by Oliver Velez

So, there are only three trends. The uptrend, downtrend, and sideways trend. These three trends make up every single movement in the market. There are only three. If I can teach you how to play with a great degree of accuracy each one of these three trends, I can teach you how to cover yourself in every possible market environment in existence.

If you find a stock that is making a series of higher highs and higher lows, that means you are in an uptrend. This is the bullish part of the stocks cycle where greed will continue to rally the stock. This is stage two, and your action as a swing trader is to buy the very next decline. I want you to understand this because it is critical. If you find a stock that strictly meets the criteria of the definition of an uptrend, higher highs, and higher lows, your job as a swing trader is to buy every single decline; not some of them, not a few of them, but every single one. The only question you have to answer is when. Not if. When. We will discuss when and how to buy them shortly. 

If you find a stock that is making a series of lower highs and lower lows, you are obviously in a downtrend. This is the most bearish time of the stocks cycle known as stage four. It is led by the emotion of fear, and fear will dominate the action until the downtrend ends. If you are in a downtrend, your action is to short every single rally and consolidation breakdown. I am telling you that I don’t care what some high paid Wall Street analyst with frayed shirtsleeves say. The rallies that occur in this stock are nothing to get excited about. As a matter of fact, every single rally is a sellable rally until the down-trending pattern ends.

When momentum gets exhausted, this pattern pays out. To recognize the signs, click here.

If you are in a sideways trend, meaning relatively equal highs and relatively equal lows, you, as a market player, can play both. You can buy the declines and you can sell the rallies. We will discuss how to buy and sell these shortly.

There are many names given to sideways trends. You may have heard terms such as channels, consolidations, shelves, or any of a dozen different names. However, in truth, there are only three types of sideways trends in the market’s basic unit. That sideways trend is either a stage one, a stage three, or a pause that refreshes. You will never confuse a stage one with a stage three if you understand the life cycle of the stock. Stage three can only follow stage two and stage one can only follow stage four. As I discussed above, the only issue will be distinguishing a pause that refreshes from a stage one or from a stage three. However, regardless of which of the three sideways trends the stock is in, the base can be shorted at the top, and the bottom of the base can be bought until the sideways trend ends.

The Importance of Knowing When to React

Now this may sound very basic to you, but this very simple concept gives you the ability to perform better than 98% of the so-called professionals out there, or the talking heads on television programs like CNBC. The $64,000 question every single day in the market is how do I know when a decline is an opportunity, or when a decline is a reason for me to run for the hills? Isn’t that the prevailing question? Aren’t entire television shows dedicated to that one answer?

One guy says you should buy because the stock is going higher; another guy says no; the stock is completely shot, there is no more momentum. The two guys are battling on this one question. Is the decline in the stock an opportunity to buy or is it the first sign of trouble?

This concept answers the question. If the stock has made a new high and the decline is falling from a new high, that decline is buyable. It is not a reason to take flight. It is not a reason to get nervous. It is a buyable decline. The same is true in reverse.