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Hey, this is Sasha Evdakov.
Today we're going to be talking about euphoria and emotions when trading. I'll give you some insights on the market and what I see as far as market conditions.
Keep in mind all of this is for educational purposes only. Be aware of this crucial fact.
Getting Started With Stock Market Euphoria
Here's the TC 2000 and now we're looking at what's happening in the market. We are going to start with the SPY.
You can see that we did have some volume picking up right here which is typically a good sign.
When you see volume picking up like this is usually a positive sign for the market. The only thing about this is you always have to look at it in context is how far stretched are we from a moving average.
On the daily, we're looking quite stretched. If you look at the weekly, you can see how much further stretch we are. Remember markets are like a rubber band. The more they stretch one way, the more they'll snap back. It doesn't matter if it's going to the upside or the downside.
If it's breaking hard to the downside, they'll probably see a snap back to the upside. If you see it breaking out to the upside, you'll probably see the counter-trend snap to the other direction.
When you start looking at all these things you can't get too caught up in the emotions when it comes to the markets.
Some Of The Things That I Mentioned Earlier
It's fascinating to me when I look at news reports because there are a lot of people they trade based off of their emotions.
I mentioned here February 15th:
"VIX is going up while the market is unchanged. Big Boy's knows something. Be cautious."
When you start seeing the VIX creep in it's a way for markets to push things higher and see if they can suck more people in.
While they're on the other hand getting and buying protection, now they can't hide their full position. The VIX is an exciting indicator to look at. When I saw the VIX here on February 15th heading a little bit higher, I mentioned that it's heading higher. But why is the market also heading higher?
Then you look at these sayings that come out:
"Nasdaq in longest record streak since the dot-com bubble."
This also makes you think if we're in the longest streak since the dotcom bubble well what happened after that longest streak? A bubble - which is also very ironic.
The other indicator I was looking at and pointed out is:
"Powerful market, but Bollinger Bands on the SPX is stretching."
If you look at this, you can see I posted this chart way beyond. It's one thing to see Bollinger Bands go beyond it on the downside because you have fear in the market and much more on emotional trading.
It's another thing to see it to the upside. I've seen this in the past, but I haven't seen it in the past with such a terrible administration that has things in chaos.
We'll see if the regulations come through, but nothing ever happens. And market trades on the rumor, so you buy the rumor, and you sell the news.
Think about that concept. They're buying the rumor.
It's like the immigration ban. You know it was this big thing and then what happened?
In either case, it wasn't as good as projected.
Read the Situation On The Market
You also have to remember we're going into a market closed on February 20th for a holiday. People will want to take some profits. This doesn't mean the market is going to crash. That's not what I'm saying. I'm saying that watch out when things become stretched on the market.
You start looking at the SPX or the composite. We'll pull up the Bollinger Bands here for you. When you start seeing these things remember Bollinger Bands try to contain things. It's sporadic that you see things going outside of the Bollinger Bands.
It's a relative indicator, so you compare it in the past. It's relative to the past time of going outside of them. But you usually don't see it at this extreme where the Bollinger Bands open up, and the VIX is also spreading. All these things working together as the VIX starts popping (markets still going higher) it starts to give you some clues.
I'm not saying you can't bump it or push it into higher prices. What I'm saying is that when other people are buying and they're euphoric, you should be selling. And when other people are selling in a big way you should be a buyer at this pick. Because remember we get that snap back - the rubber band effect.
In either case, that's the big thing I want you to think about. If you go into the weekly on the S&P, you can also see that we have the daily and the weekly. But the monthly is a big thing that you watch.
It's sporadic. I mean it got in 2013 a little bit, but again big streak. To me, it also means be very cautious because you can get a snap back.
I'm not saying it will happen, but the statistical chance is market trade on these emotions. That's what I want to talk to you about today. We'll look at some feelings and more or less how people trade when they're looking at emotions.
Market Euphoria - Things To Be Aware of
We'll talk about when putting on decisions, and in the markets, I like to look at this also in being productive. It's an excellent diagram to think about and look at.
Here we have two extremes:
- Up here we have your higher-self
- Down there this is your lower self
You could look at this in making decisions or making processes to decide to work out. When you're feeling in your lower self, and you're unhappy you probably don't want to work out.
That's a decision in your lower self. You probably don't want to work out. Whereas if you're feeling happy, you probably want to work out. And this is how the market behaves.
They work on the same premise. In the middle area, this is where you are content or even. I'll say even for shortening purposes.
You are content or even when you're overall between the higher self and the lower self. In these kinds of markets what's going to happen internally is it's whipping things around. I'm talking about inside of you. Think about it in your stomach and your heart in your brain.
