How to Trade a Stock Market Top | Podcast Episode #22

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Learn to trade, stocks successfully, learn to profit consistently. I’m Ryan Mallory and on my weekly podcast, I’m going to teach you the in and out of a complex ever-changing stock market. You will learn to trade better trait, smarter and profit bigger.

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Now let’s go trade. Hey everybody, this is Brian Mallory. Doing another podcast episode with you here and today’s topic of discussion is how to trade a market top. So this is a big deal because, you know, especially when we’re on these incredible Market rallies. And we’ve been on one essentially for the last nine years, the markets just been going higher and higher and higher and people get paranoid. They try to start predicting when the market tops, going to take place and they start making bets before it actually even happens. They start actually shorting the market. Without their even being a breakdown in the market and patients with Market.

1:04
Tops is absolutely key. You can’t short every day that the market trade slower, okay? And every day that the market trades lower doesn’t mean that the top is in. You have to see something more. There has to be something more to it. There has to be a change. In the character of the market, there has to be a change in the status quo of the market.

1:20
And until you get that, you can’t really get short or get net bearish on the market and there’s different time frames that you have to be aware of theirs. You can be bearish in an intraday time frame, you can be bearish in the, in the short term, the midterm, or the more longer-term.

1:37
So each one of those requires their own sets of variables to be looking for as well, but a lot of the principles I’m going to talk to you about today transcends all the time frames and can be applied to each one. So the first thing that you want to know about Market tops is that you want to wait for the initial push lower and that goes back to what I just was talking about a moment ago where When the markets push and Higher and Higher and Higher.

2:00
You don’t want to just all of a sudden be like, hey I’m going to go short this Market here because it’s just too much too soon or it’s got to stop somewhere or we’re closer to a top than we are to a bottom. You can’t you can’t use that as the basis for why you need to go ahead and short the stock market. Instead you need to wait for that initial push lower.

2:17
You need to see that crack and the trend lines, the the break below certain moving averages. You need to wait for that initial push lower and sometimes it catches people by surprise. You don’t see it coming. So sometimes the marking could be taking you to a step up, you know, when it’s one step at a time, it’s going higher and higher and higher than all of a sudden, boom, it takes the elevator down, that’s why they always say.

2:38
The market takes the stairs up in the elevator down, because when it finally does sell off in a big way, it’s like, you know, the Tower of Terror at Hollywood Studios in Orlando, Florida, which I’ve I’ve been on a bunch of times myself, but, you know, you wait in that line and you go up the stairs and everything else and you’re climbing up there and then when you get to the top, it just go straight down on you.

2:57
So So that’s what the market means. Stairs up, elevator down. So you want to wait for that initial push lower, but you don’t necessarily need a short that initial push lower and often times that’s the hardest place to get a really good entry on. So what you want to do is you want to start identifying key support levels and once you identify the key support levels, that’s where you want to start, you know, looking for a entry into into the market on the short side.

3:24
So once one of those key support level is that you have identified has broken then that’s where you Start getting short at now, there’s another option. Two is that once it takes that initial surge lower is to go ahead and short the initial bounce back because oftentimes it will because the markets been so bullish when it finally does crack and push lowered, there’s this initial knee-jerk reaction to buy the dip and push it back higher a little bit.

3:47
And sometimes it even exceeds the initial push lower, which basically nullifies the entire move when that happens. But if it doesn’t retrace all the the the losses from the previous day and Instead, it makes like a meager bouncing to, like a key resistance area, then that’s also a good.

4:05
Area to Stage an entry point. Now, we have the first point, which was waiting for the initial push lower and then we talked about shorting below key support, or waiting for a bounce in the key resistance, okay? But also, once you are short, one area that people can get themselves into trouble with is not being aware of where the moving average support is underneath the, the stock.

4:30
So the key moving averages to be cognizant of its the five-day, the 10-day the 20-day, the 50-day. And 200-day, moving average. And so other people will also talk about like the 21 Day moving average, which represents the closing price of the past months, price action or the 100 day, moving averages.

4:51
Well, I even in some things for when I use indicators and everything, I’ll even use a 40-day moving average on the t21 08, just to gauge the health of the overall Market. But you want to be aware of where those moving averages are. Because if you’re not aware of the moving, averages you set yourself.

5:08
If up for a big surprise, when the market finally does decide to bounce back. If you go back to January of this year, January 2018, the market had a big sell-off and it didn’t last all that long. Quite honestly, if you look at the bulk of the losses, it came from about 45 days, worth of trading.

