Author: Lee TG
Many people asked the question of how to spot smart money. I have been learning for more than one month, am still learning. But I think I know how, and I just need more time to master this skill of chart reading.
Yes, a chartist may be able to spot SM in action, that is, if the chartist knows how to read and interpret the price and volume bars, and connect to the corporate news released by the company and analyst reports, and of course need some fundamental analysis knowledge and common sense. I am showing you how from my learning experience, but this is from my hindsight study, as I have no experience following such a stock by looking forward, other than those analysed in my blog, but those stocks were really fundamentally excellent.
Now look at the chart of this stock Supportive (7131). I did not read about its fundamentals, except the latest quarterly reports that showed small earnings.
I am going to show the tracks of smart money that can be seen in the chart. Those who have good technical analysis knowledge would not have been trapped in the losses, as they should be able to read and interpret the chart on the entry and exit points. But those who are not good in technical analysis, the fundamentalist and punters would likely be the losers. If you can understand what I am talking about in this post, you would know why I have so much faith in using the chart in trading stocks despite having good knowledge in fundamental analysis. The chart never lies, and if you are sharp and knowledgeable in interpreting the chart, you can find out the likely truth to avoid entering a likely trap.
Tracking the Smart Money (SM)
Point (A): More than one month of quiet accumulation by SM at a trading range. Volume was relatively low, and accumulation was unnoticed.
Point (B): A huge volume bar with a doji candlestick with narrow price spread, indicating shares changed hands by many trading accounts of SM. This also attracted attentions of other retail market participants.
Point (C): After a test of supply in a low volume bar, the SM started to mark up the price to accumulate more by absorbing any selling by profit takers.
Point (D): Mark up more rapidly with higher volume. Higher volume is a result of buying and selling by SM, but the objective was still accumulation. This will attract technical traders. I am not sure of any news that resulted in the mark up success.
Point (E): Slow distribution by SM, and they were already taking profits.
Point (F): Edge reported some corporate moves by the company on 20/9/2010, and the next day the company provided details to Bursa. Of course the explanation was about good profitable moves. This news generated interests of buying, while SM was slowly distributing.
http://www.bursamalaysia.com/website/bm/listed_companies/company_announcements/announcements/historical.jsp
Point (G): Another good news reported by Edge on 3/11/2010
"Supportive International, ChengDu in China venture"
http://www.theedgemalaysia.com/component/content/article/176479.html
This really was a piece of good news that resulted in a two days of huge volume bars with big price spread. Punters were chasing, and SM were supplying, and continually supplying the next days
Point (H): An experienced chartist with discipline in trading would have exited on this day, as the exit signals were quite clear, the signal shown at the chart was one of the exit signals (broke down below 20d EMA)
Point (I): Continuous distribution by SM marking down the price on the way. It is clear that SM had no more interest but intending to sell to take profits. Note that SM were still making profits all the way. From this point of time, investors should realise that the news given was merely "a process". Many punters could be averaging down or entered with hope.
Point (J): A single day of high volume, showing that SM had their final exit
Point (K): The sellers and buyers were the "Hopers" of a rebound to the previous high, which it think will not be possible, unless the SM makes another move by accumulating again. But this will take long time. Those who could not accept losses would be the long term investor of this stock.
My Additional Comments:
From the above account, I may have a good educated guess who the SM are, but it does not matter who as what they were doing were legal deception. What smart retail investor can do is to learn more to avoid falling into a trap, and learn to control the emotional aspects of trading on news or tips.
Personally, I would not touch any stock whenever there were good news and corporate moves spreading all over the internet. The logic is simple, my common sense tells me that the news would already be stale when it comes out in a report. Whatever buy action could have been done by someone else weeks ago. I cannot gain much, but the risk of loss would be higher. But the majority of 95% would follow news, so they themselves are to be blamed if they lose money because of SM actions.
Note: For those who think they can learn to read smart money or price volume bars easily, let me tell you that it is not easy. Unless you have already mastered the basics of technical analysis, don't jump into learning this as you will get very confused. Technical analysis should be the priority and price volume bars reading is more advanced, and you are looking at raw naked data and chart. A person has to have the skill of reading chart patterns, a clear head, and lots of concentration and time spent to learn the skills. Maybe take a training program provided by a training provider will help to speed up the learning curve. I have mentioned one provider before in my earlier post, and I have no relation with them, other than learning from their videos.
Sun Tzu says: "All warfare is based on deception"
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