Monday, June 27, 2011

Market moves between fear and greed - creating bid and ask

We have always been taught that markets move between bid and ask. The balance of those who want to buy and sell is reached at the time of trade. Market maker (if one is present) acts as a middle man and facilitates the transaction. But what really moves the buyer and the seller in their desire to consummate the transaction? I would have to conclude that fear and greed is the reason. When SPX hit the "devil's" 666 in Spring of 2009 fear was flying in the air. I remember how everyone (including most respected chartists) were calling for SPX 400 and Dow 4500. That was the bottom marked by unmeasured fear. That was the moment when fear created the opportunity of a lifetime. Opposite is true for greed. In fall of 2007 some very popular talking heads were calling for Dow 14500 and SPX 1600 in not too distant future, and traders were buying on ask on the way there. We all know what happened just after that. I really think that even on daily basis the same is true. We are going through Financial Armageddon II scenario right now, and traders are fearful, and they are selling on the bids as we speak. What seems to be yet another case of "shoot first and ask questions later" is happening again. Equities of all scopes are being thrown out with the bath water indiscriminately, raising cash for those who are fearful and creating lifetime opportunities for those who are opportunistic but will soon be greedy. You will see that greed accelerate as we get above 1371 on SPX and calls for 1400-1450 will roll out almost instantaneously across all media outlets. Charts will be viewed in positive notion (just like they are being viewed negative now), and all fundamental proponents will raise the EPS and P/E on SPX to accommodate and justify their higher targets.
So what are we, the unemotional traders, to do? First we are to suppress all our emotions and opinions and arrive at our trade desks without predisposed bias in the morning (or whenever your trading day begins). We are to digest all inputs of our trading basis, criteria to be weighed, and decisions to be carried out in orderly way. STOPS to be placed according to our view and not because we just heard some talking head say we are heading for disaster.
After we are in the trade on the opposite side of the fearful, we are not to become greedy! Realistic targets are to be expected and exit orders are to be placed in advance. We are to get out before everyone is on the same side and going to the moon, thus catching entire market off-guard and in total chaos of uncontrolled fools, looking for overnight riches from punishing market for misbehaved.
Please stay calm, stay collected, and stand ready to act with a carefully designed plan.

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