MARKET MADNESS
Traders How-To Guide for Dominating the Markets in 2021
Detecting the Smart Money
John Seville | Acorn Wealth Corp
● The six most powerful market patterns you must know
● Which patterns and strategies yield consistent results
● Difference between oscillating and momentum patterns
Predicting Major Market Moves by detecting the Smart Money :
In today’s economic climate investors are faced with a multitude of different sources of information, from Facebook, stock twits, business news, stock newsletters and everyone else’s opinion who is willing to give it to you – which is everyone.
Unfortunately, recent statistics show that over 85% of investors generally lose money.
Since the Global Pandemic situation this noise has now turned into a roar!
In fact, in a recent documentary I watched discussing the value of ‘experts’ it was reported “economists have studied the wrongness rate in economic journals and have concluded it’s very close to 100%”. In conclusion, “virtually all the studies published in economic journals are wrong”.
Therefore, where does an investor turn to find the TRUTH of what is going on? More importantly how to find good investment idea’s knowing that the likelihood is that 85% of them will be wrong?
The most valuable method I have found to predict major market moves and capture significant profits is by tracking the smart money, how it moves and the key indicators signaling which way the money is flowing.
Amazingly these indicators have predicted every major crash in the market in the last 25 years, including the recent meltdown in February 2020.
Incredible right!!!
In this E-Book we will discuss the ways in which we do this, key elements and checkpoints.
A complimentary video workshop discussing the concepts and patterns discussed in this E-book will be provided at the end.
Market Structure and Dynamics
Firstly, to set the premise of the ideas set out in this article we must first look at the nature of how money moves through the stock market in today’s modern age.
JP Morgan recently estimated that as much as 90 % of volume in the stock market is accounted for by buy and sell decisions made my computerised trading.
These powerful algorithmic systems make investment and trade decisions almost entirely based on certain patterns. These patterns occur in the charts of a stock and follow extremely precise pre-determined buy and sell targets based on the relative rules for the algorithm being used. Often fundamentals won’t be factored into the decision making at all.
Love it or hate it, we therefore feel that regardless of what opinions we may have of the fundamentals of the market, or what we feel ‘SHOULD’ happen next, it is far more important to track what the patterns are saying.
Once we know the pattern, we can then utilize quantifiable indicators to look at what the’ smart money’ is doing and piggy back of their invaluable expertise and insight which would be almost impossible to get through conventional research.
Based on this approach, we can observe how some of these techniques predicted the market crash of 2008 long before so called ‘experts’ even started talking about it. These methods gave the same identical signals in the crash of 2008.
We will break down the methods into several categories.
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The Powerful Patterns
Upward Channel Break - One of the most easily identifiable patterns is the upward channel. You can see this illustrated on the S&P 500 weekly chart over 2018.
- While this is an upward trending pattern the rules almost always dictate that after three touches of the support line there is a very high probability of a breakdown correction to occur. So despite popular belief the upward channel is in fact a BEARISH pattern as it predicts the next move to be a breakdown instead of further upward moving.
- As indicated in the chart below it can be seen that we have indeed touched three times on both the short term upward channel shown in green as well as the larger upward channel showing in black. After the third touch ,in both examples , we broke through support and broke down to the rule driven channel target.
- This ‘Rule of Three’ not only applies to upward channels but also to patterns such as ascending and descending triangles, head and shoulders, rising and falling wedges and almost all other oscillating patterns.
- Often investors are sucked into buying support they have seen touch multiple times feeling the more times support has been respected the better, however, it is quite the opposite. By understanding this rule, we can anticipate when big money is about to step in and short the stock and avoid getting sucked into buying into perceived support at the worst time.
- Head and Shoulders
- While this pattern is harder to recognize for many beginner traders, this pattern is one of the most highly probable and profitable bearish patterns to occur in a bull market. This pattern is one of the most powerful and highest probability patterns to predict the top of a market or a stock’s run.
