Posted on

TVO Market Barometer 10-16: How do you catch a falling knife?

Some folks say in the world of trading, the one thing you should never do is try to catch a falling knife. This colorful metaphor usually refers to an enormous red candle forming on a price chart, but it basically means buying into a huge drop in the market before a bottom has been firmly established.

Most folks will tell you if you try it (and we’re not just talking about your everyday run-of-the-mill “buy the dip” trade) you’re only asking for trouble. They tell to you to avoid it, yet that’s exactly the opposite of what the big institutions do, time after time, over and over again.

On Tuesday, the big boys caught the knife and ran with it, logging what is now the second across-the-board accumulation day this month. Our Heat Gauge is designed to anticipate with high accuracy (about an 87% success rate since 2016) just when the smart money will step in, and allows us to get in the trade right before they do. Last week our members were able to open a position ahead of today’s rally that resulted in an options gain of +15%.

If the falling knife trade works so well most of the time, then why is it so hard? Quite simply, it comes down to perception. During corrections, the doomsayers come out of the woodwork with their bear market predictions, and once the majority of traders decide to heed their warnings, there’s hardly anyone left to make what is perceived as just a crazy trade… And that’s exactly why it works.

Noise and opinions from the news and social media are things that will never change, but the one thing you have the ability to do is change your perception or how you feel about it. Choosing to change your path is certainly easier said than done, but at the end of the trading day, it is often the road less traveled by that makes a world of difference. -MD

Sentiment: LIMBO – Markets are neutral and sentiment can go either way from here.

Volume: 13% – Today’s volume was higher than the previous session.

Real Feel: 3-DOG NIGHT – Bulls dominated the session with selling kept to a bare minimum under the surface.

Cycle: OVERSOLD II – Retail investors are dumbfounded and are rapidly exiting their holdings.

Portfolio: HOLD – The market is in a period of indecisiveness and the best place is on the sidelines.

Next Day Move: UP - The probability that SPY will close positive in the next session is 57%.

Want to read more? Join our list. It's free.

For the full rundown on today's active signals and options trades, please log in. Not a Member? Join us today.

To view past positions check out our Trade History.

To find out what the indicators mean, visit our Market Volume Volume Barometer.

To learn more about market volume and how we trade, find us on Twitter (@TradingLicks) and StockTwits!

The indicator descriptions in the above graphic represent general market sentiment. The actual TVO System signals and trades are listed below in the Members Area. To view, please . Not a Member? Join us.