Market Overview

The Dow was the strongest index last week it made a strong move up to close on Friday up roughly $470, while the Nasdaq gained $90 and the S&P finished up $40. We’ve been talking about the market beginning its next major upleg and with a move up 470 points int he Dow, our suspicions are even stronger than we are likely in for a big month of October. Despite September historically being a down month, the markets have held surprisingly steady with all 3 indexes up on average about 1% since the start of the month. While we still a few weeks to go that could bring that average back down, most traders should be happy with any profits they could squeeze out over the past couple weeks.

Considering the significant profits likely made last week by Wallstreet and the professional traders, the odds favor we will see some profit taking this week with prices likely to consolidate and stall out before resuming upward. I will be on the sidelines to start the week, and am content sitting and watching the market digest the prior week’s gains while I wait for an entry that puts the odds in my favor. Jumping in early this week to try and ride the wave from last week is a pure gamble, and though it wouldn’t surprise me if this bull has the markets continue up, the odds do not favor it. I have no problem protecting my profits and patiently waiting for our indicators to align for one of our textbook setups.

Long-Term Herd
The LTH remains overbought with odds favoring stalling and consolidation over the next 3 days.

Short-Term Herd
The STH odds favor some stalling this week as indicators currently show the market as overbought. Don’t force a trade, wait for our indicators to align before finding a setup to enter on.

Bull Market Status
Confirmed uptrend. From a macro view, we are headed to higher prices!
Stocks & Trade Ideas

Stocks & Trade Ideas

Microsoft (MSFT) saw sideways price action as anticipated last week and closed Friday on big volume. No current entry points, odds favor more consolidation before another big move.

Facebook (FB) rode the prior week’s wave to open the week on Monday up $2.50 from the close on 9/8 before profit taking brought the price back down to the 21 dma to close out the week. Odds favor sideways price action but don’t count it out as FB is a volatile mover and doesn’t need much consolidation to take off.

Tech Sector (XLK) as mentioned last week, you could trade this stock solely off the MA bounces, as the 21 dma bounce on 9/8 would have netted you a little over 100 bps with an exit point midweek. It closed the week with a reversal bar slightly above its 10 dma but looks overbought and odds favor sideways before suitable entry.

Alphabet Inc. (GOOGL) finished the week down approx $14 as it continues its long consolidation period over the past 1.5 months. Odds favor sideways to down this week.

Alibaba (BABA) gave us an entry point on 9/8 as mentioned last week on a rare pullback below the 10 dma. With an entry on Monday and exit on Wednesday, you could have clipped a $7 run, a little over 4% gain in 3 days! Odds favor stalling and consolidation to open the week.

Amazon (AMZN) found higher prices to start the week as we highlighted last week as the stock made a $23 from Monday to Wednesday. Currently, in no man’s land in terms of a setup, odds favor waiting for a more favorable entry.

Tesla (TSLA) gave us an easy entry that we spotted in last week’s newsletter with a textbook 50 dma bounce on 9/8. If you jumped in on Monday, you’re up approx $28 or 8%! It opened the week up big with a touch n go on the 10 dma, giving us 4/5 days forming reversal bars. This is a major sign of strength. Need to wait for some sort of pullback before finding a suitable entry. 

Powershares QQQ Trust (QQQ) saw more consolidation last week for the 2nd consecutive week. Watch it to follow the overall market direction this week, but currently no setups look prime for a Monday entry.

Netflix (NFLX) also found higher prices last week as it closed the week up $6 from the close of 9/8. Need to wait on a setup.

Trading Psychology
The 14 Stages Of Investor Emotions And Trading Psychology

Markets have defined and specific cycles. This is because investors and traders are emotional –whether we choose to be or not. Everyone has the best of intentions when entering this business right? We all want to make a ton of money with as little risk as possible – who doesn’t.