5:25
But that sell-off took us all the way down to the 200-day moving average and there was a violent bounce off of that. 200-day. Moving average. If you weren’t paying attention to that 200-day moving average that Bounce off of that Ma just really took away.

5:42
A lot of your profits that you might have had shorting the market. So you want to be conscious of that, in fact, on that particular cell, if I want long after it tested, the 200-day moving average and showed signs that it was it was going to bounce thereafter. So Be very cognizant of the moving averages because when the market starts to sell off the buyers are looking for a place where they think that they can get long atom.

6:06
And usually the first places that they start, identifying are the moving averages and and the longer the moving averages and that means like the 200-day is going to have more legitimacy than the 5-day moving average in the 50 days going to have more than the 20 day. But when it tests those you need to be very Cautious about shorting right above them, because what you’re doing is putting yourself in a situation where you’re going to be a bag holder while the market market rally.

6:32
So don’t don’t get short above the moving averages and wait for a break of them to increase your bearishness. What you want to do though is if you start seeing where the buying activity is really picking up a tacky moving average, particularly like the 200-day moving average. Because if you look at all through 2018, we’ve tested the 200 day of about four times and every single time, It has held, and it has held with unbelievable Vigor.

6:58
I mean, it is just really brought in the buyers in the market has launched higher each and every time. So, What you want to do is be cognizant, be aware of the moving averages underneath the market, that could lead to a significant price support support for the for the market going forward.

7:16
And now, the other thing too is that you want to make sure that that you put greater way on the 200 day versus the 50 day. And then also go back in time and see where as what areas has the market held on to what moving averages. Have played the biggest role in the embassies.

7:34
And so, the last point I want to make here is be aggressive with your profits. We talked about Letting letting your winners run but cutting your losses short. Well, when you’re shorting the market, you have to be aggressive with profit-taking. You can’t just write it down and mainly that because that’s because unlike the long side where a stock can go from 0 to infinity and theory on the short side of stock can only go from, you know, its current price down to zero.

8:03
So as the stocks continues to decrease in value, Let’s say you’re up. 10% on your short. Well the stock moves down, another one percent, you’re not even making one percent. At that point, you’re making a Nike point nine percent on your trade. So the the further down the stock goes, the less less percentage increases that the that the stock will decline actually is reflected and your overall profit loss statement there.

8:29
So, you want to make sure that you’re not putting yourself in a situation to where your risk is greatly increasing. Because of a bounce possibility, while your reward is quickly diminishing because the stock is moving so far down that there’s not a lot of room to capture profits at this point relative to where you got in at.

8:49
So you want to make sure that you’re quick to take profits. My sweet spot tends to be around two to four percent. I really like that. At and for others because that’s what I do as a swing Trader. Some of you guys might be looking at a longer timeframe, you might say, okay, let’s go for 8 to 10 percent and if you’re a day trader, might be more like one to two percent.

9:09
But what you want to do is you want to make sure that you’re consistently locking in gains on your short setups and that you’re not letting them just, you know, melt away because the markets do bounce, historically, they bounce. And you don’t want to be caught on the wrong side of those balances.

9:26
So just to wrap this up, Okay, we’ve had a pretty good discussion here about how to trade a market top. First, you want to wait for the initial push lower, okay. Then depending on what it does from there, maybe there’s follow through to the downside. You want to start shorting when there is a break of key support or in, this is what I like to do more than anything is to wait for there to be a meager bounced back into some kind of resistance level that you can short going going back down.

9:52
So that’s one way to. Those are two ways to do it but you also want to to make sure that you’re aware of the support. Level is in the form of moving. Averages that are underneath your, your short set up. So be aware of the 200, the 50, and the 20 primarily, and then be aggressive with your profit taken.

10:12
Don’t don’t try and go Hog Wild on your gains. I mean, the most, you can make off of a short set up is 100%. And that’s if the stock goes bankrupt, which that’s not really what we’re playing. Most of the time when we’re sorting a Mark, we’re sorting the stocks where usually look, In for a short-term weakness in the market that we can capitalize on.

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So that’s going to do it for today. I appreciate you guys listening. If you have any questions, always feel free to contact me. Thank you and God bless. Thanks for listening to this week’s podcast of Swing trading with Ryan Mallory. I’d like to encourage you to join me in the SharePlanner Trading Block where I navigate the financial markets every day with Traders from around the world.

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The Trading Block. And follow me at SharePlanner on Twitter, and on SharePlanner’s, Facebook page, where I provide unique market, and trading ideas every day. If you have any questions, please feel free to email me ryan@shareplanner.com all the best to you and God bless.