Cognitive Dissonance Sent The Wrong Message to Many Stock Traders
As an active participant in social media, we found it interesting that traders believe their emotions and opinions instead of price, macro data, breadth, momentum and sentiment indicators. Once again cognitive dissonance prevented traders from seeing what was clearly a change in character.
Last night we blocked a few nefarious traders on social media for childish comments. We are here to help enlighten those who are interested in learning.
Cognitive Dissonance Versus Institutional Sentiment
Watching what institutions are doing is my priority one indicator.
One of the ways to follow the ebb and flow of institutional buying and selling is through the use of price and the ever-changing auction of buyers and sellers. If there are more buyers, we move higher. More sellers? Obviously, we move lower. Stalemate? Range bound price action can be anticipated.
Institutional Sentiment and TICK Cumulative
Two weeks ago TICK stopped making new lows. Instead, this indicator began closing above its signal line. While this sentiment measurement tool did not give an all clear, it did tell us to be open to a change in direction, the same way it did at all-time highs in September.
The bearish divergence at highs is what told us to start taking profits and reducing positions. The bullish divergence pointed to a change in sentiment. If institutions kept buying, we should expect momentum, breadth and macro indicators to turn as well. They have.
SPY Daily Made a Lower High – How Does TICK Help?
Note the pivot high or dead cat bounce back to 281.00 (+/-) on the daily time frame. Although institutions were buying or nibbling, we used the 60 minute time frame to help navigate this change in direction.
Note how TICK cumulative served as a directional sentiment trigger. As price action rose into October 17, 18 TICK started changing direction. Day traders were alert to this momentum shift enabling trades in both directions during the October selloff.
Combating Cognitive Dissonance – Additional Indicators
Additional measurements in breadth have turned bullish. Nymo, for example, registered a (-100) reading the second week of October. NYMO is now above zero and trending along a bullish path.
VIX registered fear in the markets, as it spiked to new highs. Traders that were late to read the bearish divergence in September were buying puts and hedging positions in earnest. The Put/Call ratio peaked.
S&P 1500 Composite – HiLo Percent
As the name suggests, the S&P 1500 composite includes big cap, mid-cap, and small-cap stocks. Monitoring new highs and comparing to new lows gives us a way of monitoring for “wash-out” lows. It also gave us a sell signal in September. If conditions continue to change and momentum shifts, a buy signal in the short-term seems evident.
The histogram needs to agree with the signal line, middle and top panels respectively. Once histogram moves above the zero line a trigger leads to a confirmation. The HLP line in the upper panel should be green.
We’ll discuss more macro, breadth and economic indicators today so monitor the stream. If improving conditions persist over the next few days, we will continue to add to positions.
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