Where some traders fall short is that they fail to recognize that there are predictable the repetitive stages. The markets do not exclusively depend on company or industry specific data and earnings. If it did, then stocks would trade exactly at their value and there would be no movement at all.

 ** “Uncertainty Creates Subjective/Emotional Traders”

Instead, every stock has a component of “Future Value” which is completely and 100% subjective. What will the value of the cash flows of the company be in the future?

We can always calculate the value of a company today – that’s easy. It’s trying to determine what the company “might” be worth in the future that creates movement in the markets! As such, investor’s feelings and emotions drive this variable.

 ** Master Emotions And You’ll Master The Market

To me this is the never-ending quest as a profesional trader. I want to learn to control my emotions at the same time that I learn how to recognize the herd mentality. Continuing to tweak and perfect my trading system is a weekly process, but well worth the effort.

Understanding that traders have specific emotions which have varying magnitude, is critical to learning how either you or another investor might behave. Thankfully there is a cyclic process of psychology that explains the relationship between our feelings and our judgments.

The 14 Stages Of Trading Psychology…

1. OPTIMISM – It all starts with a hunch or a positive outlook leading us to buy a stock.

2. EXCITEMENT – Things start moving our way and we get giddy inside. We start to anticipate and hope that a possible success story is in the making.

3. THRILL – The market continues to be favorable and we just can’t help but start to feel a little “Smart.” At this point we have complete confidence in our trading system (https://optionalpha.com/the-7-day-options-trading-video-ecourse-to-more-profitable-trading) .

4. EUPHORIA – This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk (https://optionalpha.com/the-2-most-important-secrets-or-principals-in-the-stock-market-10021.html) . We now start trading anything that we can get our hands on to make a buck.

5. ANXIETY – Oh no – it’s turning around! The markets start to show their first signs of taking your “hard earned” gains back. But having never seen this happen, we still remain ultra greedy and think the long-term trend is higher.

6. DENIAL – The markets don’t turn as quickly as we had hoped. There must be something wrong we think to ourselves. Our “long-term” view now shortens to a near-term hope of an improvement.

7. FEAR – Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. At this point we should get out with a small profit and move on but we don’t for some stupid reason.

8. DESPERATION – All gains have been lost at this point. We had our chance to profit and missed it. Not knowing how to act, we attempt to do anything that will bring our positions back into the black.

9. PANIC – The most emotional period by far. We are clueless and helpless. At this stage we feel like we are at the mercy of the market and have absolutely no control.

10. CAPITULATION – We have reached our breaking point and sell our positions at any price. So long as we can get out of the market to avoid bigger losses we are content.

11. DESPONDENCY – After exiting the markets we do not want to buy stocks ever again. The markets are not for us and should be avoided like the plague. However, this rare point marks the point of maximum financial opportunity.

12. DEPRESSION – We drink, cry and/or pray. How could we have been so dumb we think to ourselves. Some start to correctly look back and analyze what went wrong.Real traders are born here, learning from past mistakes.

13. HOPE – We can still do this! Eventually we return come to the realization the market actually does have cycles (shocking). We begin to start analyzing new opportunities.

14. RELIEF – The markets are turning positive again and we see our prior investment come back around. We regain our faith (although small) in our ability to invest our money. The cycle start all over again!

Plessis, Kirk Du. “The 14 Stages Of Investor Emotions And Trading Psychology.” Option Alpha, Option Alpha Pro, 29 Apr. 2011, optionalpha.com/the-14-stages-of-investor-emotions-and-trading-psychology-10433.

This was an interesting article I found on OptionAlpha.com and reminds me the one solution to all your emotions as a trader…. a “Stop Loss”! With a stop loss, you can mitigate the wide range of decisions you can make as an emotional trader, as when the price hits your stop, you are out whether you like it or not. In the end, capturing a profit, and protecting the rest of your capital is the recipe for a successful long career as a professional trader.

Best wishes this week,

Coach

Randall Hudgens
Stock Option Coach