Everyone wants to buy stocks at the support level. Everyone, including FIIs, DIIs, mutual funds, banks, retailers, HNIs, etc. are focused on the stock as it approaches the support level. However, not everyone can buy at the support level for obvious reasons. Simply put, for somebody to buy at the support, another person needs to sell at the support. You cannot have a buyer without a seller, right? But who will be dumb enough to sell at the support level? Answer – Retail traders!
More of a watcher than a reader? Want to watch this on YouTube in Hindi!
Retail traders sell at the support level not because they are idiots. In fact, it is the market which creates an amazing illusion forcing the retailers to sell at the exact support level. Let’s see how the market creates this illusion.
The game begins!
Let’s suppose that a stock is approaching its support level which is a strong support for the stock. We will take an example of a stock which recently approached its support level – Bharti Airtel.
It is quite clear that the stock was approaching its support level to all market participants. But as you would know, not everyone was able to buy at or even close to the support level. Even worse, many market participants ended up selling at the exact support (mainly retailers). The answer to the question is the candle with the long wick!
What does a long wick candle mean?
We have already discussed the significance of the long wick candle in this article before. In a nutshell, a long wick candle can represent a change in the perspective of the market participants in a stock. A long wick candle can lead to change in the direction of the stock i.e. from bullish to bearish or vice versa. But the most important thing to understand about a wick is that – A candle with a wick was once a strong body candle!
A bullish hammer was once a strong bearish candle which was followed by a series of buyers who led to the increase in the price of the stock. This strong bearish candle was caused by both willing & unwilling sellers who got tricked by buyers into selling low & buying high (exact opposite of the real money making mantra of “Buy low & Sell High”). Let’s understand how the sellers were tricked into selling exactly at the support.
The stock will leave without me! (Trap 1 : Early Buyers)
Early buyers are retail traders who think that the stock is about to leave on its journey to the upside without them. In short, they are the ones affected by FOMO (fear of missing out). The initial bounce is interpreted by these early buyers as a sign of strength, although it often turns out to be a bait for amateur traders! Early buyers bounce at the very first instance they see the stock price rise. Their stop-losses are placed at the most logical location which they can think of – just below the support.
All of these stop-losses orders are sell orders which the big players have their eyes on! These stop-losses are essentially sell orders which are available just under the support i.e. people who are willing to sell just under the support zone.
Oh wait, it’s a sell (Trap 2 : Breakdown traders)
Once the early buyers have taken up positions, the stock starts to move in the exact opposite direction of their position. The stock now moves quickly under the support which causes these buyers to panic & exit using their stop-losses (either automatically or manually).
This causes a big bearish candle to form just under the support & now enter the breakdown traders! These breakdown traders think that the support has now been broken & therefore the stock should head lower. These are willing sellers who are ready to sell the stock just under the support under the illusion that the support has been broken. However, they miss out on the point that the support & resistances are not a fine line, rather they are zones! Once the breakdown traders have created their positions, now it’s time for the final trick.
It is definitely a sell! (Trap 3 : Retracement traders)
The stock now goes back to the support level & falls again from the support which is a confirmation that the stock is now going down. This entices retracement traders to take up fresh short positions in the stock.
It seems obvious, right? When a support breaks, it becomes a resistance. Retracement traders see this happening live in front of their eyes & cannot resist to sell just under the support.
As you can see, the market has trapped early buyers, breakdown traders & retracements traders by forcing them to sell (whether willing or unwillingly) at the support level.
Oops, it was a simple buy at support!
Now, it’s time for the finale of the magic show. Once enough sellers are trapped at the support, the big players initiate their actual positions i.e. buying at the support. All of the sell orders from the retailers are taken up by the big players who are keenly watching the whole magic trick to unfold.
This causes the price to rise from the support which was the most obvious thing to happen. However, it’s not retailers who are holding onto long positions in the stock, rather it’s the big players who end up with the most long positions.
Real-Life Example
Even though this trick happens on a daily basis, let’s get back to our example of Bharti Airtel where this exact trick played out recently.
This is the daily chart of Bharti Airtel. It can be seen that the bounce from support was accompanied by a huge wick. Let’s zoom into the 15 minute chart to understand this trick in action.
As it can be seen, the stock moved precisely to first trap the Early Buyers, then it removed them by hitting their stop-losses, it was followed by the entry of breakdown traders & eventually the retracement traders joined. However, the final journey to the top was enjoyed by the big players!
Conclusion
Markets can often trick participants into doing the exact opposite thing. This article shows an example of the markets making the retail traders into thinking that the stock is a good selling opportunity – at the support! Ideally the retail trader should avoid buying at the exact bottom & wait for more confirmation to enter into any position. However, the final trading decision depends entirely upon the reader!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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