"Market Has Life" - Weekend Effect

Five trading days, ended on Friday begins again on Monday. The remaining two days of non-trading days contributes a significant impact on the following week opening. Most of them are affected by news during weekend or emotional recovery during these two days.

Since the topics here are about the psychological of stock market, let's talk about emotional recovery (emotional adjustment).

Some companies know such effect does give significant impact to the traders/investors. Therefore they like to release bad announcement after the Friday market closing hoping for the next two days will allows the traders/investors are emotionally adjusted.

Human has short memory. You may forgot what you have traded few months back (unless it is a significant trade). You may forgot some bad things about some companies after seeing their stock price surges. In the two days in the weekend, the traders/investors will go through thinking process that most probably diminishes his/her nervous bearish thought. So, the next following week opening, traders/investors might just hold and see how is the situation before reacts.

The matter will be more serious if the opening of the market is on the following days after the bad announcement is released. No time to react, the selling will be larger than the situation above.

Next, what weekend effects to the market in term of TA explanation?

Long term investors look at the weekly chart is mainly for the reason of stabilized price . During the weekdays trading (intra-week), the price is much more volatile compared to inter-week. The inter-week movement has stronger evidence for the trend. Therefore in most of the cases, gapping up or down in the weekly chart has a story to tell. Most of the TA practitioners think that a weekly gap is meant to be filled (eventually in the future) by the TA theory of "gap will be filled". Things are different than inter-day's gap, some of them may not filled if you checked the historical price chart. Try to change to weekly chart, most of them are filled.

Coming to weekend effect to index support. A Weekly Moving Average (MA) has stronger evidential effect as mentioned above. Short term players like to use 5 or 10 days MA to judge the current index trend. A 5 days daily MA is too volatile (market index is affected by tons of counters) therefore it is recommended to use 5 or 10 days weekly MA for market index analysis of trend.

Broken 5 Weekly MA in STI, the market tells you its trending downwards. Therefore 5 Weekly MA is one of the support for STI especially when the market is at uptrend (things can be different if market running sideline).

So, how does Weekend Effect affects you?

"Market Has Life" - In Between Greed and Fear

Many says,

Price = Greed / Fear

So who decides it and why should you obey it?

Today I am not feeling to write much on Psychological strategy but to share some scenarios that might very close to you or even happened to you before.

"Morning 10.30am, the market as usual nothing much external effects lately. A guy logged into his trading account after hearing one of his friend's recommendation on counter X. The price is 0.855/0.860. He has no idea on the fundamental of this counter X and only thinking to buy for short term riding on the bullish market. So, he queued 0.855.

After 5 min, he saw this X counter rise to 0.860/0.865 and then 0.865/0.870. He immediately thought of buying it at 0.865 by queuing into 0.865 queue but not 0.870 because he has a gut feeling when a counter rises, it will retrace a little once awhile and he hopes to save $0.005 by queuing slight lower."

Human is weird, first he queued for 0.855 because he is not really interested on counter X. Then when counter X surges a little, he changed his mind and decided to queue for 0.865 which is 0.010 higher than his previous queue. Moreover. he even has the gut feeling the counter will retrace a little so that he could able to get 0.005 cheaper.

What action he (as a human) has made (aside not knowing fundamental) which is questionable?

1. He does not set a buying price, thus does not buying based on the value.
   Even if you are not fundamental sounded, you should have to plan how much to buy and how much gain in the end of the trading. If you aiming for 20% gain, should you buy at one queue higher? Self contradicting. If you think the price will dips, why should you buy then? After analysis that counter X has a target price about 20% gain why should you bother about 0.005? (There is an exceptional case for range trader which he/she has set a range for Buy and Sell. Therefore range trader only buy at that certain price he/she set for Buy and will sell when the price reaches the Sell price).
   
   
2. He is affected by the price surge.
   Does this action affected by greed? We can't deny we always lose to emotion. Even you are experienced trader, emotion sometimes haunts you especially the price is surging by second. Are you technical analyst? Are you fundamentalist? Are you based on gut feel? Nothing wrong here but does the price surge so important to chase? Imagine bus ran away 5 minutes ago and just because you want to catch the bus you take cab. There are a lot more counters in STI (not enough can go to KLSE).
   
