July 16th, 2009
“Traders’ Remorse” is a term I’ve used several times recently but don’t think I ever fully explained or demonstrated it before. Given what I see evolving among stocks of the old “inflation trade” and what I believe the S&P 500 Index will do soon after it crosses above the neckline of the inverted head+shoulder that goes back to October, 2008, it seems apropos to do so now. Moreover, some believe that the conclusion of the “traders’ remorse” correction is actually the best time to initiate a purchase.
Quoting an excellent description from MetaQuotes Software:
“After a support/resistance level has been broken through, it is common for traders to ask themselves to what extent new prices represent the facts. For example, after a breakout above/(below) a resistance/(support) level, buyers/(sellers) may question the validity of the new price and may decide to sell/(buy). This creates a phenomenon that is referred to as “traders’ remorse”: prices return to a resistance/(support) level following a price break through.
Price action following this remorseful period is crucial:
- either the consensus of expectations will be that the new price is not warranted, in which case prices will move back to their previous level, classic “bull or bear traps” (or false breakouts) where or
- investors expectations may change causing the new price to be accepted, in which case prices will continue to move in the direction of the break through.
A good way to quantify expectations following a breakout is with the volume associated with the price breakout.
- If prices break through the support/resistance level with a large increase in volume and the traders’ remorse period is on relatively low volume, it implies that the new expectations will rule (a minority of investors are remorseful) or
- Conversely, if the breakout is on moderate volume and the “remorseful” period is on increased volume, it implies that very few investor expectations have changed and a return to the original expectations (i.e., original prices) is warranted.”
Remember when everyone was talking about the emerging world economies generating new demand on all commodities pushing those stocks up dramatically? What happened then was that everyone started second guessing the assumptions and prices started to falter.
Individual stocks will act differently producing a wide range of chart patterns-but each is a valid example of “traders’ remorse”. Stocks may form an “inverted saucer”, a horizontal channel, a symmetrical triangle, a descending flag. Name it, you’ll see it; but they all mean the same thing:
- AKS (AK Steel)
- MTL (Mechel Steel)
- ANR(Alpha Natural Resources)
- STP (Suntech)
- PAL (N.A. Palladium)
- ATI (Allegheny Tech)
- BUCY (Bucyrus)
I look at hundreds of charts daily and could find many more (most of these are from the Spreadsheet list of ). If you’re in a stock that experiences traders’ remorse, don’t panic; if you’re not in one of these stocks, remember it’s the best time to get in.