Interpreting Sentiment with MarketSmith, Leaderboard 52-Week Highs, and Break Out Data
We use Investors Business Daily, MarketSmith and Leaderboard to monitor sentiment and breadth, with the explicit goal of understanding the daily supply-demand data and how we can best utilize it to make more winning trades.
Leaderboard “Market Pulse” Tracking the Data
When more demand is present, the markets move higher, whereas elevated supply ultimately leads to lower prices.
“The Great Paradox of the Stock Market is, what seems too high in price and risky for the majority usually goes higher, and what seems low and cheap usually goes lower.” – William O’Neil
While this might seem obvious, traders and investors routinely find themselves on the wrong side of the trading equation.
Rule #1: When institutions are buying, so shall we.
This is called trading on “the weight of the evidence.”
Understanding when you are trading based on the weight of the evidence, versus your opinion is an important determinant between success or failure as a trader.
When a stocks price rises, demand is present. When a stock or index price drops, supply is present.
“Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless. Facts and markets are far more reliable.” – William O’Neil.
WWE Market Sentiment and 52-Week Highs
Imagine what traders were thinking as WWE broke out in late 2017 to fresh 52-week highs. Many probably thought no way it would appreciate 183% from this level. In addition, the indices were running higher into the January 2018 peak.
To be fair this is in hindsight, but it does represent a finding by William O’Neil, the original “Turtle Trader” and creator of Investors Business Daily. When he backtested winning traders at the time and analyzed their best trades he noticed the most consistent trades were those that were breaking out of a base or consolidation going on to print fresh 52-week highs.
MarketSmith – Breakouts and 52-Week Highs
MarketSmith makes it easy to track the performance of breakouts. We see 192 stocks breaking out over the past couple of weeks.
As stocks break out, we also get instant alerts to our trading screen as they trigger and emails if we choose.
Rule #2: When institutions are Selling, get Out of the Way.
Do a little research on your own; when breakouts to 52-week highs start to fail or breakdown immediately we are bearish short-term. We let members in the trading room know immediately when market sentiment and character has changed.
We monitor breadth with NYSE New Highs Minus New Lows (NYHL) as well as Advancing Stocks vs. Declining Stocks (NYAD) and TICK Cumulative for institutional sentiment. These three indicators give us immediate “real-time” information about the markets. Looking at these from a cumulative perspective, we can see trends, removing our opinion or bias from the mix.
When breakouts start to fail in greater numbers we can assume a short-term top is forming.
Finally, the S&P 500 broke out of an eight-month consolidation in August, while the Nasdaq Composite is persistently making fresh 52-week and all-time highs.
This is very important. The only way stocks can keep rising after making fresh 52-week highs is for demand to completely outstrip supply. It also means institutions are buying. Market sentiment is bullish when this happens.
Until these conditions change, the markets are in a confirmed uptrend. Short-term indicators are mixed going into this week.
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Disclaimer: Do your Own Research
Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional investment advisor in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.