Did I have you going? No, there is no crystal ball. We play probabilities, manage risk, manage our trades and prepare relentlessly for every realistic possibility with an enthusiasm unknown to mankind.
Identifying as many of the possible outcomes as you can, key in on the probable outcomes and come up with a game plan for each of these outcomes. That is our crystal ball.
Let's use biotech to illustrate this point.
Biotech has been THE sector to trade since . Even when it looked like it might crack, it came back with a vengeance. It has been the market leader. However, biotech is like a great boxer that shows signs of weakness before getting his bell rung. He may have a few fights left in him, but we all know he's close to getting knocked out.
Notice that negative volume is picking up to the downside. Whereas in October the bounce that followed the pullback had stronger volume than the pullback, the last two major pullbacks have been met by weak, feeble bounces. The trend is slowing. Biotech is giving us clues that it no longer wants to lead the market.
Now how do we use our crystal ball? We identify the probable outcomes based on past experience.
- the current bounce stalls in "dead cat bounce" fashion . We enter on a confirmation candle or early near resistance.
- the low volume bounce carries farther than expected to highs. This bounce will likely fail, as did the previous one. In this scenario we enter on a close below the old high as a breakout-failure setup.
- volume unexpectedly picks up on the bounce. In this case we look for a good long entry.
These are the three most likely scenarios. While we will come up with good probabilities for each scenario, we do not have a crystal ball.
However, once one of the scenarios occurs, we have a game plan in place that will make it appear that we have some sort of mystical crystal ball.
At the end of the day, we do no have a crystal ball. We do have something much better: PROFITS!
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