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Why Use Inverted Technical Analysis™?

Why Use Inverted Technical Analysis™?
September 23, 2020 Martha Stokes CMT

Why Use Inverted Technical Analysis™?

Determine If a Stock Is a Retracement or Sell Short

When Retail Traders are already in a stock and it starts to move down rather than up, many do not know whether to sell the stock or hold it. They are uncertain whether the move down is just a retracement or if the stock is going to continue moving down, so this is how Inverted Technical Analysis can help. What this means is that you are studying the downside action as if you intended to sell the stock short. If you are only looking at it from the standpoint that you are in a trade that is either slightly in profit or slightly at a loss, you will not know whether to sell the stock or hold it.

We are going to use the candlestick charts below as an example of how to use Inverted Technical Analysis to study a chart for a held stock position. We will pretend that you own this stock, and now that it is moving down, the concern is whether to hold or sell the stock. See candlestick chart example #1 below.

Let’s say that the entry or buy was on the small gap up white candlestick day indicated by the green arrow. It moved up the next day as well, then it started to correct. This was a bit of a surprise as the expected action was more upside, especially since the index this stock is on went up over 100 points each day that this stock has moved down.

Nervousness is settling in, and you are wondering whether to hold or sell the stock. You have a small profit for now. You are wondering why this stock is moving down when its index and the general market has been moving up strongly.

You are hoping the stock is going to move up, but you aren’t sure. Instead of hoping, worrying, or giving up on the trade, use Inverted Technical Analysis and take a totally different perspective. Look at the chart and determine if this stock is a good Sell Short candidate.

In order to do this of course, you need to have an education in sell side action. The sell side or downside action is not the same as the upside action. Price moves differently on the sell side because there are fewer Stock Market Participants that Sell Short.

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Stock selling is done for different reasons than when the Stock Market Participant Groups are buying. In addition, when a stock moves down, there are often Dark Pools lurking that most Retail Traders are unaware exist in certain price levels and ranges.

Candlestick chart example #2 below shows how to use Inverted Technical Analysis with support lines, which are set at the levels of their prior Dark Pool Quiet Accumulation.

We can now quickly determine where Dark Pools are likely to enter again. We can also determine how far the stock can move down before it will find support for either a bounce or a rebound that will convert back to an upside run.

In candlestick chart example #3 below, a third line is drawn at the first support level. The stock is likely to easily bounce at the first support level. There is also support at the second line down which is even stronger support than the first level, and the lowest support line is where aggressive Dark Pool activity halted the last short-term correction.

When this stock is viewed as a Sell Short pick, it fails dismally as a Sell Short candidate because there is not enough possible point gain for profitability. It is not a good stock to Sell Short. Learn to read the sell side action as easily as the upside action. Then when you are in a held position but are uncertain what to do, use the analysis described in this article, and it will help decisions become far easier and analysis more accurate.

Summary

Oftentimes, a Retail Trader is looking at the chart from a perspective of hoping that the stock will turn around and run right back up. However, hoping a stock will run up and analyzing price properly to determine whether it will or will not, makes all the difference between a profitable trade or a losing trade.

A special type of analysis is often needed to really determine whether the stock will turn around and move right back up, or if it is going to continue to move down and start a deeper retracement or even a short-term correction.

Inverted Technical Analysis which is only taught at TechniTrader exposes aspects of price, Stock Market Participant activity, and support levels. It also eliminates the most dangerous part of analysis which is letting your emotions, hope, or fears of loss distort or confuse your trading decisions.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using MetaStock charts, courtesy of Innovative Market Analysis, LLC dba MetaStock

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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Martha Stokes, CMT is co-founder and CEO of TechniTrader. She is a retired professional Buy-Side Analyst and was awarded the Chartered Market Technician designation for her thesis, "Cycle Evolution Theory." Martha is a passionate teacher of the financial markets and a prolific writer, having created over 40 stock, option, and financial market courses.