Headfakes vs Breakouts | Podcast Episode #287

0:07
Hey, I’m Ryan Mallory and this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex ever-changing, world of Finance, learn what it means to trade, profitably and consistently managing risk, avoiding the pitfalls of trading. And most importantly, to let those winners run wild, you can succeed at the stock market and I’m ready to show you how, hey, everybody, this is Ryan.

0:31
Mallory with swing trading the stock market in today’s episode, we’re gonna talk about head, Makes versus breakouts. How can you tell the difference between the two? You’ve seen a lot in this market this year. That looks like it’s a legit break out. Only to see the next day. The market gives up all of its gains and you’re losing money on the position.

0:48
Instead of what you anticipated was to make a good deal of money. So we’re going to talk about that. How have I been able to not perfectly? But to a pretty decent extent this year, I’ve been able to avoid a lot of the unnecessary trades that involve breakouts but then they turn into head.

1:05
Fakes and not necessarily A breakout. So that’s the thing that we’re talking about. This email comes from a guy we’re going to call them Cletus Cletus rights here on the Mark, has been really choppy as of late. There have been times where we broke through the June lows and then bounced back.

1:20
Also, to the upside, we have broken through a few resistance levels, just to fall back down. I have been waiting to play one of these but basically have broke even since none of them really went anywhere. I noticed that you didn’t even attempt to trade any of them, which leads me to believe you can see something that I And how can you tell me the difference between a head fake and a breakout?

1:38
Also, one other question that might actually be related, but I’m not sure. What does breath mean. You have mentioned, the breadth of the market and I’ve done a little bit of research, but haven’t found any specific indicators. Is there a breath indicator. Thanks so much Cletus. Good ol Florida redneck name, right?

1:55
So before I start to answer his question, what am I drinking for this podcast? That would be Ezra Brooks 99 proof Kentucky straight bourbon whiskey. She says a 49.5 percent, alcohol level in 99 proof the sour mash and on the bottle it says a genuine sour mash bourbon made using the finest ingredients available for Generations.

2:19
Ezra Brooks. Whiskey has been the whiskey for those with a rugged spirit and taste for adventure. All right, so this bottle only cost me twenty two dollars. So, a lot of times with those, I’m not sure if I’m getting into like Jim Beam Jack, Daniel territory. Like basic kind of Stuff.

2:36
But there are some pretty good ones. Like I think probably the most popular retail bottle of whiskey or bourbon that you can get is Weller’s. Well, there’s this is actually the same recipe as Pappy except for the fact that the bourbon stored in different part of the warehouse and it’s probably aged longer up there.

2:53
At the Buffalo. Trace distilleries, that bottle. I can get it for about $25 down here, really awesome. If you can find it, and usually, I can find it. So I’m not ruling out as Rooks from actually being a decent bourbon here. I mean to the eyeball Ball a little bit of a light brown color to the nose.

3:08
Definitely pick up some of the caramel and vanilla smells to it. Not bad it’s a pleasing. There’s not a lot of ethanol smells to it especially with it being a cheaper Bourbon and it being almost, 100 Proof. You’d expect there to be a little bit more ethanol, but there’s not now to The Taste.

3:25
I still pick up that corn and vanilla, but I’m also tasting a lot of that corn flavor. And then when it finishes, you get a little bit of a kick of spice, a little bit of heat. And then this like peanut So it’s not that from beginning to end. It’s plus I would say it’s slightly above average, I would say it’s respectable on a scale of 0 to 10.

3:45
I’m going to give it a six point nine, that puts it in line with McFarland with binge proof, small batch not bad company but on the cheaper side of things and it’s respectable like it holds its own at $22. There’s some forty Dollar Bottles that are far worse than Ezra Brooks and I wouldn’t take as well.

4:03
Brooks any day of the week over. I take it over. Will it the basic offering of? Will it take that any day of the week over? Will it? So Ezra Brooks, 99 6.9, not bad at all. Now back to Cletus. And will he is asked me again? One of the first things he’s asking about is there’s been times where we’ve pushed through the June lows and then we bounce back.

