Professional investors are aware that the value of individual stocks can be measured. It is interesting to observe that a stock can change in price by 30% over a short period of time. How can that be? Does that mean that the fundamental valuation of stocks and the market as a whole has changed 30%, or is there another driver of price at work? Yes there is. The term most widely used to describe this driver is called “sentiment”. Sentiment can be observed to drive market prices to extremes due to fear and over exuberance. The problem with sentiment is that it is not a part of the normal metrics used by fundamental analysts. At Options21 we have a number of ways of measuring the extremes of sentiment which guide our timing decision to enter a trade. Measuring sentiment is the key for derivatives trading, as timing is essential no matter which trading vehicle you choose: options, stocks or CFDs. The vehicle becomes irrelevant if you cannot correctly time your way into a trade and pick a point in time where you experience a high velocity price move in the chosen direction.
In the past 4 weeks the markets have been demonstrating an extreme of negative sentiment which we now believe to be coming to an end. The obvious conclusion to an extreme sentiment event is a sharp reversal in price and it is now we believe that this is most probable. The Marker basis $SPX has formed a solid base above the November swing low. A break up and close above 1104.73 will once again confirm the resumption of the short term upward trend. This needs to be watched closely because it may evolve into a resumption of the larger bull market move. The next resistance level is at 1166.69, a Fib 100% extension of the range A-B. The second major resistance is at 1242.71. This is a 1.618 Fib extension of the Range A-B. This second resistance level is important as it also coincides with a 60% division of the high of the bull market in 2007 and the low of the bear market in 2009.
A complete update of the macro view of the market is given in detail on the first Wednesday of every month in our Live Market Briefings.
Happy Trading,
Paul Wise.