I have been tracking a set-up for the SPDR Gold Trust ETF (GLD), which I analyze as a proxy for the ...
The Ideal Play for Market Extremes
11/16/2011 8:30 am EST
Trader Robert Seifert reviews the "blow-off" trade, a high-percentage play that works well anytime markets including gold, silver, equities, or others, reach extreme high or low levels.
There are literally thousands of different patterns that traders look for out there to find good opportunities to trade. Our guest today is Bob Seifert, who is here to talk about one pattern he likes.
So Bob, talk about something you call the “blow-off” trade.
Yeah, the blow-off trade is a trade that I’ve used for probably 20 years. I know a lot of professional traders love the pattern, and it’s the pattern that really panics most amateur traders. They’re told to stay away from this trade.
What happens is at the extremes of the market, there is no logic, no technical factors, there’s just pure greed when it’s going straight up.
I remember recently in gold, when gold reached the top of the market, I distinctly saw TV shows in which people were saying gold certainly will go to $2500 an ounce…it “has” to.
Last spring, when silver reached $47 an ounce, I was watching an interview with a guy on a street in New York, and the interview was he was sure it was going to $60, so he was going to convert all of his cash into silver.
Unfortunately, that was the top tick of the day, and that was the top tick of the market. I’m sure that guy didn’t do well!
So the blow-off trade is characterized by extreme greed and extreme panic. A classic example would be just a while ago in gold. Why would gold be worth 25% less seven days after it reached its top? Is there anybody that can explain that?
It’s just simply that we had the selloff. Everybody saw where it was going, and they wanted to get their money and lock it in. Then, as it started to come back, more and more people said that might be the top. They started to sell, and that brought in more sellers, it brought in new sellers, and finally, the market just collapsed.
It collapsed for a number of reasons: people who were selling kept getting lower and lower. They were price-averaged to the bottom of the market and they tried to take profits. That caused more and more selling, and then finally, the panic selling. Like “This is it, something has changed, and the world has come to an end.”
I used those as opportunities. I don’t actually catch the falling knife, but I use indicators that will tell me when there’s a very good chance that the market is about to reverse, because when you reach the extremes of panic and greed, the market will always turn over. But you don’t know where that top is. You cannot predict it. So you let the market tell you when it’s reached the top.
So what does it look like on a chart? How do you know that that top or bottom has been reached?
Well you don’t know in the longest time frame you’re observing. On shorter time frames, the market will show you indicators that it’s turning first. And when it gives you that sign that it’s turning, it’s a very low-risk entry position.
Most people think it’s a high-risk position because you keep trying to buy it, but you don’t. If the market turns, you have a stop just like you do in any other trade. You elect the stop and you get out. If you get another buy signal, you take it.
On this particular trade, I will generally enter it three or four times before I realize that I haven’t gotten the bottom. It just keeps taking me out, but it’s a high-percentage trade.
For every time I’ve got to enter it three or four times, I have five times where I enter it once or twice.
The other thing about a blow-off trade, even though it probably represents 3%, 4%, or maybe 5% of all the time frames, the amount of price movement in that 5% is about 40% of all time frames.
So what happens is when you hit that trade, you get a big punch; it’s a rebound. It’s like a trampoline; it just simply explodes. It either comes off the top—in the case of gold—or it comes off the bottom, in the case of after the 9/11 attacks.
In 2008, when we finally reached the bottom in March 2009, the market exploded back to the upside. Those were very good trading opportunities, and I like to work with people on those.
Quickly, that stop: How close do you put it in to know if you’re wrong those three or four times so you can get out quickly and back in?
I use the low of the move and then I add a few ticks because I know that there will be people down there trying to hunt. So they’re going to hunt and try to pick you off.
I pick a certain amount below it and that’s it. It’s just a dead-drop stop. If it hits there, I have to get out.
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