I Know What You’re Thinking

It’s pretty easy to predict human behavior once you realize that it all boils down to three primary motivations: sex, fear, and greed. When it comes to predicting the market sentiment of human participants you simply exclude the first one and evaluate the prevalence of the other two. For behind the veil of intellectual sophistication greed and fear are the operating emotions that drive our financial markets. Quite obviously you will find an abundance of fear near market bottoms and ready supply of greed near market tops. So just do the opposite, right? Yes, if it just was so easy we’d all be swimming in ill-gotten coin. The problem is that market tops take time – much more so actually than market bottoms.

Now after two months of painful sideways gyrations we have arrived at an important junction across equities – most so however on the S&P 500 – the Russell for instance is looking distinctly bearish. When we consider the probability of a meaningful correction it is difficult to dismiss that we may dive lower here. Seasonally this would fit rather nicely and thus far the tape has not been able to overcome a brick wall near ES 1890. Several attempts have been staged and at this point we all are worn out. Emotionally speaking most of us would welcome swift resolution of the stalemate at this point – no matter which way.

I must however caution you to jump to conclusions – and in particular to get drawn into risky/hasty trades. This is exactly the intent of high volatility sideways tape and there’s a reason why market makers love these periods. Now on the spoos volatility has recently started to drop off and it seems we are shifting into a lower volatility sideways period now. These are usually followed by high volatility directional periods – which is exactly what everyone has been waiting for. We’re getting closer, so let’s see where we are:

The answer is nowhere – we have no solid buy or sell condition on the roster and that means we are dealing with low probabilities here. The best I could dig up for you is that we seem to be holding on top of the 25-day SMA – although it was briefly breached and I’m sure it drew in a bunch of folks who are still recovering from the spike higher.

On the upside we have at best a failed shooting star long – and that is actually the only solid technical pattern I see right now. On the downside it’s possible to be short below the 25-day SMA but it would be risky for obvious reasons.

Interestingly we are once again near the 1866 mark which also has been observed multiple times over the past few months. The peak of our volume profile is right there and thus it gives us soft support. In essence being long above it and short below it does have merit but it is a terrible entry rule and not one I would want to follow. Thus I am still waiting for a solid entry I can sink my teeth into. Wether or not Godot finally presents himself is a good question – perhaps it’ll simply spike or fall off the plate and leave us all behind.

And that is really the key message of this morning’s post. Before you back up the truck and hit that buy button (to acquire either short or long positions) consider for a moment what really drives your decision. Is it an objective reason to get positioned or is it the fear of missing out? If it is the latter I strongly suggest that you reconsider as fear is rarely a sound policy for participating in the financial markets. Whether greed is remains debatable 😉

A key lesson for maturing as a trader is to learn when to say no. And that always implies the courage for accepting the possibility of being left behind. It is cowardice mixed with fear and not boldness that leads to rash decisions.

I leave you with an instructional video on developing patience.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


Human Nature 1.0

As you may have heard – the Mole does not read the news. Actually, to be more precise, he avoids it like the pestilent mental contagion it has evolved into over the years. A bit over a year ago I actually wrote a pertinent post in which I encouraged all readers to unplug themselves from the matrix and in its stead adopt a strict information diet as part of an effort to regain peace and mental balance. However, that said, as a financial blogger my readers often feel the need to share with me salient articles, especially those high on the list of needing to be preserved for posterity.

And with that I present to you this morning’s jewel:

Dow 20,000 – here we come. It’s different this time.

Now whether the Dow will one day actually touch 20,000 is not the issue here. What is however is that of human nature. In a world where information can spread across the planet in a matter of seconds, where the relevancy of news often only lasts days, and in which the lifespan of our devices delivering said information is now measured in mere years, and sometimes even months, there is one important component that has not been upgraded for a very very long time.

Yes, you probably guessed it. It is us. Human beings have not changed significantly for tens of thousands of years. We may have been smaller or even taller at times, we dress differently, and our social customs have evolved over time. But the human brain of a prehistoric fellow bashing it out with saber tooth tiger some 15,000 years ago is almost identical to the hipster yapping on his cell phone in the theater while you’re trying to enjoy the latest 3D blockbuster featuring said saber tooth getting clobbered at the local cineplex.