   Short term/intraday trading - Hardest part if you do not stay close to the screen. Market depth would helps a little. Concentrate solely on counter X would be better. Price surge or dips is out of the scope here.
   
   Medium/Long term - 0.005 is nothing compared to your projected return. If 0.005 is so significant to you as a Medium/Long term player, you should be questioning yourself.
   
   
3. He still queue for the counter at 0.010 higher than previous queue price even he knew that the price might dips later.
   Another self contradicting. One side of the brain buys because he believes the price would surge. Another side wants it to dip another 0.005. Do you want it to surge or dip? If you are not confident, do you think you need more time?
   

The above actions are questionable but no correct or wrong on it because trading habits can be different. Therefore basic rule of trading is important to control your risk.

Anyway, there are really a lot counters in STI is under-researched. Dig then you will know.

Psychological Index - Contra Index

Contra Index is a term used to classify the amount of market contra, leverage and margin play. In general, the higher contra index is, the faster small cap stocks will rise.

The reason behind is contra normally for short term play. This applies to high leverage and margin as well because high leveraging on a margin account has a greater amount of risk if dragged too long. Thus, they are more suitable for short term position.

Next, why small cap? Retailers like to contra because they do not have much money to pick up especially those speculative counter that not suitable for long term. Basically, if you are confident to a counter to perform in long term, you will pick up the stock or buying it using CPF. Besides, some risk takers might perform leverage trading to maximize profit versus time frame in this period as well.

Contra Index ▲ Increase value and vol of small cap ▲

Speculative small cap is not healthily to the market. Generally heavily trading on speculative small cap indicates that the market is moving towards a risker direction and could easily collapses (might be final wave of Elliot's Wave). Reasons:

1. Firstly, ever rising of speculative small cap generally increases the market price ratio against earning and fundamental value. This leads to gradually cashing out by fundamentalist to transfer to other low risk (low PER) regions.
   
   
2. Secondly, retailers will turns more radically high leveraging due to human nature - gambling, greed and pride. High leveraging causes high tendency of market crash when wave followed by another wave of margin call.
   
   
3. Thirdly, as trading volume increases, brokerage risk control will break loose due to the competitive business nature (or broker to increase trading limit for higher commission earn). Hence, investors' exposure definitely will increases by opening more positions.

Many reasons more but the above three are the major ones. Basically as a conclusion,

Speculative Level ▲ Market Health ▼

This summarize to:

Contra Index ▲ Market Health ▼

The general strategy for high contra index scenario is to sell and lock profit. Avoid speculative counters if possible. NOTE: Greed kills.

The cash you prepare after locking down profit is for bargain hunting. With waves and waves of margin calls, force selling and nervous selling, one shall able to collect and buy cheaper stock for long term. Another thing to remember is, never lose your capital.

Explanation of Strategy

When market's health going down, the risk is much more higher (price too high also contributes to high risk). Sell and lock profit for most of trades by performing target price and cut loss price. You can lose all your profit in one two bad trades hence trades within your risk appetite.

Why never lose your capital? A simple mathematic will tells you why. (Link for the simple calculation of Cost of Capital Loss)

Advanced Strategy

1. Contra index high. Reaction index low.
   In this case, it is double edges sword scenario. Market can ignoring bad news due to bullish sentimental. Take this opportunity to cash out while everyone is still buying.
   
   
2. Contra index high. Cash index low.
   Sell or short smartly. Those who believes in karma can buy Put warrant. If you wish to continue to trade, you may choose to hedge with Put warrant as well.

"Market Has Life" - Unique

This month and last month, if you keep losing money. Few things for you to ponder below, hope that this article can enlighten you something.

First of all, you lose not because market is dipping, or market is volatile, or market is whatsoever. The reason you lose because you are not unique. You think like what normal person think. Me myself sometimes can't help to think like general market does. Can't be help, it is human nature. So are you going to keep losing in this market?

Earlier on last month, I told one of the forumers - that the "market has changed". The first time he heard this sentence, I bet he can't understand what I meant. I described to him that the market is hungry last month and be cautious because he don't know this market. Until he lost the first few trades he admitted the market has changed.

In this market, general market players surely loses more than gain.

