Wednesday, October 9, 2013

Fool me once shame on you...

..fool me twice..I'm an even bigger fool!

Human emotions is what make up the behavior of our markets.  Traders and investors have all felt the same emotions at one point in their trading lives unless of course you are a sociopath.  Fear, greed, hope, desperation, euphoria, regret just to name the most common.   It is only when we acknowledge that we all non-psycho individuals can and will fall victim to these emotions while trading that we can truly beginning to take steps to control this emotions.  Additional, understanding that these emotions are felt by all of us we can use this to make better investment decisions at critical psychological areas (support and resistance) of the market.  It's the ole adage of understanding yourself to better understand others.  This I believe is one of the key characteristics of any successful trader.  They don't lie to themselves instead they look to how they can better themselves or take precautions to mitigate the risks posed by their own emotional trading imperfections. 

So where am I taking this?  I have spoke emphatically about the distribution area on the SPX between 1684-92 back in July/August that resulted in a decent pullback by the end of August.   Then as the market approached this level again in early September we mentioned that it would be difficult for the large players to buy their way through this area of large supply.  So instead they decided to leap frog over this area using the euphoria of FOMC decision to not taper the free money press known as QE.  This helped to gap the market above this supply area. That gave hope to those holding these positions since July/August that they will finally see a profit. Unfortunately, this was just a tactic used by the big boys to unload their positions willy nilly to the hopeful (a.k.a dumb) hoping that the market will continue to see higher highs ad infinitum.   Instead the market made its way back down from those all time highs and back into this area of supply striking fear into the hearts of the bagholders that just saw their positions go from losses to breakeven to profit now back to breakeven regretting they didn't act on their hindsight filled decision to sell at the higher prices.  Think about how you would feel after this world-wind of emotions after over a month of holding a losing position and then getting whipsawed.  That's right you would problem be grateful that you are breaking even and sell your position.  Now imagine what a little price push below that area of supply would do for your trading confidence if you didn't already sell.

The chart below highlights the emotional roller-coast one would have felt holding a position from the July/August distribution area until now. 

What you should draw your attention to is the volume associated at the beginning or ending (depending on how you look at it) of a trend.  Is it a coincidence that the September 20th candlestick and massive volume bar was the exact top for this current move down?  Maybe it was but I don't think so. You can almost see the euphoria in those poor souls that thought after the FOMC decided to hold off on tapering QE that sky was the limit for the market.  Instead that sky got cloudy.  However, today's action has some bullish undertones as volume was the highest since that euphoric day and price did drop below support only to recover and close in the upper area of the daily price range indicating demand was present.  Tomorrow should be an interesting day like most days are to provide a better picture of the markets intention at its current inflection point. So what the moral of today's post?  Psychopaths would make great traders!

Thanks for reading.

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