This Week’s SFO – Psychological Issues

Jul 17, 2007: 9:21 AM CST

For those of you interested in Behavioral Finance or the Psychology of Trading, this month’s edition of Stocks, Futures, and Options Magazine contains plenty of information regarding these topics and more.

The cover article is entitled “Build Your Trading Brain,” and other articles in the magazine include the following:

“This is your brain on trading,”
“On the Hunt for Market Moods…,”
Behavior Economics: Most Take High-Risk Gamble to Avoid a Sure Loss,”
“Tech Take: Crowd Psychology and Market Turns,”
“Building Your Trading Brain – A Framework to Manage Thoughts, Emotions, and Actions”

Other articles address option strategies and commodity trading tips.

As a bonus, there is a great book review of Brett Steenbarger’s Enhancing Trader Performance. If you have not read this book at least twice yet, I strongly recommend you do so.

You can subscribe online at SFO and receive the hardcopy, or go to your local newsstand/bookstore, or you can view each of these articles free online this month with registration.

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Index Chart Overview

Jul 16, 2007: 8:18 PM CST

The Dow Jones set another new all-time closing high today, but it was the only major US index to show an advance on the day.  The largest index decline came from the Russell 2000, which has lagged the S&P, Nasdaq, and Dow in terms of making new highs and its technical pattern (it remains rangebound).


The Dow made new price highs and a new (relative) momentum high, suggesting higher prices are yet to come (likely following a pullback correction).


The Nasdaq is reconfirming its uptrend and recently made new price and new (relative) momentum highs.  A ‘sell swing’ down to test the rising 20 period moving average is more likely than immediate upside continuation.


The Russell 2000 index is experiencing a swing sell, with odds favoring a test of the rising 50 period moving average.  The largest major index decline today was experienced by the Russell – note that it failed to make new highs with the other indexes.  Buyers are not pouring money into small cap stocks relative to the large caps of the Dow 30 stocks.

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Positive Divergence on US Dollar Index

Jul 16, 2007: 9:36 AM CST

I know the headline gives it away, but a positive momentum divergence is clearly forming on the US Dollar Index, as evidenced by the 3/10 momentum oscillator and a “Swing Chart” reading.

The dollar index recently made new lows, which hit the newswaves rapidly, but from a technical perspective, we have at least three bullish factors working:

  1. A positive momentum divergence
  2. A possible double bottom… or at least a successful test of previous lows established near the start of 2005
  3. Selling momentum decreasing (evidenced by shallower ‘swings’)


Of course, the index must still overcome established resistance at the 20 and 50 period moving averages, as well as the ominous 200 MA just above it. Should price break these barriers, momentum should carry price markedly higher.

A “weak” dollar is actually not a horrible thing – in fact, for some businesses, their profits are much higher due to favorable exchange rates (especially for US companies that do significant sales overseas and then convert their profits in the foreign currency to US dollars to report overinflated earnings due to exchange rates).

You can find much deeper fundamental analysis from other websites, news sites, and blogs if you are interested in the deeper picture of what a weak dollar means for stocks, companies, and the US Economy as a whole.

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Mid-Sunday Weekend Links

Jul 15, 2007: 9:49 AM CST

linkIn the past, I have provided individual site links with a short summary/analysis designed for each link.  Now, because I am reading more blogs and finding many more high quality links, I’ve decided to offer a few posts containing multiple links with fewer summaries per link.

Here are a few links that are definately worth studying:

The Big Picture:  Hulbert’s Four Big Lessons:

  1. Returns in excess of 20% to 25% annualized are unsustainable.
  2. There is more than one road to riches
  3. Discipline is the premier investment virtue.
  4. Past performance is a helpful guide to picking an adviser — if it is measured over a long-enough period.

The Big Picture:  This is a Bullsh*t Rally

Chris  The Holy Grail of Trading – It’s NOT Your System

Dr. Steenbarger at TraderFeed:  Three Good Questions to Ask About Your Trading

  1. How many set-ups do you trade?
  2. What are the outcomes of your largest vs. smallest trades?
  3. Is the distribution of your long and short trades consistent with the market’s direction at the next largest timeframe?  What is the Risk of Ruin? (if you don’t know, please find out quickly)

Trade4Cash:  2002 – What a Year it Was (historical analysis of the Dow)

Lauriston Letter:  Dollar Falls to a Record Low on Growth & Rates

StockBee:  How can the Market Wizards be so Wrong (homework to do)

StockBee:  List of Summer Reading Books from the Author

VIX and More:  The 5% VIX Rule/Strategy

Kevin’s Market Blog:  The ATR – What it is and how to use it  (Average True Range – I use this frequently in my trading)

Dr. Bruce Hong:  Herd Behavior and Other Curiosities (part I)
                                  Herd Behavior and Other Curiosities (part II)

The Fresh Trader:  Understanding the Stock Market – Series on Crowd Psychology (a must read for beginners)

My apologies if I missed a major post this week.   

If you have a link you would like to recommend to me, please let me know.  I am branching out on my blog reading list and am always looking for new resources! 


Link: Sources on Sector Rotation

Jul 14, 2007: 9:45 PM CST

The Author at Simply Options Trading recently provided five professional links and two blog links regarding Sector Rotation Theory and I wanted to direct you to the site to check out those resources. 

I won’t steal the thunder by reposting the links, but will advocate you to visit the site and glance over a few other posts as well.  Although the site is themed towards options traders, many traders of various levels can benefit from the analysis and links on the site.

I wanted to add a thank you to the author for providing a link to Afraid to Trade – I indeed frequently discuss various perspectives from the Sector Rotation Model and hold it to be a major core of my trading philosophy.  I have recommended a few books on the subject and have provided a brief overview of the theory and have attempted to show readers how to put it into practice.

Please learn more about the subject if the concept is new to you, and Simply Options Trading provides a great source for you to get started finding out where the “big money” is flowing (trending) at this moment and where it is likely to continue.