1. Because that the market corrected a lot, you afraid it will corrects even more.
2. Because that prices changed from red to green, you start to buy based on colour.
3. Because that people buy you buy, people start to worry and sell and you sell.
4. Because that Dow Jones surged triple digits you buy in the morning hopes that the market will rebound.
5. Because that last correction is a 'V' you forgot about false rebound.
6. Because that you yearn for another 5% gain you waited another day.
7. Because that you think you are still live in Feb 2007.

Ask yourself, do you know what is few basic rules in trading? You will be surprise you have forgot them rather than you don't know them.

Buy at dip, sell on strength (Look at No. 1, 4)
Avoid greed (Look at No. 2, 3, 6)
Technical indicator? (Look at No. 2, 4, 5)
Emotional (Look at No. 3, 4, 7)
Lower the price, lower the risk (Look at No. 3, 6)

So, you can list out even more basic rules in trading (as much as you like). You will simply found that bad news spreader, market volatility, shortist, are not to be blamed but you, yourself. You have forgotten them since the market surged irrationally before hard landing.

So ask yourself, are you unique? Or just one of the herd.

(After this, try to list out today's market condition and check with the basic rules to see whether it is worthwell to jump in)

Psychological Index - Reaction Index

Reaction index is how much does a trader react to the market either deep green or red. Reaction index is a human psychological effect that can be factored by news, sudden change of economical situation etc. The most common correlation for STI is Dow Jones results the morning before, Nikkei opening (-1 hr SG Time) and Hang Seng opening (+1 hr SG Time).

For your information,
Regional Market opening hours in SG Time. (PM me if I am wrong)

Nikkei Index - 8AM
Seoul Composite - 8AM
SSEC (China) - 9AM
Jakarta - 9AM
KLSE (Malaysia) - 9AM
Taiwan - 9AM
Hang Seng (HK) - 10AM

Therefore, when Reaction Index high means market is more volatile and more sentimental driven.

Reaction index ▲ Market Volatility▲

General strategy for high reaction index is to reduce short term holding. For long term investors, volatility is unavoidable therefore can be neglected if equities price does not trending downwards shown by other technical indicators.

For risk taker, more volatility means more risk and more gain. Turnover is faster but always take note of brokerage fees. Intraday shows volatility can be exploited as well.

There are a lot of general rule developed by the traders themselves when facing volatile market. Therefore it can be varied from an individual to another.

Explanation of Strategy

Volatile market is not good for new players because of emotional effects on them. If you notice, most of those who lose in volatile market is new players. This applies to contra players as well because when emotion takes control, human tends to act irrationally thus always end up at losing side. Therefore, avoid leverage, warrant, contra if the risk control is inadequate.

One good thing about high reaction index is good for picking up bargain from nervous herd. Whenever reaction index gone wrong and with some unique regional market movement, the first 5-15 minutes of market opening is good for bargain hunting.

Advanced Strategy

1. Reaction Index high with Cash Index high (for STI only)
   Smart money can be earned for the first 5 minutes of market opening provided some conditions are fulfilled. (Look for a clue for nervous market yourself, play at your own risk). When nervous investors try to jump out of the wagon, quickly grabs up some bargain buy and start to queue to sell. Holding period between buy in and queue to sell and sell price is case by case basis (NOTE: DO NOT greedy).
   
   
2. Reaction Index high with Contra Index high
   Be cautious. Force selling and margin call may followed by this. Cut loss when your target is reached. Money can be earned again but capital loss is a no-no. Take note of the volatile low cap speculative stock. Shorting can be performed if you don't believe in karma and skillful enough. If you do not have either one of these - skill, luck, money to hold, can consider cut, stop and wait.

Psychological Index - Cash Index

Cash index is how many percent of cash vs equities in the hand of most of the investors.

What is so meaningful about this? Basically as more investors with high cash are waiting at the sideline, the likelihood that the market will go down without support is lesser.

Cash index ▲ Correction Damage▼

The strategy when encountering cash index high is to buy quickly when a support level is being found. Next, take profit whenever you feel the market is going down again. Watch for the fundamental stock that suffers most punishment, buy at dip when the sentimental is allowing.

Cash index is also related to the liquidity of cash in the market. High cash index means high liquidity of cash.

Explanation of Strategy

Sideline investors with cash are waiting to buy bargain stock. Be sure to buy with them and move with the flow. Whenever the sentimental turn bear again be fast at locking profit or cutting loss.

