Massively Oversold Bounce Plays. Normally Coming Off 52 Weeks Low

 Bounce

Emotion rules in markets of any description, with individual stocks as a prime example. Here you will find less experienced traders in higher numbers than in currency, commodity, bond, or index futures markets, which heightens the influence of the foibles of the human psyche.

Nowhere is this more on display than during sharp declines in price.

Panic Pays

When a stock price is in a true free-fall or death spiral, traders and investors panic! They often become overwhelmed and divert basic executive control to the Basal Ganglia — the part of the brain sometimes called “the reptilian brain.”

This is the Fight or Flight, Survival, Eat or Be Eaten center of cognition. In other words, decisions are at their least rational.

As a trader of many years’ experience, I can tell you that I have come to equate the concept of “opportunity” with that of “other people acting emotionally rather than rationally”. There are many times when this is a central driving characteristic, but during a panic is perhaps the most pure.

Market Panic
Capitulation

Even the smartest people can end up making really stupid decisions because they are acting with emotional blinders on. As a result, the end of such moves, known as a ‘capitulation’ often represents a major overreaction that can add as much as 20-40% of panicked selling onto the move.

The key is to step in only After Capitulation.

In addition, when downside momentum and bad news come together, one will almost always see short sellers who circle like hyenas. Their activity compounds the situation and further drives down the price.

However, at a certain point, shorts will have to “cover” (to buy back their share exposure) to monetize their gains. Along with value buyers and shaken-out strong hands, stocks can often see huge snap-back buying following the capitulation of a major downside spiral.

This whole dynamic can give astute traders a huge opportunity.

Some Key Do’s and Don’ts

This strategy can be tense as it is nearly impossible to time things perfectly. However, we suggest a couple strategies to help.

First off, wait for the “Puke Your Guts Out!!!!” moment to start buying. In other words, Never Buy Into “Pretty Big Dives”. Wait for them to become almost horrifying in their ‘crashiness’.

I realize this is not a scientific statement. But trading is honestly a whole lot more about intuition and ‘gut feel’ than it is about precise data. You need some old fashioned ticker sense and a hefty dose of gut feeling to beat the crowd because the crowd will have the basic data, too.

Reptile Brain

One other big key: Stay away from slow, grinding sell-offs.

Remember, the opportunity is necessarily a function of overly, irrationally, emotion-driven behavior. That does not look like a steady trend on a chart. It’s an emotional heart-attack spike downward.

Once you see that, you know the weak-handed bounce buyers who moved in too early have already been thrown off the bus, which is imperative.

Second, use a strategy of scaling in. Once you see the “Puke Your Guts Out!!!” moment, buy a small amount. Then wait.

If you get a secondary plunge (which you often will), buy a little bit more and then wait for positive movement.

In the end, one should never play such a trade at normal size. Use half size at most. And only add to normal size once it has started to show you higher highs and higher lows on small time frames.

If handled correctly, you can reap huge rewards by this approach.

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