By Chris Ebert

One quality of the stock market that is universal is that folks tend to buy stocks when the reward appears to be better than the risk. So, simple as it may seem for something as complex as the stock market, there are really only two factors that cause stock prices to move: a change in the perceived reward, or a change in the perception of risk

There is a natural tendency for traders to scan the market for evidence of either increasing reward or increasing risk. Economic developments are often viewed only in terms of whether they are more likely to increase the reward or increase the risk to traders. In simplest terms, traders like to buy stocks when the reward increases, and sell them when the risk increases.

riskAn often-misunderstood quality of the market is that a decrease in reward can be perceived as an increase in risk, just as a decrease in risk can be perceived as in increase in the potential for reward.

Even though the two concepts, risk and reward, are not necessarily linked together, many traders do indeed combine them into a single concept. As such, risk can be viewed, not just as the potential for stock prices to fall, but for the absence of the potential for stock prices to rise; reward, in that light, reward is nothing more than the absence of risk.

Since it is not possible to know in advance the exact nature of future economic news, it is not possible to know whether the market will perceive such news as an increase in reward or an increase in risk. It is, however, possible to pinpoint specific levels on a chart that are likely to represent an absence of reward or an absence of risk.

So, while it will almost always be impossible to know which way the stock market will go tomorrow, because the news is not yet known, a trader can always make some assumptions about what effect the chart will have on stock prices. Essentially, there are always areas on a chart that represent the relative absence of risk and others that represent the absence of reward, and if the news pushes stock prices to one of those levels, it is often possible to predict the end result.

In technical analysis of the stock market, levels of support tend to correlate with a perception of an absence of risk, while levels of resistance tend to correlate with an absence of reward. These levels are not always permanent, and can change rapidly depending on the exact type of analysis. In some instances, a previous resistance level can suddenly become a new support level, and vice versa.

Even though levels can change, as long as a level of support exists there will tend to be a perception of low risk near that level, and when resistance exists traders will see tend to perceive low reward. Thus, it is possible to make a prediction about how traders will react if the stock price reaches either of those levels, even though it is not possible to predict whether either of those levels will actually be reached.

The natural tendency is for traders to sell when prices reach resistance, because resistance represents an area in which the perception of reward typically tends to be low. Just because it’s a tendency doesn’t mean it’s always prudent. That’s because prices sometimes break out above a level of resistance, and the same level that once represented resistance can quickly become a new level of support. What that often entails for traders is that a previous level with a perception of low reward can quickly become a level of perceived high reward. Instead of being a good place to sell, a level of resistance can become a good place to buy – if it gets broken.

OMS 01-10-15

But, in the event that resistance does not break, a lot of traders are likely to come to the same conclusion, and they are likely to reach that conclusion at about the same time. Lots of folks will want to (more…)

08
Jan

By Jeff Pierce

Via Yahoo Finance

DuPont Fabros Technology, Inc., a real estate investment trust (REIT), engages in the ownership, acquisition, development, operation, management, and lease of large-scale data center facilities in the United States. The company leases its data centers to the American and international technology companies to house, power, and cool the computer servers that support their critical business processes.

 

Strong weekly chart says that after a pullback this will likely continue higher, especially when looking at how strong the RSI is. It may not even pull back, but I wouldn’t be chasing it after the run it’s had.  Safe dividend paying stock in an otherwise volatile market environment that should be on your watchlist.

 

dft

 

07
Jan

By Poly

This is an excerpt from this week’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

We’re starting to see some very interesting price movements within the equity markets. Primarily, the recent decline has been much sharper and deeper than I would have expected for a Daily Cycle that is so young. This is a bearish sign, although on the surface, we do not have anything close to a Cycle failure, so of course maximum respect must continue to be bestowed on this great bull market. It wouldn’t be the first time that the bears became excited with a sharp single digit (%) decline, only to be savagely mauled by the bulls. “Buy the dip” and “Rinse and repeat” they “smuggishly” have called, as they repeatedly push the market to new all-time highs.