Since the sentimental is unstable, it is not advisable to hold too long because bargain buyers are not for long term. They tends to lock profit, therefore if you can't win them, be with them.

Advanced Strategy

1. Cash index is high but sentimental is terrible.
   The support might not be strong, therefore execute buy and immediately queue for sell. Always close position within the day. If you are looking for long term investment, high cash index can be volatile sometimes, you can look for counter that you feel the current pricing is cheap against to your long term risk.
   
   
2. Cash index is low. Contra index is high.
   Risk is higher. Consider to close position on high speculative counters and lock profit gradually if possible. Liquidate as much cash as you can, sharp correction might easily triggers by bad news.
   
   
3. Cash index is high. Reaction index is high.
   Expects a volatile market. Reduce overnight position. Avoid trading outside your limits. Monitor regional markets, currency rate, oil price, gold price.
   

"Market Has Life" - Nervous Strike

Sometimes I wish to know what is the investors reaction index, investors contra index, investors cash index even it is just some terms I come out myself. These are related to the contents of the article today.

First of all to STI, Reaction index is how much does a trader react to the market either deep green or red. This is mostly correlated to Dow Jones results the morning before, Nikkei opening and Hang Seng opening. As all of us know, market is affected by regional market's life performance. Moreover STI is a better follower than the rest.

More Info

Contra index is more related to how many percent of the investors in the market are playing contra, leverage, margin etc. The higher is the percentage, the more dangerous is the market due to the so-called zero capital game of stock market.

Cash index is how many percent of cash vs stocks in the hand of most of the investors. Basically the more cash and the more investors are waiting at the sideline, the less likelihood that the market will go down without support.

Lately if you notice, the contra index come down because margin call going around and a lot of investors reduced their leverage rate due to unstable market. Therefore we can say that it is becoming less likelihood market to crash and also less likelihood to surge like before.

Cash index goes up because a lot of investors cashed out due to their nature of fear the market will go down more and affected by the negative news going around.

So, as a conclusion, greater crash/surge might not easily occurs (without sudden incident like 911, war) for time being. That's why you can notice that the 'up and down' is not so significantly seen even if bad news keep coming out.

Coming back to the title nervous strike, there is a way a lot of people use to earn smart money. It happens when the Reaction Index gone wrong. Often like Dow Jones corrected 1-2% and STI gap down by a lot, the first thing within 5 min after market open a lot these so-called 'kan-cheong spider' (nervous herd) will jumps out of the wagon.

It is easy to grab some cheap stocks within this 5 min and immediately start to queue higher. Without any worse news going, there will be a short technical rebound likely to occurs due to buy up from these nervous herd. That's why avoid to buy for the first 15 min after market opens not for this reason above.

Do take note of the current situation before execute the 'buy at dip for starting 5 min' strategy. Sometimes if the market sentimental is not good, or the risk vs gain is not good, it is not recommended to execute this strategy.

"Market Has Life" - Just Across The Causeway

Just across the causeway, the flavor is different from here. If you trade regularly in STI, you will find yourself alien to the Malaysia's market - KLSE. In the previous article of Market Has Life, I wrote that STI has an attitude of its own - Kiasu and Kiasi. Today let's talk about KLSE.

When you look at the charts in KLSE often you found that the cycle is much longer. It probably can be explained that because Malaysian is not that afraid to die (not that Kiasi) or Malaysian is much greedier.

You may argue that KLSE has different funds or even Singaporeans invested too. What makes you think that KLSE is different from STI? The truth maybe because they are also shaped themselves to approach differently in a different market. This is what I meant that Market is always different based on geographical, knowledge of investors, cultural and much more.

Not only the cycle is much longer than STI but the fluctuation too hence it makes more profitable if you know how to play swing with their tempo.

In STI, if you catch a breakout, normally it is about 5%-15% (for pennies) from the previous price. The breakout often comes with profit taking style (T+3, T+5 unless it is obivously cornered). However, KLSE's breakout can be up to 20%-30% non stop until the next profit taking session. It may sounds crazy but you can look at KLSE's counter yourself.

One undeniable fact is human nature is similar. They can be afraid too, even if the cultural and environment they grew up is different. So, T+3, T+5 scene can also be observed in KLSE, however the KLSE's force selling is not that obvious as STI.