4:21
Now, one of the things I would say about that and why was I not shorting when we broke through the June lows, and why it was, I able to avoid that bear trap that took place. If you were to have shorted the June lows hoping for a much much big leg lower Well, oftentimes when you’re hitting a major support level in your breaking through it and you’re extremely oversold, let’s say I can the case.

4:43
A spy here, it’s dropping like 10-15 percent to get to the support level with really, no relief rally and it’s hitting that support level and then it’s breaking through it. Is there a strong reason to believe that when you’re that oversold on? Not only just like a daily or an intraday chart but also on a weekly chart that we’re really going to continue to push lower.

5:02
That’s my thought. I see it all the time where you get these big big-time Head & Shoulders pattern, you’re like holy cow. This thing is going to really have a major meltdown you’re seeing it right now. A Tesla Tesla has a gigantic Head and Shoulders pattern. And again I’m not trying to get into you know talking about chart specifically or anything like that because I know it’s a podcast and podcasts, you know, need to be something that you can just here.

5:24
So I do my very best not to get into like the extreme technicals to where you need a chart in front of you. But just in passing, Tesla has this massive head and shoulders topping pattern, which is very bearish and it confirmed. Last week. Did I short Tesla for that? No. I mean, the stock had a pretty much Drop Like 30 percent in order for it to even break below that neckline of The Head and Shoulders pattern.

5:44
So why would I start getting sure they’re after, it’s made a substantial move to the downside and has seen, no kind of balance during that period of time. It’s extremely oversold. It sets up for a bear trap where you push below the support level, and then you go rally, and right back, creating a short squeeze, for all the retail in Algos and Wall Street guys, that got short on the stock, And just because it broken, neck line, sometimes with technical analysis, you do have to use a little bit of common sense, right?

6:12
You got to use some of the broader knowledge for individual situations and what I mean by broader knowledge is that we have an understanding of, you know, the markets can be overbought, they can be oversold, individual stocks me you overbought and oversold and when you can recognize that and then start to realize, okay?

6:33
Common Sense will tell you Tesla’s drop in like 30 percent over the course of a couple months really no balance in between it’s hitting this. Neckline is breaking below it. Short it right there. No, because there’s not a good reward to risk ratio where you going to put the stop loss at. And then to really ask yourself before we get a bounce. How much further downside after its dropped 30 percent. Am I really expecting out of Tesla? My expecting another 30 percent.

6:50
I mean that starting to get pretty crazy without some kind of about. So then you start to realize, hey, if I get short here, I might actually be putting myself in a situation of getting just really screwed from a short squeezing standpoint, and you don’t want that. So you pass on it, and Then just like learn that overnight or, you know, it just dawned on me one day.

7:09
No, I learned that through experience. I mean, I, I would short them. I would find a tight way to manage the risk, but it didn’t mean that I wasn’t going to get unnecessarily stopped out. I didn’t need to take that trade. And so, I’ve been on the receiving end of some nasty short, squeeze, simply because it broke a key support level thinking.

7:25
Okay, now it’s time to get short. Not considering the fact that maybe had already dropped 15 or 20 percent over the past week, or so before it got to that support level, that’s why before breaks the support level. I like to see a little The consolidation work off some of that oversold nature of the particular stock or the overall Market, sometimes a nice beer flag is the best thing to get because it allows it to Riley a little bit but keeps that pattern and play without, you know, going on some major swing to the upside but it also works off some of those oversold conditions.

7:55
So yeah, I’m not necessarily like a Houdini or something to where I can always tell the difference between a head fake versus a breakout but sometimes you can put some common sense into it and just realize this Probably not the best reward risk ratio for getting into a trade.

8:13
And then he said, I noticed that you didn’t even attempt to trade any of the breakouts that we’ve seen. And then you would see that these breakouts don’t go anywhere. So how did I know not to trade some of them? Well, I think there’s some pessimism that you should have in a bear market, right?

8:35
We’re not in a bull market were in a bear Market. What’s the difference? Obvious markets going down? Instead of up, predominantly, it doesn’t mean that there isn’t rallies that exist within the bear Market, but they tend to die out and fizzle out.

