The Berlusconi Sell Setup

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Last week, I focused on understanding exactly how and why price moves in a market and used a real Extended Learning Track
(XLT) trading session example to make the point. Specifically, I talked about good news from a strong economic report inviting
novice buyers to buy right into a key supply level where we were sellers during an XLT session. The most important part of
understanding how to consistently profit from this is, again, understanding exactly how and why prices move.

When good news comes out that creates strong perception, many retail traders/investors push the buy button. The more
willing buyers come into the market, the more price will move higher. It will keep moving higher until it reaches a price level
where willing supply is equal to or greater than the demand coming into the market; it has to. Once that last buy order is filled,
however, price will decline. It will keep falling until it reaches a price level where willing demand is equal to or greater than
supply.

Fast-forward to another live Futures XLT session Friday, November 4th. In the beginning of the session, the key supply level
given to students was the NASDAQ 2393.25 - 2401.75 level as seen below. This is where we were interested in selling short as
supply greatly exceeded demand and there was plenty of room below to the nearest demand level. Pre-planning these levels
and trades well before price reached that level is extremely important for long-term success.

Early the next week, price rallied up to that pre-determined supply level as seen below and proceeded to fall fast.

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 This ended up being one of the biggest one day market declines of the year, sending the Dow to a 400 point reversal, closing
near the low. A big question that comes to mind, however, is this... If it was so clear to us that supply exceeded demand at that
level, why in the world were so many people interested in buying at that level? The answer is the same as last week's article -
because of the perception of a positive news event. November 8th, breaking news came out that Italian leader Berlusconi
announced he would resign. This was what the world was looking for as the European Debt issues, specifically Italy of late,
have been the biggest news. As soon as that news was released, stock markets around the world screamed higher simply
because the masses took this news as a buy signal. What they didn't realize is that they were buying at a level where supply
exceeded demand and just as importantly, there was plenty of room below before any demand. In the XLT, we called this trade
the "Berlusconi Short."

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 The lesson to be learned here is this. When making a decision in the markets, there are two things you can focus on. You can
focus on the news and buy when it's good and sell when it's bad like most people do. Or, you can focus on the reality of how you
make money buying and selling anything which means buying low at wholesale (demand) prices and selling high at retail
(supply) prices.

In summary:

When good news brings price to a fresh supply level with plenty of room below before demand, look to sell short and take
advantage of a downside move.

When bad news brings price to a fresh demand level with plenty of room above, look to buy and take advantage of an
upside move.

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