When we talked about how profitable KLSE's breakout can be, I also mentioned that the fluctuation is much greater there thus when the price swings down you will definitely be shocked how low it can goes. So, avoid catching falling knives if you don't know what you are doing in KLSE.

As a conclusion, this is what KLSE's nature compared to STI:

1. Longer swing cycle
2. Greater price fluctuation
3. Force selling can be seen with longer T+n

"Market Has Life" - Singaporean Style of Market

Stock market if you notice is different from one country to another country. Therefore some indicator is suitable for STI used only.

From what I have seen, market changes and market does evolve as well. Hereby I will write some views of mine on the market and I decided to name it as "Market Has Life".

First of all before I start with today's topic, please take note the key points:

1) Market changes - yesterday's market is not today's market and today's market is not tomorrow's market.

2) Market does evolve - from the level of knowledge of their 'players' and their cultural, their risk appetite, their experiences, market's characteristic is being formed and it does evolve time to time. Just compare STI to SSEC and KLSE and you shall know the difference.

Therefore "Market Has Life".

To win in the game you must know your enemy, to win stock you must know your market. STI is very similar to Singaporean's nature due to large amount of its 'players' are local. Think of two words that can describe STI - Kiasu and Kiasi.

From my observation, most of the STI's stock like to have 1-2 days UP continue with 2-3 days PROFIT TAKING and the cycle continues. From here you should know how to play the game. Some like to buy during the profit taking period and force-selling period - which is T+3 to T+5 and sell on next rise. As a result, you shall see the chart most probably go up like a "stair-step".

Remember the characteristic, Kiasu and Kiasi. Therefore contra trading is heavily utilized. So, to conclude, each "swing" is much shorter and can define by T+3, T+5 and T+7. Most of the market swing players take about 2-3 weeks to complete a swing whereas STI takes about 1 week. Be smart to take this as your advantage - kill those who buy high at the 1st and 2nd day.

Market Grief

Please refer to the Market Grief Indicator just next to the article. Often people relates Technical Analysis to human behavior in the market. Previously I like to relate lots of thing happens in the market to human psychology especially how investors/traders react to the market and derive my own view and own formula to analyse the market.

Talking about Market Grief Indicator, what so useful about this indicator? Just imagine correction is an illness to the Bull Market and it is unavoidable for all of the traders to feel such way. Anyone can 'jump' out from this loop shall know the market reaction and could judge when to enter the market.

I often relate this indicator to the market volatility because volatility of market is same as human mood in acceptance to his/her illness. For example, how does a cancer patient first reacts when he/she knew that he/she suffers this fatal illness? The cycle (volatility of the market due to correction) will ends when the indicator cycle ends. You have to enlighten yourself when looking at the indicator and correlates them to your peers beside you in order to fully understand the meaning behind this indicator.

I have quoted the information on this indicator from cancersurvivors and shall not take credit myself for coming out with the wordings in the indicator.

Flag

A lot of TA practitioners only know about flag flag flag and how to draw flag in the chart. About more than half of them totally blur why flag come about. TA is based on human psychological behaviour therefore people always say that "Market never changes because human never changes".

Knowing TA and correlate to human psychology is important as a TA practitioner. Everyone knows how to draw trendlines, resistance & support lines, get moving average (MA) from charting software with simple training. When you say about I am a practitioner of TA, do you really mean so?

I started with TA then come along studied FA for medium term counter analysis. I can't say I am very good but when I was looking at TA at those days I read from the basic, the very basic (even the history, how it comes about... blah blah... can be very useless).

Formation of flag is based on human nature when balancing their greed and fear. It says when a flag is form, eventually it will follows the previous main trend, meaning if a upwards flag is formed eventually it will goes up after "shakes" a little.

Let's talk about Uptrend Flag. Imagine you are part of the market, the first time the price raises to $0.50 you took profit. Then because of a lot of traders have the mentality same as yours the price dips a little but won't break through the first time price you bought because when it retrace a little you will start to buy in as a bargain buy.

You begin to grow greedy, bought again at $0.475 and raises to $0.50 is not enough because every single counter in the mainboard is rising non-stop. Then people like you will push the price slightly higher to $0.55 before taking profit. The cycle continues until eventually it breaks the previous old resistance and traders like you will think sky is limit which will causes a "Breakout".

So, turn the other way round for downwards flag. Just substitute rise with drop, greed with fear, resistance with support.