Trade ideas, analysis and low risk set ups for commodities, Bitcoin, gold, silver, coffee, the indexes, options and your retirement. We'll help you keep your emotions out of your trading.
Prices continue to churn as traders and investors try to figure if they want their hard earned dollar in cash or investments. The market is very jittery simply because no one wants to get caught on the wrong side of the market if it makes another 30-40% move, which is why we are seeing money rotate in and out each with very little commitment and follow through. Until a major trend looks to be in place most investors will not me holding many positions over night or through the weekend.
Here are a couple charts on what I think is most likely to happen in gold and the sp500.
GLD – Gold ETF Daily Chart
Last week we saw gold move higher by 1% but I cannot help but think a sharp sell off is only days away from being triggered. Either we get a another pop into resistance which would eventually trigger a wave of sellers and cause a sharp drop or the price of gold will drift lower to eventually break a key support level and trigger stop orders. Once the stops start to get triggered I would expect follow through selling for a couple days which will pull the price of GLD back down to the $113-116 area.
Also there is a possible head and shoulders pattern forming on this chart which is not picture perfect one but, it’s important to be aware as a neckline break could trigger massive selling and pull GLD down to the $100 area. But that would not unfold for several weeks if not months.
SPY – SP500 ETF
SP500 broke down from the support trendline two week ago and has since been trying to bounce. Last week we did see a two day pop but was given back Thursday. As you can see there is a possible mini head & shoulders pattern forming and the current price is testing the neckline. A breakdown below this should trigger a move to the $102 level.
Weekend Trading Conclusion:
In short, the market is trading at a key support level and this week should be exciting. Looking at several large cap stocks I am seeing bear flags on a large percentage of charts. Seeing these forming makes me think lower prices are just around the corner.
It looks like low risk trading setups are about to start popping up across the board and if we get a powerful trend going into the year end there will be some good money made for those on the proper side.
Understanding market psychology is crucial for a trader’s success. But so many people get caught up in the daily market volatility, media coverage and “noise” of the trading environment, it’s almost impossible to not think and trade in agreement with the majority of traders.
However, effective technical analysis allows us to use trends, patterns and other indicators to evaluate the market’s current psychological state. Fortunately, this analysis can both enable us to independently forecast whether the market is heading in an upward or downward trend and do so against the grain of the majority.
It takes a disciplined trader to be able to watch and listen to the market doing one thing, filter out the noise, then do the opposite – all in a controlled manor. To this day I still find myself fighting the herd mentality at times and that is when I step away from the computer and regroup.
I have a simple rule that has saved me thousands over the years. I would rather miss a trade and learn what caused me to get confused, then to take a loss.
Rule # 1 – When in Doubt, Stay Out!
There are two types of traders:
1. Herd Mentality Trader – Someone who trades off fear and greed buying near tops and panic selling out at the bottom with the masses. 2. Black Sheep Trader – A trader who stand out from the masses and trades opposite to the “herd” during extreme levels.
Last weeks market action really allowed us to see which way the masses were moving. The extremely high selling volume and sharp price decline notified us that the market was trading off FEAR. And, last Thursday we actually saw PANIC which tells us the balance of the market (retail investors, John Doe’s, The “Herd”) were exiting their positions.
When we see this happen, it’s generally a good time to start scaling into long positions, as most of the down side has already happened.
I have been talking about an ABC retrace pattern for the indexes and gold for some time and last week we got just that. An ABC retrace is when we have 3 waves which are, down, small up, then another leg down. In short this wave breaks the uptrend of higher highs and lows, as it forms a lower low telling novice traders to sell and go short. This is what causes the high volume and sharp sell offs.
Below are a few charts showing the 2009 July lows and where we are now, February 2010:
SP500 – Daily Trading Chart
Gold – Daily Trading Chart
Silver – Daily Trading Chart
Oil – Daily Trading Chart
Intraday Price Action – Just click here if you want to see some of my exciting intraday trading charts check out the setups last week.
Market Psychology Trading Conclusion: Most get involved with the stock market because it looks like something they can quickly learn and start making money from home. But it doesn’t take long before they quickly realize there is more to trading than meets the eye.
While trading looks easy from a glance, in actuality I think its one of the toughest jobs out there.
Why? Well, this is what you are up against: 1. You are trying to predict something that is unpredictable 2. You are trading against millions of other highly skilled traders 3. You are trading against automated computers with complex algorithms 4. You are trading with your hard earned money which causes fear and greed 5. You must accept losing trades as that is part of the business 6. You must trade with a proven trading strategy and follow the system 7. You must understand money management and apply it to every trade 8. You must truly love the market cause it will break you down mentally
I don’t want to say you must be a contrarian, but in reality you must do the opposite of the masses during times of extreme price behavior.
These extremes happen on a daily basis when trading intraday charts and every 4-6 weeks when looking at daily charts. The toughest part is to pull the trigger when emotions are flying high in the market and you are looking to do the opposite. It takes several trades before you even start to get comfortable doing this.
I hope this helps shed some light on market psychology.
