Today is a good day to review more about the Counter Trend Trade Alerts that I have built into the Momentum System. Some folks have expressed to me that they feel uneasy shorting against what looks like an obvious uptrend in progress. The truth is that counter trend entries if they are done in the right type of market conditions and computed with extreme precision carry identical risk to “with-trend” trade entries and can deliver similar point gains. Lets examine the psychology behind these counter momentum shorts. What happens is that the market at times makes parabolic and unsustainable runs into “stall zones”. The momentum system detects these reversal areas ahead of time and issues Counter Momentum Alerts which you can enter the the short side using a Limit Order. These are basically, projected areas where the Momentum System computes that the selling pressure will overwhelm the buying pressure and reverse the up-move that is in progress. These zones make good high probability counter momentum short entries and can be quite profitable if played correctly.
The only caveat is that many times the initial stall zone is so obvious that all the shorts jump on it at the same time… and if the large lot sellers don’t come out in force to knock the market down.. the shorts may start to get nervous and bail on their positions having to buy to cover to exit. This creates the dreaded “short squeeze” conditions that ends up popping the market even higher as the shorts themselves end up absorbing the limited selling at that price level with their Buy to Cover exits.. it becomes a game of musical chairs trying to get out first and stops start getting triggered similar to tossing a ping pong ball into a room loaded with mousetraps. The market then will climb to a new and even higher overbought price.. and this time… half the shorts will be too chicken to try again so they sit this one out.. (less short squeeze potential the 2nd time around) The large lot sellers detect this and jump on this move to hammer the market down from this new higher level. This is why the 2nd Counter Trend Short entry often works just the way we want it to. Knowing this.. I purposely martingale these plays.. i.e. the first counter short is a smaller position.. and then I double down on the 2nd if the first gets stopped.
The Power Momentum system is designed to play these counter trend setups in this 1-2 punch fashion. You can see from the chart example from today, the 1st Short Entry got stopped, but the 2nd System Short at 91.25 hit the nail on the head incurring only a 3 tick draw-down before they reversed the market for an eventual 5 point drop. In the end you can see how the system was able to pick off the high of the morning session with extreme accuracy on the 2nd alert, even though the first entry stopped. Now you know the mechanics behind the price movement. Moral of the story, don’t fear the Momentum System Counter Trend Short Signals. “There is nothing to fear, but fear itself…”