8:51
Otherwise, you wouldn’t be in a bear Market anymore. So with an existing bear Market, you gotta have low expectations of sustained bounces and remember this too, when you’re in a leg lower. And when I talk about a leg lower, I’m talking about, you know, the market is seeing substantial selling.

9:06
You know, your day after day after day it seems like we’re selling off, you know, maybe we have a streak of three or four days to the downside. Well remember to just because you get a Green Day within a leg lower doesn’t mean that all of a sudden the selling is all done and over, it can even be a 100-point rally on the S&P 500, were you Get like a two percent, right?

9:26
Doesn’t mean that the rallies over because you will have green days and some of the most nastiest sell-offs. And then in the broader scheme of things, when you have a leg lower what follows is usually a bear Market rally. And so we’re setting up for a bear Market rally because we’ve seen some pretty serious selling from late August to September to some of this October here so far.

9:42
So it would seem appropriate for us to get that whole Market rally. But you have to have a show me mentality, show me the market needs to show, You that it’s willing to bounce.

9:59
I didn’t buy it at all. It doesn’t mean that I don’t think that it can’t rally in the days that follow, but we got Tire. On a Monday morning to the tune of about 70 points, and we just kept rally until we finish at about 90 plus points higher on the day. Okay?

10:18
Now, let’s see if it can continue that tomorrow because so far over the last five weeks, we haven’t seen that. So the market needs to show me that it can and needs to break. Some technical barriers are struggling with some down trend lines. It’s struggling with some moving averages.

10:39
Let’s see how it does with those in the days to follow. Can’t break through those moving. Our just can’t break through those down Trends and establish itself as okay. The tide starting to shift in the very short, Term or near term, and we’re setting ourselves up for a market, bounced.

10:58
I don’t know exactly when they report, you know, if they’re on the same day or not but oftentimes you’ll have the big tech stocks reporting on the same day like two or three. Them that’s the case. I might stay away from the cues and go into spy. Last week I played SSO it’s a 2 to 1 leverage of the S&P 500 and when I played it we had a bad CPI report, come out and the market sold off pretty significantly wiped out the morning gains, I mentioned to the folks in the trading block and also on.

11:23
swingtradingthestockmarket.com to hey don’t be surprised if we rally today off of those. I’m not necessarily saying it’s going to happen but I wouldn’t be surprised if we did now. That’s not me pulling out like the crystal ball and making some great prediction. And like spiking the ball in the fact that it actually did happen. That’s me, just saying that I was aware of the potential for it and I was willing to wait and see if it did.

11:42
Well, it did it rallied, pretty hard right out of the open off of the lows and then it started to pull back and then I played a break of the highs of the day and it kept on moving higher throughout the rest of the day, I was like actually kind of shocked. I looked away for like one second and I’m up, 3 percent on this tree, I think. Overall I ended up making like five or six percent that was a much easier trade to take.

12:00
Because you saw some clear signals that with the CPI report coming out and what We saw the last time we had a very hot CPI report. The market completely fell apart. We were extremely oversold coming into the CPI report, yet. The CPI report was still hot. We sold off initially but it made sense why we did rally because we pretty much exhausted all the selling and it created this certain conditions for a little bit of a dead cat bounce there.

12:24
Now, I was pretty stoked. After Friday, I think to myself, man, this is great. I’m up about 6 percent. I still had two thirds of a position. I sold about a third of it, for a total of about 6 percent. Well, so I was feeling pretty good about that. Then the next day comes Market opens up about 1 percent higher and spends the rest of the day selling off.

12:41
What do I have to do? I have to go ahead and get out of the tray. I get out with about a four and a half percent profit overall, which is still great on a failed. Dead cat bounce, take that all day but there was the expectation there and maybe on veering off into a different subject here. But it’s still probably worth talking about just because it’s such a unique current event situation here and it was talking about a bounce that I did play versus the many that I have not played and they actually turned out not to beat that great of balances.

