in the SPY

If History Repeats, Will it Mean New Highs for S&P 500?

“New S&P 500 Highs Forecast by Fifth Sprung Bear Trap”

Could S&P 500 be Building Yet Another Power Move?

Assessing the character of the market is far more important than using indicators – after all, certain indicators do better or worse in certain market environments.

Knowing the character can make all the difference.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

5 Comments

5 Responses to “Recent Popped Stops Again Reveal Character of Market”

  1. BalaB Says:

    Kudos Corey…..Your Idealized Trade reports have really hit a stride…..

    Best,

    Bala

  2. Corey Rosenbloom, CMT Says:

    Thanks Bala!

  3. Corey Rosenbloom, CMT Says:

    Thanks Bala!

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