As I have written about so many times, the movement of price in any and all free markets is simply a function of an ongoing supply and demand equation. Feel free to read my article on May 11, 2010, News, Price, Supply and Demand. Trading opportunity exists when this simple and straight-forward equation is "out of balance." Meaning prices turn at price levels where supply and demand are most out-of-balance in any market. The key for the market speculator is to have the ability to identify what this picture of opportunity looks like on a price chart. The lowest risk, highest reward, and highest probability time to buy into a market, for example, is to buy at price levels way down on the supply/demand curve where demand exceeds supply.
At these price levels, profit margins to the upside are huge and the risk is low. Unfortunately, price does not fall to these types of desired levels as much as we would like and when it does, it doesn't stay there long. Of course, this is because demand exceeds supply in such a big way.

Another thing to consider is how and why prices in markets fall to these desired sale prices. Most of the time, a stock, for example, reaches demand levels low on the curve on very bad news. The worse the news, the lower the price. The most recent publicized example is British Petroleum (BP). This is not an easy stock to write about as the news is very bad and very real. Being an animal lover myself, it is very hard to witness what is happening in the Gulf and think about the long-term ramifications to the environment.

In the Extended Learning Track (XLT) program, we have been watching BP as the news has really helped push price far down on the supply/demand curve for BP share prices. As price was falling, we identified a price level where the chart suggested demand exceeded supply, which is where we expected price to turn higher. This demand level is seen on the chart below in the $26 - $28 range. The opportunity was to buy at that level for a move higher to targets identified in the XLT. I chose that level and not the area shaded grey because one of our rules for finding key levels kept us from buying at that level shaded grey. The rule states that the demand level in question must be a "fresh" demand level, which that area clearly was not. Therefore, I went with the lower demand level which met our criteria for a low risk, high reward, and high probability buying opportunity.

While this may seem simple, I would argue that the logic and rules actually are very simple. However, taking the proper action is NOT easy for the average person. This is because the news is so bad and people are not comfortable buying when the news is bad. Have a look at the news at the time we decided to buy shares of BP in the XLT.

BP shares fall to new low over Gulf spill – AP, Thursday June 24th, 2010

Worries over Gulf of Mexico oil spill push BP shares to new 52-week low in U.S .

Shares of BP dropped to a new 52-week low in the U.S. on Thursday, to levels not seen in 14 years, as the two-month-old oil spill in the Gulf of Mexico continues to weigh on the company's stock. BP lost 93 cents, or 3.1 percent, to close at $28.74. Shares dipped as low as $28.56 during the trading session. Analyst Phil Weiss of Argus Research said there didn't appear to be a particular reason for Thursday's decline.
"There's still a lot of downward pressure on the shares, so, in general, I expect more down days than up days at least until the relief wells are successful or something else positive develops," he said.- AP

Lessons From The Pros

BP fell hard on the news, right into our demand zone. The reason for that demand zone is because that area is the origin of a strong rally in price. That rally only happens because demand exceeds supply in that area. In reality, price simply dropped down to deep discount, wholesale prices which is where anyone would be an interested buyer if you look at it that way. Think of it this way... You walk in the store and your favorite item is on sale for half price. Naturally, you're going to get excited and probably buy more than you typically do. Your emotions are going to drive you to buy more of this item and so on. The greatest mental edge in trading and investing is to realize that this is EXACTLY how you have to think when trading or investing. Amazingly, most people take the exact opposite action when putting their hard-earned funds at risk in the markets. Below is one of our many XLT members that bought BP at that level from our XLT analysis and trade planning. Who did he buy from? He bought from a seller who focused on the bad news as a buy/sell indicator. Whether our XLT student below is trading the markets, shopping at the grocery store, buying a car, or anything for that matter, he realizes that how you properly buy and sell things in any other part of life is EXACTLY the same as how you should be buying and selling when it comes to trading and investing.

Sam,

I sold my shares of BP yesterday @ 38.47 for a realized gain of eleven dollars. I'm doing an average of 800 a day now. I would like to personally thank you. Thanks a ton.

Mark H.

Wall Street tells us that you can't time the markets' turning points and that it's a waste of time. Of course they tell us that. If the average person could time the markets' turning points, no one would need Wall Street. I would argue that the average person can time the markets' turning points like we did with BP. It's not that we are always right and can pick every turning point in a market. With our rules, however, I would argue that the average person can time the markets' turning points with a very high degree of accuracy. For more information on the topic of market timing, please see my prior articles.