come and go, but in this modern age of the computers and their
algorithms, I believe that traders need to consider who is on the other end of their trades more carefully. The geeks that
program the computers that we trade against watch to see if the sentiment is bearish or
bullish and then they push things in the opposite directions many times.
I have heard that there are even a couple of technical services which monitor popular message boards and twitter (and it’s cousin site, StockTwits.com), to pick up the words that are being entered (actually I heard this on Bloomberg Radio and read it in the Wall Street Journal). For example, if the sentiment seems to be bearish, then many negative words will show up in posts about the stock market, or in any individual stocks. These special services then compile this data in almost real time and then send a report to the hedge funds that pay a pretty penny for this information. From there, the hedge funds have a pretty good idea which way retail traders are leaning.
lot easier to force BIG MOVES with monstrous profits if every one is
lined up in one direction and the computers push things in the other
direction….forcing a massive short squeeze these days is easy for the
algo kids….and I have noticed that whenever the news media gets real
gloomy, it is usually a short time thereafter that the market reverses and climbs. One tool that helps the professional chartists is the Arms Index (“TRIN”), which spots capitulation points in the markets.Anyway, I hate to say it, but I can’t help but think the media is sometimes “working” for these computer outfits, or
they are the computer outfits’ biggest fools!
In turn, this has to compel technicians (chartists) to re-evaluate their craft. Since more and more trading is based on technical analysis (TA), then technicians have to be careful that they are not simply following traditional techniques–because traditional TA only leads everyone to the same conclusions. This
in turn leads the trading robots to know that most traders are leaning
one way, and they have the power to upturn things quickly. One has to
remember that many hedge funds have large amounts of capital that can
quickly be invested or pulled away from any single stock issue–they
control the markets in many issues.
Many technicians pay a lot of attention to volume, for example, and over the years, volume was an important indicator of which stocks or sectors were gaining momentum. Today, it seems that volume in some cases, points to a group of traders flocking in droves toward a few stocks–the machines see this and begin to sell out in a slow, methodical fashion using High Frequency Trading (HFT) principles, whereby they sell 100 shares here and 300 shares there, rather than sell a large block of shares all at once. This makes the HFT traders hard to spot. But the retail crowd is easy to spot because they are now the ones spiking the volume on given days.
In conclusion, today’s best technicians need to think beyond the ordinary signals and set-ups to discern the proper trade–this may include using more esoteric graphs such as ADX, CMF and certain special derivatives of RSI, which I have developed and favor. It also means paying more attention to the inter-play of moving average lines, and perhaps less attention to volume in some situations.