Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
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March 23, 2017 - The RightLine Report
Notes From The Editor
Recent selling in the market has prompted questions about whether there is a reliable way to tell the difference between "profit-taking," and "real selling", or shorts coming into the market. Good question! Without the luxury of a survey or some other type of hard data, the answer to whether selling at any point in time is due to profit taking or to some other factor is based on a variety of conditions.
To determine why selling occurs, we first look at when it took place. If the selling is on a Friday after several days of gains, there's a good chance intra-week traders are locking in profits before the weekend. Sometimes during an extended rally you will see this pattern repeated week after week, with the "pre-weekend" selling starting around mid session on Friday.
Sometimes the profit taking starts on Thursday, especially if recent gains have been very strong. Also, profit taking will often begin on Thursday ahead of long holiday weekends. This is because traders like to extend their time off by leaving a day early. Plus, everyone wants to begin a holiday break or vacation with a few extra bucks in their trading account.
Another condition that helps reveal the difference between profit taking and short selling is the "where" aspect of the price action. Short-sellers tend to place their trades at or near strategic resistance levels. This enables their initial entry to quickly take advantage of a price reversal - or at the least hesitation - with the lower risk factor of having a clearly defined exit point just above the resistance level. If the market moves higher instead of lower, shorts get a loud signal to bail out.
Another component to consider is the level of upward momentum leading up to the selling. As well as being savvy, short-sellers are also usually tentative. They don't like to jump in front of a fast moving train even when there is a resistance level to take advantage of. On the other hand, profit taking in the same environment is often a result of the emotional temptation to grab the money quick before it evaporates.
Bottom Line: The faster profits accumulate, the greater the temptation to quickly lock them in. Just remember that profit taking and short selling aren't necessarily exclusive of each other. They can and often do take place at the same time and location.
- Thomas Sutton, Editor
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