Buying with Conviction

Hey there! My name is Nate and I write for WOLF Financial. If you enjoy learning about trading, I guarantee you’ll also enjoy my newsletter A Trader’s Education, and more of my content on 𝕏 @tradernatehere. Thanks for reading!

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

Do you struggle with buying when markets are dropping?

You are not alone.

All it takes is buying one “falling knife” to learn a very tough lesson.

Every trader has this experience at one point. You let hubris get the best of you, break your rules, and get sliced wide open because of it.

A lot of money can be lost in a short amount of time trying to time the bottom and become the hero.

But learning how to trade it correctly can lead to massive gains.

There are signals you can wait for to help increase your probability of success when it comes to buying near the bottom.

Notice I didn’t say “at the bottom.”

We could see a nice bounce for the stock market this week, but will it be what we are looking for or just a small pause before more pain?

Let’s dive into what to look for to help improve your odds and reduce losses.

The Power of Support

When you try to catch a falling knife, you are effectively betting against the market.

You’re saying, “I know better than the market” and more times than not, the market has the advantage when it comes to information.

Instead of trying to catch falling knives, I prefer to wait for a bounce off of support. I say this often.

Support represents a level at which buyers have stepped in before, indicating that they may do so again.

When a stock bounces off of support, it's a sign that buyers are still interested in it at that price level.

It's a signal that the stock may have found its bottom and is ready to start climbing again.

By waiting for the bounce, you are not just guessing where the bottom might be.

You're seeing real evidence of it.

And volume is a key component of the analysis as well.

If a stock bounces off of support on high volume, it's an even stronger signal that buyers are stepping in.

High volume indicates a high level of interest in a stock, which sounds so obvious when you say it out loud.

Significant volume, well above the average, could be a sign of big institutional buyers stepping in.

This is often followed by additional purchases to round out positions, which continue to drive the price higher.

And yet another signal to watch for is a change in trend.

If a stock has been in a downtrend and suddenly starts making higher highs and higher lows, it's a sign that its trend may be reversing.

This is especially powerful if it happens right at key support levels and bolstered further when trendlines are broken.

Higher highs and higher lows indicate that the stock's momentum may be shifting from bearish to bullish.

Add in strong volume and the stock will get my undivided attention.

What to Look For

Look no further than Tesla (TSLA) for a great example from earlier in 2023 as well as for a potential set up heading into the last quarter.

From February to June, shares of TSLA dropped from $217 to near $152 and it looked like a return to $100 was possible.

Then the first signal showed up, as higher highs and higher lows formed.

Soon after, the downtrend line was not only broken through but also retested and it held.

Shares took off to nearly $300 before cooling off again!

That was more than a 50% gain after it broke above the trendline near $200.

And that is actually a really big take away.

It was worth waiting for the confirmation of the trendline being broken as well as a hold above this level. There were plenty of gains still on the table.

You do not need to capture 100% of the move. In fact, it is nearly impossible to do so.

And it is important to keep in mind that it was possible for shares to reject at the trendline and follow up with a lower low, possibly retesting as low as $100.

Losses were possible.

Instead of getting in too early, risking being stopped out on reversals (which is always frustrating), I like waiting for multiple points of information confirming strength.

TSLA made a recent lower low, the trend continues to be lower, and it is one of the sharpest knives you can try to catch.

I’m looking for support like we saw earlier this year, followed higher highs and higher lows.

The final piece of information needed is a break of the trendline and a continuation higher.

I want history to effectively repeat but at higher price levels and it is possible we see exactly that.

First, we need to find support and see the right signals.

If you found this information helpful, consider sharing it with others so we can all trade wisely together.

Have a great week ahead!

-Nate

 @tradernatehere