Using panic selling to find an ideal entry point
In the stock market, winners are separated from losers in many ways. One vital way is reaction time. This is where the day trader always has an advantage because he or she is watching the market twenty-four hours a day. However, even day traders haven’t mastered benefiting from market overreactions. Market overreactions can establish ideal entry points for a long-term position, allowing you to benefit from the drop in price.
An example of an overreaction is panic selling due to slightly bad news. If a company were to release a subpar financial report, then panic selling would occur and the share price would plummet. Almost every intelligent investor will have a stop-loss so that you cut your losses when the share price drops. However, the pros are now benefitting from this rookie panic selling. While you’re worried about the small amount of money you lost, the pros are finding the bottom of that downtrend line in order to establish a new long-term play. Here is the chart of DLH Holdings Corp (DLHC) after releasing a subpar financial report:
The above chart chart shows a huge drop in share price with high volume due to all of the panic selling. The point that the pros are searching for is the very bottom of the drop in order to establish their long-term buy. The following scenarios must happen in order to find that price floor:
- Share price must plummet on high volume.
- Lower lows must follow, establishing a downtrend.
- At least one higher low must be established.
- A break of the Simple Moving Average (SMA) must occur and hold.
- A break of the downtrend line must occur and hold.
Here is an example of how to apply these steps to DLH Holdings:
1) The share price plummeted because of a bad 8-K report on a volume spike.
2) There were four lower lows on huge red candlesticks establishing a downtrend.
3) A higher low confirmed the upward trend.
4) The 40 day SMA was broken.
5) The downward trend was broken by a green candlestick and confirmed by a higher low. The next higher low is the ideal entry point.
After following each step to find your entry point, you will have established a great long-term position and played the market overreaction to your advantage. Now, the key to knowing when to exit lies in the Bowser Game Plan.