13:06
But on this particular one, I played it and then it did fail in the problem. There was, is that I had the expectation that it was going to continue to Rally. It was setting up after Thursday for a decent bounce to continue to the upside. And then we had this nasty sell off the next day and I had the choice. Okay, I can continue to risk.

13:22
My profits, I’ve already taken 1/3 off the table but this rallies falling apart really quick. So I went ahead and close out the remaining chunk of that position. Now, of course, you know, the market did go on to recover off of that, but I’m not Into the mood of giving back, all of my gains in a bear Market when I’m trying to trade from a bullish standpoint, you got a pretty much assume that the markets not going to work that it’s not going to do well and that these balances will fail.

13:49
And so circling back to what Khloe is this talking about here, where you know, why are these things all failing? Why are these bounces? Not really materializing, really only had a couple bounces that really sustain themselves for an extended period of time. The one off of the February and March lows and then again the one off at the in lows and they took a while to get going, you know, we were still making lows as of last week, so we need to be aware of that.

14:11
So sometimes these bounces, they don’t just happen in a v-shape manner. The reason why we’re not getting the v-shaped bounces like we used to like what we’ve seen for the like last 14 years or 13 years is because the FED is not on our side. All those years, the FED has been on our side, so you get these sharp be shaped bounces but when the feds night, you get your lucky if you’re getting a u-shape bounce and oftentimes These fake bounces that just keep going lower.

14:37
And that’s where a lot of dip. Buyers are getting themselves into trouble. They’re thinking, hey, this is worked for me for 13 years. Why is it stopped working? It’s simple defense, not on your side that dip buying works great. When you have a fed that’s keeping interest rates at zero percent and buying up the assets at every turn.

14:53
Finally Cletus here, talks about Market breath, what is it how do I use it in my trading? Well, Margaret breath is just simply the number of stocks that are going up versus the number of stocks that are going down and I it a quick ratio out of it. So for instance, today, there was 2500 stocks going up. 516 stocks going down.

15:12
Pretty simple math. That’s about a five to one ratio, right? 25 divided by 5 equals 5. That’s a five to one ratio. So we have 5 stocks going up for everyone stock going down. That’s pretty good. That’s really good breath. Actually, you start to get into extreme readings where you’re seeing like anything over 8, 9 and 10.

15:29
That becomes, you know where the trend is extremely strong, there is usually some kind of news driven event behind it. If you get a 1 percent higher, on the day, in the market, has a two to one breath. Where 2,000 stocks are going up for 1,000 stocks going down. It’s a pretty good breath reading for that kind of a move, but I also use it for Divergence is so if I see, you know, the market going up, 2 percent on the day, and we got breath that’s like, 1,200 stocks advance in 1800 stocks, declining meaning, there’s more stocks going down than that are going up, and it’s like a three-to-two advantage in the favor of declining stocks.

16:01
Then I might say to myself, you know what, this isn’t a very strong Market rally the The breath isn’t telling me as much, so I do use the breath to gauge the strength of a market rally. So, for instance, on a day, like today, where the S&P 500 rally 2 .5 + percent. I think was 2.6 actually, and we’re having a five-to-one breath reading, okay?

16:18
That’s matching. The kind of euphoria that’s behind the buying that’s taking place. And I don’t just use Breath by itself, but I use a number of other indicators, but for the purposes of this question, I’ll just focus on breath now. Is there an indicator for actually used to one is an I use this on the thinkorswim platform.

16:34
You can use Assign a dvn. That’s Apple. Disney Victor, Nancy preceded by the dollar sign, of course, and then that will give you the advancing number of issues. And then another one, do I have dollar sign d as in? David is an echo c as in Charlie and his anansie DEC n.

16:52
So that’s where declining issues and then I just use the ratio off of that. Pretty simple and what’s also really good to use a swingtradingthestockmarket.com, with swing trading, the stock market.com, guys. You were getting all my stock market research each and every Today that’s going to include market update videos videos on the overall big tech stocks plus, you’re going to get watchlist, trade ideas, multiple videos each and every day.

17:15
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17:30
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17:47
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18:08
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