So here it is – the weak link in the chain – and the final recipient of the flood of information that now is being channeled into our collective minds. The hype, the gossip, the fear du jour, the big news, and of course the small news courtesy of our latest glorious digital contraption designed to enrich our lives – social networks. We are now being inundated with information 24×7 and we all squeeze it into our strained frontal cortex and leave it to our synapses to duke it out with each other. Somehow we all try to make sense of it all. Whether or not this is a good thing or a bad thing isn’t the purpose of this article, I leave it to the reader to make a call on this one.

What is the issue is that we have not changed in any significant way. Not only are we the same human physically we are almost identical mentally. So effectively we are using the same brain designed to alert us to that saber tooth lurking behind the next rock to drive cars, operate heavy machinery, write essays on a computer, analyze charts. You get the point. Basically we are still running the very same mental firmware that kept us going tens of thousands of years ago. Fortunately it’s rather plastic and thus far we have managed to somehow keep up even if sometimes it feels we’re scraping by the seat of our pants.

There however is one aspect of our consciousness that has barely changed and is almost identical to that of our ancient ancestors: human nature. If there is one constant you can expect in the game of trading the markets then it is that of human nature. For one, and all wishful thinking to the contrary, we simply don’t learn from past mistakes. Yes, we may realize that touching a hot plate will result in burned mittens. But even that one gets re-tested every once in a while. Predictions are another mental flaw we keep on pursuing – for some reason we constantly try to predict the future. Sports, lottery numbers, our personal future, the weather (although we get better on that one), you name it. Are we any good at it? Yes astonishingly we are – but only when it doesn’t matter. But we are in fact pretty horrible at making predictions when it matters the most. When it comes to tsunamis, earth quakes, terrorist attacks, stock market crashes, we have a pretty bad track record. Just ask Nicholas Taleb.

Which brings me to the financial markets – supposedly a system built on market efficiency. A hypothesis which asserts that financial markets are informationally efficient, whatever that means. The truth is that it is good old human nature, yes the original version, release 1.0, that still drives us and thus the markets. And that invariantly leads us to conjuring up silly predictions like the one featured above. Let me ask you – the reader: Did you back up the truck and loaded up on long term Dow 10,000 options in March/April of 2009? Or two years before that – did you sell your house and borrowed a few hundred grant from your local loan shark to short the heck out of the S&P in mid to late 2007? And then took profits in early 2009? Of course not. You didn’t do any of these things because you didn’t have a damn clue.

But for some unknown reason that doesn’t keep us from trying, does it? It’s human nature – v1.0. And I don’t expect an upgrade any time soon. I leave you with a few quotes from some enlightened minds – who knows, perhaps somehow they managed to acquire an early release of v.1.1?

“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.”
– Albert Einstein

“Never underestimate the power of stupid people in large groups.”
– George Carlin

“People often claim to hunger for truth, but seldom like the taste when it’s served up.”
– George R.R. Martin, A Clash of Kings

And my favorite:

“Most human beings have an almost infinite capacity for taking things for granted. That men do not learn very much from the lessons of history is the most important of all the lessons of history.”
– Aldous Huxley

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


Boring Thursday Morning Briefing

Welcome to our morning briefing. Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.

Things are pretty flat out there right now and the only short term setup that caught my interest this morning is the NQ which however is a pretty nice one. First up we’ve got increasing Bollinger compression here as the 100-hour is closing in after three sessions of sideways churn. It’s sitting right on top of its 100-hour SMA and the 25-hour is swinging up to meet it in a few hours. Finally price are closely flanked by a NLSL and a NLBL – pretty sweet!

I’d be long here on a breach of 3,356.5 with a stop below 3,347.75 – short on a drop through 3,342 with a stop above  the 100-hour SMA. I can’t guarantee you it’ll take off today but it’s a good inflection point and that’s the best we can hope for.

FYI – stay out of Pound related FX trades around 12:45pm EDT today. And tonight at 7:30pm  we’ve got the Japanese CPI numbers – that ought to be good for a few wild swings.

Before I go here’s a little goodie. The AAII Investor Sentiment Survey now bears the third most bearish reading in eight years. Alright, see you guys in a few hours.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.


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