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This is a pattern designed to fool investors and traders into thinking the chart is making new highs resulting in investors being lured into buying in right before it begins its downward decent and as smart money sells into the rally.
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A head and shoulders pattern is characterized by a stock creating a symmetrical triangle up and down forming the left shoulder. This is followed by a larger symmetrical triangle representing the head and then a final right shoulder triangle usually of equal size and shape as the first. When this forms, it is assumed the stock/index will then breakdown to the amount of at least what the measurement of how large the head was. Also note that the breakdown occurs after three touches of the support line.
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In the market meltdown of 2007-2008 the top of the market was characterized by a series of this exact head and shoulders setup. (see fig 3 below)
- In other words, experts and news aside, the ‘chaotic’ breakdown of 2008 was in fact a drop that was highly predictable and in fact where it dropped to and where it reversed from were levels that were almost exactly what the pattern of the head and shoulders had predicted. This illustrates how vital it is to understand the role such a powerful pattern plays in predicting big money moves.
Understanding the Patterns of the chart is one of the most vital aspects of trading in being able to determine where the money is moving and also tells us the key levels at which the pattern dictates us to buy and sell with highest probabilities.
Now if we compare that to a weekly chart of the S&P 500 in the 2018 scenario we discussed earlier will notice a strikingly similar image.
Of course we do not only apply this to the market but also for also for finding highly potentially powerful moves in stocks.
We will discuss some recent trade setups we alerted our students to recently where the Twiggs Money
Flow played a key role in being able to predict the major move in the market.
In the below example you can see a chart of CROX where you will notice two strong upward channel’s were present leading into January of 2020. Not only do we have the pattern in place but you will also notice the Twiggs Money Flow going down as the stock went up!
This divergence tells us that as the stock trended upward in a bearish upward channel smart money was selling into it and the Twiggs Money Flow trended lower as a result.
The stock the broke down to the target of the first upward channel and then further sold off to the target of the larger upward channel.
This of course produced a very profitable setup one can then take advantage of by shorting the stock or buying put options and was indeed something we highlighted to our followers at the time this occured.
The same approach can be applied for Longs.
In the below example you can see a chart of BBOX where you will notice a strong downtrend in place from the 21st of October 2015 onwards and you will notice that the money flow was dropping along with it. However as of the 17th of December all of sudden the Money Flow takes a sharp change to the upside and continues to make higher highs and higher lows as the stock continues to decline.
This divergence tells us that accumulation is going on and that the smart money is starting to shift in the bullish direction. Now of course the trick is to pick the right timing for entering this trade. This perfect entry point occurred on the 2nd of February. Not only did the Money flow continue to diverge, but it also crossed above 0 making it an even stronger signal. At the same time we also had perfect pattern confirmation with the stock breaking its downtrend line as well as the 9 day exponential moving average and the 20 day simple moving averages that were previously holding this stock down. The resulting move produced almost a 50% profit for anyone entering the trade.
For shorter term traders it is worth nothing that this divergence can also occur over a shorter period of time. For example below is a trade we took on BCRX. After a massive drop the stock was going sideways yet the money flow was going up sharply. We therefore took advantage of getting into the trade on the 2nd of March. If you were a stock trader and entered in at the open this would of a resulted in a 20% intraday profit. Instead we opted to go for the June $2.00 calls which had a 60% intra-day move.
B) Bond Traders
The second key factor we look at when determining big moves of ‘smart’ money is following the High Yield Corporate Bonds using one of the relevant ETFs ‘HYG’. Typically speaking in a strong bullish market money will flow into corporate high yield bonds showing confidence in Corporate America. If you observe the chart below you will notice that HYG indeed correlated with the S&P in 2008 perfectly.
