Structural Tendency

CC @PradeepBonde

Basics

• Structural tendencies = inherent behaviors of free markets, similar to natural laws (like physics).

• If you understand and build your trading strategy around them, making money becomes easier.

Key Structural Tendencies Discussed

a. Momentum Burst

• Stocks tend to move in momentum bursts of 3–5 days.

• Typical magnitude:

  • Low-priced stocks: 8–40% move.

  • High-priced stocks: $5–$40 move.

• Happens across all markets and countries.

• Entry strategies:

  • Buy on breakout day (first day).

  • Buy in anticipation before breakout.

• Same behavior occurs on lower time frames (e.g., 5-minute charts): 3–5 candles.

b. Established Momentum

• Stocks with momentum (over 3, 6, or 12 months) tend to continue their trend.

• Always prefer stocks with existing momentum.

• Tools to measure: ROC, YTD performance, TI65, MDT, etc.

c. Post-Earnings Drift (PEADS)

• After a positive or negative earnings surprise, the stock drifts in that direction for 3–6 months or longer.

• Strategies:

  • Buy immediately after earnings surprise.

  • Buy pullbacks after earnings.

  • Watch for pre-earnings drift 15–3 days before earnings.

d. Volatility Contraction

• Periods of decreasing volatility often led to a breakout or breakdown.

• Marry momentum + volatility contraction for higher probability trades.

• Ideal setup: strong momentum stock undergoing volatility contraction.

e. Buyer and Seller Exhaustion

• After continuous buying or selling, exhaustion happens:

  • Buyer exhaustion ➔ likely reversal to downside.

  • Seller exhaustion ➔ likely reversal to upside.

• Best observed after 5–10 consecutive days of strong movement.

f. Weak Structure (Shorting Setup)

• Continuous waterfall-like stock declines with no meaningful bounces.

• Ideal for short selling.

g. High Volume Surges

• When stocks experience sudden, unusually high trading volumes, it signals institutional interest.

• This is the basis for the 9 million volume breakout setup.

h. BTFD (Buy The Dip) Logic

• Historically, despite frequent bearish talk, the market trends upward over the long term.

• True catastrophic years (like down 40%+) are very rare (~5% historical probability).

Macro Structural Tendency: Breadth Collapse

• Extreme bearish breadth (many stocks down) often signals the start of a bull market (lasting 3–10 years).

• Useful for long-term investing (e.g., in 401k, TQQQ).

Plastics Concept (Future-Oriented Stocks)

• Best long-term opportunities are in sectors with continuous innovation:

  • Healthcare (e.g., biotech, medical devices, fertility services).

  • Technology (e.g., cloud, cybersecurity, electronic signing, SaaS).

  • Consumer Discretionary (e.g., luxury, fashion, health & beauty tech).

• Future technology stocks make the biggest moves.

• Focus on new, unfamiliar technologies rather than old, familiar names.

• Look for stocks that are early in the innovation curve.

Building a Trading Plan Around Structure

• Entire trading can be based on:

  • Momentum bursts

  • Momentum

  • PEADS

  • Volatility contraction

  • Buyer/Seller exhaustion

  • Weak Structure (for shorts)

  • Breadth Collapse (for long-term investing)

  • Plastics (future growth sectors)

• Important principles:

  • Scan + structural understanding ➔ winning trades.

  • Understand the WHY behind movements, not just indicators.

  • Avoid random chart patterns, indicators without structural basis.

  • Build setups around structural behaviors.

Key Message

• Big winners often come from new healthcare, technology, and discretionary sectors.

Final Takeaways

• Structural understanding = trading edge.

• If you build strategies aligned to inherent market structure, your probability of success increases.

• Think like an engineer building a bridge: base your trading system on natural market laws, not random methods.

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