How many times have you heard someone say that they are going to buy a stock after it just soared higher on news or earnings? The answer to that question is probably very often. You see, the public loves to chase equities higher after the bulk of the market move has already been made. The opposite is true and happens when the stock market declines, the public will generally begin to sell short around the lows when most of the selling has already occurred.
Many people have recently asked me how the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) can make new all time highs after staging that sharp decline in mid-October. The reason that the SPY can rally to new all time highs is because many people in the public went short the SPY near the lows on October 15, 2014. Simply put, the crowd started to chase the market lower after it had already declined by nearly 10.0 percent. The end result was that the public was late to selling party as they listened to the media become scared and bearish in tone. As you know, the SPY found a low around the $182.00 level on October 15, 2014. This V-shaped rebound in the SPY caused the public to cover the short position by buying back the shares that they sold short after the market bounced. Once the short sellers buy back in and cover their position and the professional institutions buy equities it causes the market to trade higher than normal. This is what is known as a short squeeze in the trading business. This was a classic example of the public chasing the downside in the market.
Another example of classic chasing was when Apple Inc (NASDAQ:AAPL) traded as high as $700.00 a share (pre-split) in September 2012. The public was once again all aboard the Apple Inc story, but little did they realize that the professional money was distributing the stock to the public. In fact, the day that Apple topped out, CNBC did a story about how the public loved Apple Inc stock. They showed people on TV that only have Apple Inc stock in their portfolio. This was a clear sign that the stock was poised to drop sharply and it did. Apple Inc stock dropped by over 200.0 points in a few weeks.
Remember, if you do not know anything about stock chart reading or trading stocks you should know this, never chase an equity after a major move has been made. It would be better if you wait for a pullback or a long chart base before looking for higher prices or lower prices. All equities have to retrace at some point in time. Here is another important rule to remember, nothing in the stock market moves up or down in a straight line. The best thing that any new trader or investor can do is to learn how to read the charts. By learning to read the charts you will learn where the institutional money will generally support or distribute stocks. This is what the business is about, so it is well served that you learn to read the charts if you plan on being involved in the markets.