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.

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Cheers,