Thursday, September 5, 2013

Bulls Throw a Wrench in the Mix

As traders, our toughest opponent, and the hardest one to beat, is ourselves.  We all know that humans have a rational side (or like to think we do) and an emotional side.  And most of us like to think that we're rational beings, and that we make well-reasoned decisions.  But the reality is different.   

I was a pretty successful sales manager and trainer in a prior life, and one of the things I used to teach my reps was that people justify their actions with logic/rational thinking -- but what actually motivates people to take action in the first place is emotion.  When a person makes a purchase, be it a house or a car or a new watch, they usually have a list of the "reasons" they're doing it ("It's a good value; it will save us money in the long run; it's safer; it's better for the environment; it gets good gas mileage..." etc.), and some people actually believe that's why they're buying something.  But the reality is that -- outside of the basic necessities -- people buy things for only one reason: because they want them.

Don't believe it?  Ask yourself how many times you've walked away from a purchase that you knew made perfect sense on every level, including financially -- and then ask yourself how many times you've bought things that made no sense at all.  If we were truly rational beings, neither situation would ever happen.  Our purchases would be logical and consistent, and we'd own a house full of useful and practical items that Mr. Spock would buy (Vulcan Q-Tips and such), not the bunch of useless junk we actually own, much of which was purchased on a whim (are you ever going to actually WEAR that shirt?  Why?). 

As humans in our "natural state," what drives us to take action, or to remain paralyzed, is emotion.  If we don't actually want something, a salesperson can make all the logical and practical arguments they can imagine -- and those can be good arguments; arguments which make all the sense in the world -- but in the end, we ain't breaking out the credit card unless we feel the product fills an emotional need (security, safety, pride, whatever).

The point is:  Despite what many of us like to believe about ourselves, the vast majority of our actions are driven, first and foremost, by emotion.  And this is one of the factors that makes trading so difficult.  Money controls almost every aspect of our lives, so decisions that involves fair sums of money are almost always laced with heavy emotion.  This is why discipline is such an important part of successful trading -- left to our own natural devices, we'd jump in and out of the market almost at random, based on how we felt on the spur of the moment. 

These same emotions are hurdles faced by analysts as well.  Reading a chart is as much an art-form as it is a formula, and there are times it's hard to sort out the legitimate gut instinct/subconscious-warnings (that something is amiss) from the typical fear and greed-type thoughts.  That's essentially what happened to me yesterday, and I actually wrote about the fact that I felt the market had behaved "too well" and it bothered me -- but in the end, I chalked this concern up to normal worry... instead of listening to my gut.

Meanwhile, the market promptly broke above Tuesday's high, which keeps the bulls, and the alternate count that i/A is complete at 1627, alive.  There's nothing new to add for this chart, except to note that the S&P 500 (SPX) has reached the upper red down-trend line.  Bears can tolerate a quick trip outside of that line, but sustained trade above it would strengthen the bull case.

At this point, the pattern could be a number of different things, and there's simply nothing obvious that jumps out as "oh yeah, this is what's happening."  I'm somewhat inclined to favor the near-term pattern shown in blue below, but I wouldn't get married to that expectation.  At times like this, I'll  take quick stabs at a play if the market gives me a good low-risk entry -- if not, I'll sit on the sidelines until things clarify.

On the Dow Jones Industrials (INDU), I've detailed the bearish and bullish resolutions to the pattern.  As noted, I'm somewhat inclined to favor the blue path, but I'm not married to it -- if bulls can reclaim noted resistance, then that would open up the game for them considerably. 

Some food for thought comes to us from the NYSE Composite Index (NYA), which is a good representation of the broad market.  NYA's decline has thus far stopped just shy of the key level for bears.  I noted this index back in August as a possible thorn in the bears' side, since it failed to make a new high on the last rally leg, which it would normally have been expected to do.  That fact, coupled with the fact that it's presently trying to base just above a key overlap level means we should remain open to the possibility of a meaningful bottom forming here, particularly if bulls can reclaim the 9500 zone.  If one is inclined to short, then I'd recommend only low-risk entries.

In conclusion, the bulls did what they needed to do to keep hope alive yesterday.  I'm inclined to feel this is a counter-trend bounce until proven otherwise, but I think we should keep a close eye on how the market reacts to overhead resistance in the coming sessions.  Trade safe.

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

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