The Art of Knife Catching

The term “knife catching” is often misused to describe any situation in which a market participant attempts to buy a market which has experienced a steep price decline. I believe that knife catching is often inappropriately used in most cases, as not all sell-offs are created equally. There are certain situations in which buyers may give the appearance of being “knife catchers” when in fact they are providing liquidity at important price levels which offer them attractive risk/reward propositions. Let’s look at gold futures ($GC_F) last night:


Once the December $GC_F contract broke below 1736 following the BOJ currency market intervention, gold became a knife catching situation. With the next support reference point coming in the form of trendline support around 1708 as @HCPG pointed out:


There were two ways to try to catch “the golden knife” last night: One could have either gone long at 1710 with a tight 2-3 point stop looking for a 6-8 point scalp as HCPG recommended or for those with a longer time frame and more risk tolerance placed the stop below the previous breakout zone of 1695-1700.

Both of these trades offered attractive risk/reward propositions using key price levels – this is NOT knife catching, it is called trading! Now let’s take a look at two recent examples of knife catching situations:


$NFLX was a broken momentum stock heading into its quarterly earnings report last week, once the numbers were reported sellers raced to dump their shares in the after hours trading session. Once the “line in the sand” support area around 100 was breached NFLX became a falling knife situation. Those who attempted to get long NFLX in the after hours below 100 were essentially hoping to “find” a bottom which is similar to trying to find a light switch in a dark room in which one has never been. This was a situation in which not only was the selling momentum too strong, but it was also impossible to find a reasonably attractive risk/reward setup for a trade. Another recent example of knife catching comes courtesy of the $MF chart:


When support around 5.40 was breached in August, MF became a knife catching situation where it was not possible to find an attractive risk/reward swing long setup. Finally, after last week’s disappointing earnings report the stock went into nosedive mode – eventually breaking below its 2008 low before ending the week at 1.20. Anyone who chose to buy MF on Thursday or Friday of last week was the epitome of a knife catcher in the stock market – the next level of support was at 0 which makes it impossible to manage risk properly.

The MF and NFLX situations above are perfect examples of egregious knife catching that should almost always be avoided, whereas, the gold trade setup from last night is an excellent example of buying a market which had fallen substantially within a short period of time with an intelligent and well constructed risk/reward plan.



The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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