Ahhaha,
I've enjoyed reading your posts, and have learned more from you about market sentiment/psychology and its effects on price movement than everyone else combined. Although I've only logged about half as many total trades as you, I have experienced the sweet rewards as well as brutal punishment for obeying or disregarding these concepts.
This seems to be a crucial subject for one to master to be a truly high performance trader. Thus, I would like your opinion on some of the finer points of these concepts.
First off, I would like to address the situation we have now... Of a market where cash levels amongst money managers are at historically low levels... (i.e. they are fully invested). According to the concepts you have presented, this would create one of the most bullish situations possible, because there is relatively little money available to "bid" the market, which would explain the shallow nature of recent corrections which nearly always seem to end before they have really begun. With fully invested positioning, one would think the book would be above the market as these managers look to take profits and reallocate funds as the market rises. And as long as these funds are reinvested "at the market" (i.e. not sitting on a limit buy price), then the whole process should perpetually snowball and feed upon itself. Do these concepts ring true with you?
Now I would like to address how this process comes to an end. Obviously, inverse events that occur at bottoms must take place, which you have already adroitly discussed in your many posts on this subject. So to identify the end, one would want to look for a situation where exuberance and jubilation climaxes...great news is released on the markets.... everyone is so sure the market is heading dramatically higher that no one is willing to sell it. And the johnny come lately's are a little nervous about buying into the spike up that just occurred when everyone "realized" the market was heading much, much higher, and couldn't possibly go down, so the johnnys put their limit orders just below the price. With the "book" now below the market, it begins to turn.
Those with huge profits see the market turning, and begin to dump at market to lock 'em in, and down she goes. These profit takers decide they want to buy back in at a point significantly under where the market currently is, so the "book" continues to go lower as more profit taking occurs, leading the market lower. The common joe is watching this whole process, and is in shock and disbelief that this market that everyone was praising a short time ago is now collapsing before his eyes. He is stimulated and motivated to buy now because he missed the huge multi-hundered % move up, and has always heard you should buy on dips, and sees the market at a big discount to what it was trading at just a few days ago. So he empties his bank accounts and piggy banks, puts his market orders in to buy, and the market bounces temporarily as the masses do likewise, giving him a quick profit and making him feel good about his decision.
But more profit takers who missed their first opportunity to sell are now selling at market as the price rebounds, once again raising the cash on the sidelines looking to buy the market at significantly lower levels. With others too scared to sell these "straight-up" spike bounces, the limit sell orders quickly dry up, leaving only naively enthusiastic buyers ready to buy the first pullback with their limit orders. With the book now completely below the market, the slide resumes.... and so forth, gutting the naive and simple, who finally relinquish their positions when pure and raw panic set in... which is about where those well placed limit buy orders are located.. <g>.
So i would ask you... Do you see a coordination of activities here... Where the "Good news gas pedal" is floored by the financial media to meet the interest of certain well connected players who look to "goose a market" before they reverse positions? Or is this just the natural process of the market, with no one in particular to blame, designed to devour the substance of the naive and uninitiated....?
You have spoken much of the impact of limit orders, but what about market orders? Wouldn't you agree that market buy orders are a sign of healthy continuity in a bull market, and vice versa for a bear market?
Finally, I would be interested to know if you have defined other characteristics that may be helpful in identifying the end of a trend. Ones i've identified here include extremes in sentiment, obvious "goosing" by the financial media, climax price moves accompanied by climaxes in volume, rising cash levels, shock and disbelief of popular sentiment in the new trend, and of course the all important shift in the "book".
Thanks again for sharing your very helpful insights.
Regards,
David |
