There are two green flags that told me the ALSI was going to go up.
Two green flags which signalled a buy on the ALSI
Green flag #1:
The ALSI broke above the downtrend (Blue line) for the first time on 18 April 2018.
Green flag #2:
The ALSI then went down to test the same Blue line, where I expected a bounce.
We got this bounce, as there was more buying than selling.
Normally when the ALSI goes back to test a trend line, you’ll see it bounce off it and move up. You have to spot these trend lines to not miss these kind of opportunities.
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“I heard the JSE All Share Top 40 Index is ‘technically strong’ at the moment. Can you explain what this means as it seems to be a common saying among traders?”
A ‘technically strong’ index means the index is moving in a continuous uptrend.
It’s important for you to understand this phrase, because the words “technical” and “Strong” gives you two critical pieces of information.
Whenever you hear a trader or an analyst using the word ‘technical’, they are referring to the historical price chart of a market or a stock.
When we say a stock or a market is technically ‘strong’, it means the price has been moving in a strong up trend.
Since 2 April 2018 up to 15 May 2018 the JSE All Share Index was ‘technically strong’. We see this as the market moved in an uptrend from 48,424 up to 52,600 on the price chart.
“You wrote about the 200 Day Moving average this week. I applied it to my chart and I have to say, it works like an absolute charm. But there’s still one thing I don’t understand. How does price gravitate around the moving average and can you give examples with different moving averages?”
If we go back to the article
and the Q&A
, you’ll remember that a moving average is just a line that shows you the average closing prices over a chosen number of days.
This means when you add a moving average on the chart, you’ll see the line will smooth out the noise within a chart.
Let’s take three moving averages as an example and compare them using the same Shoprite price chart from this week…
We’ll use a short moving average (5MA- Red line), medium moving average (30MA- Green line) and a long moving average (200MA – Blue line).
You can clearly see that the price gravitates on the shorter 5 Day Moving Average (Red line) closer as it’s only taking 5 days of average closing prices at a time.
The 30 Day Moving Average (Green line) is smoother and price gravitates on it more gradually compared to with the 5MA.
Whereas with the longer 200MA, which is the smoothest of them, price gravitates towards it, above it and below it when the overall trend changes.
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“Timon in the news I heard that the ALSI went through a short-squeeze on Wednesday, 30 May 2018. What is a short-squeeze and did you know about this when you told your Red Hot Storm Traders to buy the ALSI?”
Here’s Investopedia’s definition of a short-squeeze.
“A short squeeze is a situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock.”
Basically a short-squeeze is when the buyers take over the sellers which drives the market up.
Traders who ‘short’ the market, sell at a high price and hope to buy at a lower price for a profit.
But the short-squeeze on the ALSI, resulted in the ‘short’ traders being closed out where they took losses.
Let’s zoom into the ALSI on 30 May 2018 to see what happened…
The ALSI on 30 May 2018, opened at 49,700 and throughout the day the sellers ‘shorters’ drove the market down to 49,120.
But at the end of the day, the buyers overpowered the sellers, which then drove the ALSI back up to 49,655.
We say the short sellers were ‘squeezed out’ as the buyers beat the sellers.
To answer whether I saw the short-squeeze and took action on it, yes I was well aware of the short-squeeze candle.
When you see a candle like this, there’s normally a turnaround in price, which will cause the market to stop dropping and start rising.
Always remember, “Wisdom yields Wealth”