Lessons Learned From Trading Profit Made Shorting Stocks
2022.05.31 19:40
Jesse Lauriston Livermore (July 26, 1877 – Nov. 28, 1940) was an American stock trader who made a $100-million trading profit by shorting stocks in the great crash of 1929. He is considered a pioneer of day trading and was the basis for the main character of the best-selling trader’s book by Edwin Lefevre called Reminiscences of a Stock Operator.
Jesse Livermore stated:
“When trading stocks I always look for favored groups to get weaker and collapse. This usually meant a correction was coming in the overall market.”
This is how Livermore called the market turn in 1907, and 1929, as the market leaders rolled over first.
Here are some additional Livermore quotes that are relevant to our current market environment:
- “Stocks are manipulated to their highest prices possible and then sold (distributed) to the public on the way down by selling the stock into the rallies.”
- “The big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape, but in sizing up the entire market and its trend.”
- “The speculator who insists on trying to profit from daily minor movements will never be in a position to take advantage of the next important change market-wise when it occurs.”
- “After establishing my position all I had to do thereafter was just sit tight and let the market run its course.”
- “Cash was, is and always will be king.” “Always have cash in reserve.” “Often, money that is just sitting can later be moved into the right situation at the right time and make a vast fortune.”
- “There are times when a trader must be out of the market and waiting on the sidelines.”
Livermore also correctly stated that “What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence.”
We don’t have to look too far to find favored stocks whose prices have completely collapsed. But to keep things reasonable let’s just look at Apple (NASDAQ:AAPL), a stock that was highly favored that has recently been experiencing weakness.
Apple Dropped 27.36%
Apple is a popular American multinational technology company that specializes in consumer electronics, software and online services. Interesting side note: Apple now has cash and marketable securities that exceed $200 billion.
Apple was one of the most favored stocks in 2020-2021. It rallied from a March 2020 low of $53 all the way up to its January 2022 high of $183. It then experienced a three-month sell-off, where it gave up about –18.04%. However, it immediately followed that downswing with an impressive $30 rally of 20%. But that rally turned out to be nothing more than distribution at the top, as the stock then plummeted by $50 per share, a 26.42% decline, as it breached $132.
Apple Daily Chart.
Anatomy Of A Trade Using Price
When using price to trade, it is a good idea to measure the price swings and record their movements: dollar amount, a percentage amount, number of bars and number of days. We then utilize this information to let the market tell us what to do and when we should do it.
The following examples will act as a price guide to walk us through the process of measuring, using and benefiting from the knowledge we glean from looking closer at the price swing action:
APPLE Downswing
This downswing was from September-October 2021: it measured $19, a 12.06% drop, 38-bars, 27 days.
Apple 4-Hour Chart.
APPLE INC • AAPL • NASDAQ • 4-HOUR • UPSWING
This upswing was from October 2021 – to January 2022: it measured +$44.66, +32.28%, 127 bars and 91-days. It was more than two times greater in price and three-times greater in time than the previous downswing.
Apple 4-Hour Chart.
APPLE INC • AAPL • NASDAQ • 4-HOUR • DOWNSWING
This downswing was from January 2022 to March 2022. It measured -$33.04, -18.04%, 94 bars and 68 days. Its percentage of -18.04% exceeded the previous downswing of -12.06%. This increase in percentage is a big red flag as the price is telling us that the trend is changing.
Apple 4-Hour Chart Jan-March 2022.
APPLE INC • AAPL • NASDAQ • 4-HOUR • UPSWING
This upswing was from March 14, 2022 – to March 29, 2022: it measured +$29.62, +19.73%, 23 bars and 15 days. This upswing gave us the perfect opportunity to liquidate our long position or at the very least downsize our position.
Apple 4-Hour Chart.
APPLE INC • AAPL • NASDAQ • 4-HOUR • DOWNSWING
This downswing was from March 2022 – to May 2022. It measured -$47.50, -26.39%, 73 bars and 51 days. Its percentage of -26.39% exceeds both previous downswings of -18.04% and -12.06%. This increase in percentage confirms that we are now in a downtrend.
Apple 4-Hour Chart.
As the market is currently working on an upswing, we should keep in mind that the previous upswing was +$29.62 or +19.73%. Apple is giving us another opportunity to liquidate any remaining holdings anywhere from our current price level to over $160.
The Sign That The Trend For Apple Has Changed
It should also be noted that the 2020 COVID downswing from Jan. 29, 2020 to March 23, 2020, was -$29.50, -35.85%, 74 bars and 53 days.
The current 2022 downswing from the $183 peak to the $132.50 low is -$50.68, -27.67%, 193 bars and 139 days.
The 2022 downswing exceeds the 2020 COVID downswing in both price and time: -$50.68 vs -$29.50, and 139 days vs 53 days. This is a major red flag signal that the trend in Apple has changed.
Let us remember Jesse Livermore stated: “When trading stocks I always look for favored groups to get weaker and collapse.” “This usually meant a correction was coming in the overall market.”
This is how Livermore called the market turn in 1907, and 1929, as the market leaders rolled over first.