You'll probably have these rollercoaster emotions a bit. And this depends on how high for some people they're more volatile. They'll have more volatile emotions. For you, you might have a lower wave pattern.
Looking at it, find where your wave pattern is. When the market gets into a very euphoric or emotional state, they go and almost at this higher point. You almost go beyond this point. And this is where your euphoria happens. This is where our euphoria is at.
Now at this point, two main things could happen:
- you assume we're going to continue moving higher
- things can roll back down
In reality, what ends up happening is because you're so far stretched it rolls back down. And then you get away from that higher self and go into a lower state.
Maybe you'll get back to even. Or it'll drop even more so because now you get crushed. It'll go even further or lower since you were at a higher state and moving down drops you much faster.
It's vital that you watch where you're at because this is like a rubber band. It stretches you one way or the other. If your market is stretched one way more than likely, it's going to pull back.
That's why when everybody is at their most euphoric state that's why you're the person selling. When they're buying, you're a seller. And the same thing works in reverse.
When a market is down this is where you're at a panic state.
It's a fear state, and you have two crossroads:
- many people think it's going to continue going down
- you have to know it's more than likely that things will go up
If you're logical and you're thinking about your decision process, the reality is different. Because we're so far stretched, you're more than likely going to get that snap back.
You have to be more evident at understanding the location of you personally whether you're in your lower self or your higher self relative to the market as well.
I could draw another diagram, and you could do this exact diagram and look at it in the market. Look at how far stretched is it to the upside or the downside. That's what Bollinger Bands do.
They look at how far stretched things are. And, if you look at it right now, we're down about eight, nine points. They'll probably try to do a little bounce in there. Because it's one day and one day doesn't make a trend.
The thing is that they'll probably try to get this to bounce. They'll perhaps try to bounce it a little bit, and then we'll see if it rolls back over on Friday because that's where the danger will lie. On Friday you get some massive selling action before the long weekend.
We're looking at it, and we're stretched, and that's the same thing that happens in the diagram. Well, if you look at it the market when you're stretched you're more than likely bounce. When you're stretched on the top, you will more than likely pullback.
Always try to get to that average. That's why they use moving averages. But you have to also look at yourself as to where are you personally when it comes to the market.
If you're thrilled and the market is exceptionally high, that is dangerous.
Dangerous Situation You Want to Avoid
On this example, the market has been moving to whip around to the upside. And the market is on the top, and you are also right there.
That's dangerous. When the market is up here, you should be somewhere over in this content level - in the middle (red line).
It's always better to be even on your emotions. But if the market is high and then your feelings are also way up, that's dangerous. Because now you're assuming this markets going to head higher. When in fact you know it's going to snap back.
The same thing on the other side. Maybe the market is heading lower, and it's way beyond this price point. Then you also are very depressed than you sell. This is where the selling happens. You sell out of your position, and you take your loss right before you get that bounce back.
Pro tip: it's better to be a little calmer right there or even be a little more greedy in that situation. Believe and say I'm going to put on this position because of that snapback.
I hope that makes sense because that's what you want to do. You want to look at your emotions, how far stretch they are. Also, you want to look at the market and how far stretch they are.
If you have too many emotions in the marketplace that's when you can lose out, it's because of that greed and fear factor.
The Current Situation on The Market
If you look at this market, you can see we're quite stretched. That doesn't mean you can't go higher. It means it's nice to get a little pullback if you get this market and you get it to pullback right here and then bounce.
That is a much better recipe, or it's a much better setup. A slight little pullback it allows digestion.
If you continue to keep higher, you will see a significant pullback. The further stretch that gets, the more significant the pullback. You can see right now as I look at this S&P you can see we're down about 10 points. They're trying to bring it back up a little bit work to suck in some more people, and we'll see what happens. But you need to look at the bigger picture.
Notice how far stretch you are and then look inside of you.
And even though we have this significant run-up take your money. This business is about taking money off the table if you don't learn to reduce your risk the markets going to take your money.
That's what usually happens to most people. They get sucked into this and emotions catch up to them. They get greedy then they start holding on to position and then you'll see them give it back. They'll give back all their profits.
Some people even continue to hold praying and hoping that things continue to go up because it was so good in the past. They ride off of that past euphoria when the market continues selling, and then they give in to the denial.
Once they get into this denial state, this market continues to go down, and then they sell it at a loss. You need to be careful and cautious about these kinds of markets.
Have your plan in mind. Think about what it is that you're doing and what's on the future for you. The thing is everybody's plan is going to be different. You have to be aware of your risk tolerance.
Look at it that way. Set up yourself a plan and execute that plan. But also understand how your emotions are playing the game for you. If you can block those things out if you can be aware of those things, then it will allow you to be a little bit better trader without emotions.