The Market Wants Your Money
Stockscores.com Perspectives for the week ending June 6, 2008
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In this week's issue:
I often say that trading is simple, but not easy. A good trading strategy can have a set of very simple rules that should be easy to follow. Unfortunately, our emotions often get in the way and turn simplicity in to a quagmire of self doubt and insecurity. The best traders know how to stick to the rules and keep it simple. This week, I want to talk about some of the things you should avoid if you want to keep your emotions in check.
Many trading experts consider the Level 2 screen a must have for short term traders. This screen shows the line up of people wishing to buy and sell the stock and some claim they can glean what the market makers are up to by watching the Level 2. I don't doubt that this is possible, but I do think that most traders should pretty much ignore this analytical method. In fact, I think it best to ignore the Level 2 window all together.
While it may carry some information useful to the trader, it also serves to heighten a trader's emotional tension. Market makers, in their constant quest to take your money, like to play tricks with the Level 2. Put up fake offers, take away their bids; anything that they can do to make you think the stock is going to go in the opposite way that it is actually likely to go.
You see, the aim of the stock market is to have as few people as possible enjoy the major moves. Big traders work to accumulate positions before major moves, and they do so by shaking out weak players who easily succumb to their emotions.
The great challenge for the stock trader is to figure out what the major move will be and have the intestinal fortitude to stay with it. For the short term trader, the Level 2 screen carries the emotional magnetism of an auctioneer. Many will succumb to its banter and make a decision that they will later regret.
If the Level 2 screen is the means to shake out short term traders, counter trend moves are how longer term traders lose their minds. The large and savvy traders know that minor pull backs will make nervous investors sell their stock. A lack of directional follow through early in a trend will cause otherwise good chart analysts to second guess their purchase decision. The big players on a stock will often sell stock even though they are confident it is likely to move higher in the future. Their goal is simply to extract stock from uncertain investors who fear a loss.
This practice is called shaking the tree and it is done every day. Like fruit from an apple tree, the shares fall in the hands of the few who later enjoy the continuation of the major move while the tricked traders think about what could have been.
The Energy market provides a recent example of what I mean. From May 21 to May 28 this market moved lower but never broke the long term upward trend. The media reported the weakness and often proclaimed that the run in Energy stocks was over. It would be easy for investors to feel nervous and sell their stock fearing lower prices were imminent.
However, the long term momentum remained up and this past week Energy stocks and Oil prices surged higher yet again. Crude oil made its biggest price gain ever on Thursday and the traders who stuck with the trend have been rewarded with higher prices. (take a look at Energy ETFs like T.XEG, OIL or USO to see how the sector moved this week).
Most of the emotion based decisions that people make are based on a myopic view of the market. A simple way to improve your ability to control emotion is to step back and take a big picture view of the world. Rather than watch the tiny details of the Level 2, look at the intraday chart. Rather than watch the daily chart for what has happened in the last month, look at the last six months or year. The longer term view will give a better message than the short term details.
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Last week I talked about using sector ETFs to focus stock selection on strong sectors of the market or to just buy a sector that appears likely to outperform. Over the past number of months, the Energy sector (T.XEG, OIL, USO), and the Materials sector (T.XMA, IYM) have been the big winners but I think it is too late to jump on board these sectors. So, what will be the next potential winners?
To answer that question, I did what everyone should do on a weekly basis. I went through a Watch List of all the ETFs that I had created and looked for those with good chart patterns. A couple stand out as worth watching:
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1. EWW
The Mexico ETF, EWW, is consolidating just under its resistance at $65. A break through this level would be a strong sign that this country ETF will do some catch up with the rest of Latin America which have done very well.
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2. T.XRE
T.XRE is the Canadian Real Estate ETF and it has broken its long term downward trend and is now building an optimistic ascending triangle pattern. A break through resistance at $14.25 would be a good sign that this sector is going to make a turnaround.
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References
Get the Stockscore on any of over 20,000 North American stocks.
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Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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