It followed the market down in 2008 during the crash and reversed with it from the lows of 2009. However, in the middle of 2013 while Quantitative easing pumped more and more money into stimulating the market the big money started to move the opposite way. This divergence was a key factor in how we predicted the crash of 2008 on June 6 along with the recent crash of the S&P back in July of 2015. Watching for when HYG is moving in the opposite direction of the S&P 500 is a fantastic way of predicting when big money moves are about to come and reversals in either direction of the indexes.
C) Insider Trading (the legal kind)
It should be no surprise that insiders of a company are going to have a much more intimate and specialist understanding of their company’s long-term value that the average investor or even expert analysts and firms.
Looking for opportunities within stocks where there is the presence of strong buying or selling to piggyback of their expertise and add probability to the direction and conviction of our trade is an essential part of our analysis. It can often be an incredible powerful indicator, if used correctly, to predict explosive moves in stocks before they happen!
Let’s take CNST for example. On the 3rd of October 2019 it was reported that one 10% owner and a separate director loaded up on their own stock adding $11,999,994 and $23,999,997 to their holdings respectively. In fact the gentleman who added the almost $24 million dollars in fact increased their holdings of the company by a massive 112% in that one transaction!
Shortly after the company announced positive news and the stock shot up to a high of $59.49!!!
This also applies in looking for shorts!
For example. Let us revisit the trade setup on CROX from January 2020 we discussed earlier.
Not only did were we presented with a perfect technical pattern suggesting we should short the stock or buy put’s on the stock but the insiders were also selling. In fact it was reported that Blackstone Holdings III L.P. which was a 10% owner of the stock at a the time sold 100% of their holdings on the 4th of November for a whopping $243 million dollars!
This insight clearly paid off as the stock shortly afterwards sold off to a low of $8.40 in the weeks and months to come!
Scanning for the perfect storm
Of course in this book we started off by discussing the critical importance of understanding the pattern . Ultimately trading should never be about guess work or going to bed stressed over positions that feel more like unhinged gambles than educated, well managed trades.
This is the whole purpose of understanding how to correctly identify what pattern a stock is in, what the smart money are doing and then, of course, being able to decide whether that pattern is one of the highly probable and profitable patterns worth trading or not.
This is where scanning becomes an extremely powerful asset in our trading arsenal. Once we are aware of what the highest probability patterns are we can scan specifically for only those. We can even combine scanning for the highest probability patterns with stocks that also have massive insider buying or selling!
When we find these perfect storms where all the other factors discussed are coming together in a such as fashion we are able to often predict explosive moves before they happen!
By utilizing scans it allows us to therefore specialize in only the highest probability setups and strip away all the noise that distracts us into bad trades. We can also then become highly effective in knowing the exact rules of how to trade a small handful of patterns rather than trying to be an expert at everything, which is almost impossible.
About the Author
John Seville
Company: Acorn Wealth Corp
Website: www.acornwealthcorp.com
Services Offered: Trading/Investing education, trade ideas, courses, indicators, scanners
Markets Covered: Stocks, options
Acorn Wealth Corporation opened in 2007 to become one of the few places where students could go to learn such powerful techniques directly from their mentors.
IMPORTANT NOTICE: No representation is being made that the use of use of this strategy or any system or trading methodology will generate profits. Past performance is not necessarily indicative of future results. There is a substantial risk of loss associated with trading securities and options on equities. Only risk capital should be used to trade. Trading Futures, Options, Forex, and securities is not suitable for everyone.
DISCLAIMER: Futures, Options, Securities and currency trading all have large potential rewards, but they also have large potential risk. You must be aware of the risks and and be willing to accept them in order to invest in the markets. De with money you can't afford to lose. This website is neither a solicitation nor an offer to buy/sell Futures, Options, Stocks, or Currencies. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
DISCLAIMER: Futures, Options, Securities and currency trading all have large potential rewards, but they also have large potential risk. You must be aware of the risks and and be willing to accept them in order to invest in the markets. De with money you can't afford to lose. This website is neither a solicitation nor an offer to buy/sell Futures, Options, Stocks, or Currencies. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 : Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.