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Jerremy Newsome: "People following the herd, don't have a plan"
24
Jul
Jerremy Newsome: "People following the herd, don't have a plan"

 

Jerremy Newsome - an experienced trader and CEO of reallifetrading.com. Jerremy spoke to Maria Goncharova of EXANTE and introduced his trading strategies and types of indicators that he uses on a daily basis.

Tell us please a little bit about your background, who you are, how did you start your career?

I am 27 years old and I was born in the State of Georgia, USA. My dad had me watch a movie called Forrest Gump. In the movie in the very end Forrest says that he invested in some kind of fruit company and he didn’t have to worry about the money anymore. So I asked my dad what he was talking about and he told me all about stocks, trading and the markets. I was 7 years old at that time and got totally hooked and wanted to learn more about it. Later, I went to University of Florida to learn more about trading and get Finance degree. Since then I was building slowly my knowledge on how to trade.

So, what was the turning point in becoming a trader?

My turning point was when I realized that trading, doesn’t matter what you trade, is a profession. All professions they have a plan. When you are able to create a sync, physical plan, when I got to that level - that was the change that got the most dramatic impact on me.

I think we will go more deep into your planning later. Before we get into it, I know that you are intra-day trader and you are trading stocks. Does it mean that you only trade on events and don’t do the long-lasting positions?

I do mark myself as I day trader. I always teach people that you can day trade and still have a full time job. You do not have to be in front of a computer all day. I do day trade stocks probably 98% and 2% is for options. When I trade options, I focus specifically on Apple, Google, Amazon - my 3 favourite. But I do trade stocks mostly. I do have longer-terms positions. I have kind of 3 accounts: one where I have short term,  another account where are longer term for my swing trades - I keep them from 2 days to a few months. But then I have an account that I don’t touch at all. It is invested, it is long-term, I put money in there and I don’t really look at it.

Could you tell us more what is Dow Theory behind gaps?

So let me talk about what Dow Theory is. The theory was written by a journalist Charles Dow, who is also claimed to be the father of modern technical analysis. You have technical analysis and fundamental analysis. Fundamental analysis, I am sure everyone know what it is - you are looking at the company, how much money it makes, who are the management, what are they doing, and you are really focused on the economic fundamentals of the company. Then you have technical analysis, and it is a visual of what is happening and what is going on. It is a physical, visual interpretation of human emotions. Returning to Dow theory, there are 6 tenets of Dow theory, 6 rules Mr Dow described. One of this tenets says that market trends have three phases. Those phases are: accumulation, public participation, distribution. Distribution and accumulation phases are the ones that nobody likes. Those are the ones that take forever, 1-2 years or a longer term basis sometimes. Public participation is fun and it is when everyone makes a lot of money. Accumulation always happens at the bottom of the market. I will show it on the SPY, which is the S&P 500 ETF.

Public participation, is when the markets they go higher due to really exited buyers or sellers.

Distribution phase- is when there is a lot of sellers. People are distributing their shares. They are selling their shares.

Next we can see a bearish public participation (trend going down), and bullish accumulation phase ( green color).

If you look on this chart, on a larger scale there really has only been a public participation for the last three years. A bullish public participation. 

This means that actually right now we are in a distribution phase, in my opinion. We have been trading side-ways over the last year. So what that means is a distribution phase breaks one of two ways. Distribution phase can break two directions, it can break down which everyone’s expecting or it can break up, which is actually what I’m expecting. I personally think that we will trade side-ways a little bit longer on the SPY, but I also anticipate the distribution phase to break a little bit higher and actually continue bullish trend.

You said there are 6 rules of Dow theory, you have mentioned only one. What are other 5 phases?

So, we have “ the market has three movements ”, “market trends have three phases ”,  “price discounts everything”, “volume should confirm the trend” , “the major averages should confirm each other” and
“trends exist until definitive signals prove that they have ended”.

The ones I’m going over right now are the most, in my opinion, important. “Price discounts everything” - that is number one. Number two is “ market trends have three phases “. It is important, because you need to know where the market or where your stock is. Once you know that, you have better understanding and you can create a plan of what might happen. If you check out SPY chart back in 2007, it was very clear that SPY was in the distribution phase and this phase can break in one direction or another. In 2007, the distribution phase broke down and at that point you had a bearish sentiment which got into public participation phase.

Why public participation phase is important? Well, if you know that you are in the public participation phase and the market is moving, at some point, especially if it is going down, you know you would be a buyer. You know that accumulation is right around the corner and you want to start buying. Everything moves in cycles. So as the markets start just pre-fall, then they go up. Understanding the distribution phase will calm down a lot of people on the SPY. We are not going down, until we are confirmed going down.

I know that you trade Gaps, could you elaborate more on that?

To do so, I’m going to hop over to the daily chart on Apple. Now you can see very clearly that on a daily level we are definitely in a distribution phase. A lot of people refer to a distribution phase as a channel. Channel is when something moves sideways for a long time. So the reason I want to talk about the gaps and how it works with distribution phases is because these are some of the most important and powerful gaps that you can find and the sentiment is mind-blowing and hopefully portfolio growing. 

So, Apple right now is in the distribution phase. What is the color of today's candle? It is black candle. How are black candles created? They are created from seller's pressure.

Black candles are candles that represent a stock close lower than open. Obviously, if the stock price at the close is lower than at the open - people have to be selling. On Apple, you can see this example 3 times, when big black candles at the almost exact same price, causing people to sell. Why people are selling there? Because people have made money three times before and they might make money again the fourth time.

So now, we are in the distribution phase. Everyone who is selling today on Apple, if you have people who are selling to open they are bearish. They are opening a bearish position. They want the stock to go down. If the stock goes up,  if Apple opens above 135 tomorrow - all your earnings will be gone. Why? Two reasons. The gap sentiment and the break out of the distribution phase. If you are breaking out of the distribution phase then what phase of the market are you in? You are now in a public participation phase. This gap I call Gap and Go or breakout gap and this is one of my favorite gaps to look for.

You have a distribution phase, you know that people are trapped, you have a black candle today and tomorrow you get a giant gap up above the resistance or above the pivot. Anyone who went short today will cause the stock to go higher more than likely.

I can give you another example of a profitable gap I traded so far in the beginning of 2015.

Right here we had an accumulation pattern (between green lines). Let’s look at the sentiment, we had a black candle and the stock gapped up above the resistance level and broke out of that phase. And people were trapped and were losing money. That is a good example of the Gap and Go. If this happens you need to do your best to get into that bullish.

I will show you another example on Google chart in November 2014. We can observe a distribution phase starting around May 2014 ( between purple lines) and here we got three black candles. The day before the gap on Google there was a fourth black candle. When the stock gapped up it trapped everyone who went bearish previously.

I know that a huge part of such analysis is the human factor. Tell us please, how many times you have seen people following the herd, making wrong decisions?

Again, that comes down to people not having a plan. People who follow the herd they get emotional, because they don’t necessarily realize or create the idea of what they want to happen. 

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