But underneath this market, I sense tension and concern, which I suspect could quickly turn to outright fear. This market is speculative in nature, it’s not a true secular bull market and the participants are acutely aware. For that reason, the smart money knows that while the “party continues”, they will continue to play along. But they also know that with each passing week, and new all-time highs achieved, the market is on increasingly borrowed time.

So the equity markets are going to be put to a test in the coming weeks. As this is just Day 15 of this Daily Cycle, we likely just witnessed a severe Half Cycle Low decline. A rally will come now as the 2nd half gets underway, this should be expected. And if past Cycles are to be trusted, then in theory because this is only the 2nd Daily Cycle, this should become Right Translated, resulting in yet another new all-time high.

But there are bearish signs developing (Bonds, Oil) and the market is on edge. The recent volatile and rapid swings in price could be foretelling of a top in the making. Therefore, a failure to make new highs, which then then breaks below the 1,992.44 and 1,972.56 levels will be a Left Translated Cycle, signaling a major market top. The market has not needed to prove itself for some time, but this is a case where I believe the bulls need to defend this area and push for all-time highs. A failure to make new highs signals a top to this Investor Cycle. I’m not going out on a limb here…but I wouldn’t be at all surprised to see this coming rally sold and the start of a protracted decline begin.

1-7 Equities Daily

 

By Chris Ebert

Try this – without looking at a chart, is the S&P 500 best described as being in a strong uptrend, a rally under pressure, a weak downtrend, a significant pullback, or a Bull-market correction?

How far back in time did you go to make your determination? How long is your personal stock-market attention span; a few days, months, years? The following analysis suggests the most common attention span is about four months.

stopwatchCollectively, the stock market is preoccupied with the past four months, the past 100 days or so only. Memories beyond four months ago tend to fade away. More recent developments, for example the past few days, tend to be disregarded if they don’t agree with the trend over the past four months.

As far as traders are concerned, anything that happened more than 4-months ago is ancient history, and anything that has happened in the past 4-months is random noise if it does not agree with the 4-month trend.

Take the 2014 New Year’s Eve sell-off, for example. It did not agree with the strong uptrend in place since August, 4-months earlier. The hackneyed response for many was to “buy the dip”, since the dip does not agree with the current 4-month trend.

Stock Market’s Attention Span

The market’s focus on 4-month trend is evident when one looks at the significance of the 100-day simple moving average. Quite simply, the 100-day moving average gives a rough estimate of the current 4-month trend; prices above it mean the trend is up, below it the trend is down.

While it is possible for a trader to survive using nothing but the 100-day moving average as a guide, the signal it gives tends to be black and white. Let’s face it; nothing about the stock market is truly black and white. That’s the reason for the proliferation of so many other stock market indicators. Nonetheless, the 100-day moving average stands as one of the most important indicators of the collective sentiment of traders, despite its inability to see colors.

The following analysis builds on the importance of the 100-day simple moving average. Rather than just plainly stating in black and white whether the trend is up or down over the past 4-months, which is what the 100-day average basically does, the following analysis goes a step further. Presented here is a view of the market, in living color.

Here, the expectations of traders are analyzed in order to give the market a sort-of letter grade, rather than the simple pass or fail grade one would expect from the 100-day average. And, what better way to gather data regarding traders’ expectations than to study the options market. After all, option premiums are based upon expectations. Thus, the performance of options at expiration is a perfect way to see what expectations the market is exceeding, and which expectations are being dashed to bits.

Since the market seems concerned mostly with the past 4-months, it stands to reason that 4-month options will give the best picture of the current market. That is to say, if one studies options on their expiration day, that are opened 4-months prior to their expiration, one will see whether expectations have been met.

3 Option Strategies – 8 Possible Outcomes

Using one option strategy, there are two possible outcomes, black and white. If the strategy is profitable, expectations have been exceeded, if it is not profitable, they have not. Using two option strategies, there are four possible outcomes, black, white, and shades of gray. Using three option strategies, there are eight possible outcomes that define in great detail – in full color – how the stock market is currently meeting trader’s expectations.input

The following analysis (more…)