· General Market Psychology

o Markets tend to overshoot based on psychology

o Great traders are made when they show poise and confidence and rational behavior in the face of irrational behavior

· “End of the world” – capitulation

o Markets normally shoot first, ask questions later

· Timing always a problem

o Lowest levels of cash held by funds usually signals a market top

· No cash available -> no way to push markets higher

· What is window dressing?

§ Funds attempt to keep numbers up for end of quarter/year and promptly sell afterwards

o Most technicians prefer to see a weak open and strong close

· Flushes out all the sellers giving room for buyers

· Normally a bullish sign if for at least a short term bounce

o Two stages of market environments

· Economic and market events

§ Repricing of assets, economic status

· Geopolitical economic shift

§ Election year

o Market dynamics which accelerate selloffs

· Margin calls (forced liquidations)

· Forced redemptions

§ Shift from equities to fixed income

· Perception of a due “dead cat bounce”

§ Market orders tend to widen bid/ask spreads

o Markets are pendular!

o Risk management

· Risking 10% to make 2% can and will burn you

· Best traders are obsessed with risk management, NOT PROFITS!

o Interest Rates

· Cutting rates expands P/E multiples and vice versa for rate expansion

o Always have Live News (fundamentals) up on TOS

· Watch CNBC but don’t listen to the pundits 100% of the time

· Couple news with technical analysis and intuition!

o Portfolio Analysis

· Play both sides of the markets

· Extreme delta portfolios can cause trouble

· Balance out long positions with some short positions and vice versa

§ Gains aren’t maximized but risk is limited and margin pressures are reduced

· Fully invested at all times isn’t rational, have some cash at hand at all times

· Market Indicators

o On TOS platform

· Right click – Public – Indicators

o TRIN

· Designed by Dick Arms

· Formula for upticks and downticks

· Above 2.0 – markets oversold

· Below 0.5 – markets overbought

· $TRIN – NYSE, $TRIN/Q – NASDAQ

o Advancers and Decliners

· $ADVN / $DECN – NYSE Advancers / Decliners

· $ADVN/Q / $DECN/Q – NASDAQ Advancers / Decliners

· Diversion

§ Markets generally heading in one direction while ADVN/DECN are headed in the opposite direction

· NASDAQ down 50 points with $ADVN/Q and $DECN/Q reverse heading

o Advancing and Declining Volume

· $UVOL / $DVOL – NYSE Advancing / Declining volume

· $UVOL/Q / $DVOL/Q – NASDAQ Advancing / Declining volume

o Diversions in the Market

· Study: RSI Wilder

§ Below 20 (or 30): markets are at extreme oversold levels

· Call strategies

§ Above 80 (or 70): markets are at extreme overbought levels

· Put strategies

§ Technicians prefer to see more than one tag at either level for confirmation

· Study: Slow Stochastic

§ Typically you can buy (with other confirmation) when red crosses blue

o VIX Indicator

· Contrarian indicator

· “Fear Index”

§ Higher the fear, markets can be oversold, and vice versa

· Readings above 22/23 can indicate an oversold extreme

§ “World coming to an end” – capitulation!

o “Generals and Soldiers”

· Soldiers – gain 20-30% per year but aren’t considered “sexy”

§ Defense, steel, other low beta stocks

§ Usually fall first in a down market

· Generals – “turbo stocks”

§ Grind up quickly but grind down even quicker

§ Fall after soldiers

§ Keep on a watch list (GOOG, POT, RIMM, AMZN, etc.)

o Moving averages simply do not work in an irrational market

o Market volumes

· Analyze market volumes

· Study: Volume Average (30d for day /short term traders, 50d for swing traders)

§ Stocks at extremes tend to trade at extreme volume levels

§ Volume spikes – possible change of direction in stocks when facing market extremes

§ False rallies occur with low volume