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Wednesday, March 26, 2014

SPX Update, and Avoiding Tricks of the Trader Brain

"It's not what you look at that matters, it's what you see."  -- Henry David Thoreau

While I realize Thoreau was not referencing trading, have truer words ever been spoken in regards to charting the market?  Ever trader on the planet has access to the exact same charts and much of the same information -- and yet if everyone "saw" the exact same things, then there would be no market at all; we would have only buyers on one day, and only sellers on another.

We don't have everyone on the same side of the trade, though, because we all see the market differently.  One aspect of successful trading is the ability to see things that the majority do not.

Another key is to see what's really there.  While that sounds simple enough, "seeing what's really there" is easier said than done -- partially due to our biology.  It might come as a surprise to learn that our brains aren't actually designed to see what's really there.  This is because our brains lack the capacity to process all the information that comes in through our senses, so one of the functions of our prefrontal cortex is to act as a filter against that constant flood of stimuli.  Without that filter, we would suffer from sensory overload.

Here's where things get interesting:  Scientists have recently discovered that there are neurons in our prefrontal cortex whose sole and specific purpose is to suppress information that we aren't interested in.

Read that again, and then consider the implications for a trader.  We all know that "bullish or bearish" biases can be account killers -- and part of the reason appears to be that our brains are hardwired to actively suppress information that counters our biases.  While science has only discovered these special "information suppressing" neurons within the past few years, I think many of us intuitively realized our brains work this way long before science made it official.

It really is amazing how much information we miss on any given day.  Moving from the scientific to the anecdotal:  When I was 9 years old, my father gave me an impromptu demonstration of this fact  He and I were walking out of a shopping mall in Pennsylvania, when we noticed a beautiful rainbow.  The rainbow wasn't directly in front of us, but was something we spotted with our peripheral vision as we exited.  Rainbows this gorgeous were not commonplace in the Lehigh Valley, so my father took this opportunity to teach me a life lesson.

Instead of heading straight to the car as we'd planned, he directed me to sit on a bench near the mall exit and told me, "Watch people's eyes as they leave the mall.  Count how many people notice the rainbow." 

In the time I sat there, 36 people walked out of the mall, and, as far as I could tell, everyone who noticed the rainbow reacted in some way, even if just to turn their heads and look at it.  Finally my father asked me the results of my tally:  Out of the 36 people who exited, a total of only four had even looked in the direction of the rainbow.

"You see," my father said, "most people are so wrapped up in themselves that they end up completely missing life.  As you grow older, it will become harder not to be that way.  Never lose your sense of wonder."

Keeping an open mind to all possibilities is one way to help instruct our brains not to ignore information.  As I've said before:  Your toughest opponent in trading, and the hardest one to overcome, is yourself.

Last update expected the market would correct lower over the near-term, and Monday's opening pop was sold to new lows immediately.  Two wave counts were shown, and both remain viable, with the additional note that if the ending diagonal is unfolding, there are now enough waves in place for new highs.  The bullish pivot level, and invalidation level for the diagonal, is 1895.  This level invalidates the diagonal because wave (v) of the diagonal cannot be longer than wave (iii) of the diagonal.  Interestingly, this now aligns perfectly with the 1895 pivot zone identified on March 5, long before the potential diagonal formed.



On March 21, I mentioned:

This pattern is starting to look a bit like a triangle, so be cautious of sideways whipsaw action developing.

We can now clearly see the potential of an ascending triangle on the above SPX chart -- and we can find triangle-shaped patterns in many other markets as well.  The Dow Jones Transportation Average (TRAN) shows this pattern as well as any:



In conclusion, last update I opined that the wave structure suggested SPX would ultimately see new all-time highs.  There are enough waves in place now for a complete correction, so it is possible for those new highs to happen directly.  The first key level for bulls to reclaim is 1884, while the second is 1895.  The first meaningful zone for bears to claim is now 1849, but the low end of the trading range (near 1839) is more important.  Trade safe.


Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic


Reprinted by permission; Copyright 2014 Minyanville Media, Inc.


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