Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Sentiment Analysis: How Investor Perception Drives Market Prices

InvestorEducation / Learning to Invest Apr 12, 2008 - 11:51 AM GMT

By: Money_and_Markets

InvestorEducation

Best Financial Markets Analysis ArticleJack Crooks writes: Topsy-turvy markets like these can easily make your head spin. I mean, we're currently dealing with overdone trends, implosive fundamentals, government regulation and an increasingly globalized world economy.

And as if simply understanding those complex dynamics wasn't enough, we still have the difficult task of trying to make money.


Often times, when there's so much going on it makes sense to step back to a more basic approach — one grounded in human nature. This may actually be your best bet in making money in the long-run.

In this issue of Money and Markets , I want to focus on one key point that, if properly understood, may well increase your trading profits during the next eight months, and beyond. I'll also tell you about two popular trading systems.

Let's start with this simple premise ...

Prices are Driven by the Ever-Changing
Perceptions of Buyers and Sellers

Conflicting ideas between traders exist at all times, everywhere. That's why it is said that markets are grounded in human nature. And remember, it takes disagreement over value and price in order for a market to exist in the first place.

The following illustration is a perfect example of this tug-of-war playing out in the currency markets.

The U.S. dollar was suffering on Thursday morning ... again ... and breaking down below critical support levels.

But the price action was merely a head-fake, to suck in short sellers, before a sharp dollar rally that would knock them upside the head and force them to cover their shorts.

We've been presented with many similar situations in the past few years. And every time it seemed as though the dollar succumbed to market pressure and quickly pressed even lower.

But sure enough, the buck staged a mighty reversal this time.

Of course, it goes without saying now that some traders have been handed their losses, the dollar's next leg lower is probably soon to come!

Rational? Of course not! But the turbulent price action in the dollar does sum up exactly the point I am attempting to get at ...

Markets NEVER Behave Rationally

After so many years in the markets I've developed a few pet-peeves. At the top of that list is when I hear someone say "The markets are acting irrationally."

Well of course they are. Markets never behave rationally — never. How can markets be rational when humans create markets and humans are irrational? Market prices are based on an expected future based on assumptions that are always flawed because the future cannot be forecasted. The best that can be said is that there are "degrees" of rationality in the market.

Some people seem to think that prices are event driven. In other words, economic releases and news events are always what cause prices to move the way they do. In actuality, the people who believe this are wrong.

For instance, if IBM were to report better-than-expected earnings, its share price will go up, right?

Not necessarily. Its share price may go up, but it also may go down!

The price action depends on how the players trading shares of IBM feel about the current earnings report, future earnings forecasts, current market environment, their personal financial situations and so on and so forth.

Traders and investors' reactions to events and fundamentals drive prices. Real people move real money based on the difference between expectations and reality.

Without differing perceptions we could never have a dynamic market. And for that reason, strategies have been developed in hopes of harnessing these perceptions. One of them ...

The Dow Theory:
Three Phases of Price Movements

Charles Henry Dow developed a series of principles for understanding and analyzing market behavior which later became known as Dow Theory.
Charles Henry Dow developed a series of principles for understanding and analyzing market behavior which later became known as Dow Theory.

The Dow Theory, as credited to Charles Dow, was created after a gathering and analysis of numerous editorials written by him, and further explained and improved upon by William Hamilton, and finally culminating in a book titled, The Dow Theory , written by Robert Rhea.

The Theory is made up of six major tenets. In an effort to explain the make-up of major trends within markets, one of these tenets outlined three phases of price movements within a primary trend. (The phases, as described below, refer to a primary uptrend.)

Phase #1 — Rebound and Accumulation

After a primary downtrend expires, enter the smart money. Beaten-down prices slowly recover and buying interest grows. The primary uptrend builds from this turning point.

Phase #2 — Public Participation

Fundamentals begin to brighten and investors begin to feel that prices need to go higher. The public gets in on the action and powers the uptrend. This accounts for the largest and most rapid change in price.

Phase #3 — Speculation

This is the last hurrah for the primary trend. At this point, the only thing driving prices higher are those investors giving too much credit to lackluster fundamentals. The speculators are left buying even when conditions aren't necessarily improving.

The three phases make up basic stepping stones that help in understanding how investor sentiment drives prices. Charles Dow noticed that markets tend to move in an orderly fashion, repeating the same patterns over and over again.

But Dow wasn't the only market follower who attempted to dissect the role of sentiment on markets. Ralph Nelson Elliot sought to develop a systematic approach to analyze investor attitude.

Elliot and His Wave Theory

The process Elliot developed would eventually be known as Elliot Wave. And while a perfect understanding of Elliot Wave is complicated, there are a few simple ideas that can guide you in analyzing market sentiment.

First , there are impulse and corrective waves that make up a trend. Impulse waves steer the trend, i.e. they move in the same direction as the primary trend. Corrective waves are a response to impulse waves and retrace pieces of the trend, i.e. they move against the primary trend.

Second , these impulse and corrective waves typically join together to produce a 5-wave pattern. Now, I'm not going to force-feed you the monotonous information required to understand wave construction and formation, but I do want to visually share with you the most basic 5-wave pattern.

Basic 5-wave pattern

In this basic pattern you can also find the three phases described in Dow Theory as I mentioned earlier. I've overlaid them on the same basic 5-wave pattern in the following graphic:

Dow Theory

Needless to say, there's something to this. But again, I want to drive home the point that however complicated all this technical analysis might appear, it's all based on human nature. In fact ...

In the Endgame, Understanding Investor Attitudes Is Critical

I firmly believe that keeping a pulse on investor attitude is hugely important. Perhaps more important than knowing how much profit Google reeled in for the fourth quarter, or exactly the rate at which the Japanese economy grew in 2007.

So how does all this apply to the turbulent price action we witnessed in the U.S. dollar this past week? Well, I tend to believe we're very near a critical turning point.

Let me leave you with this weekly chart of the U.S. Dollar Index. This chart captures the most recent major down leg of the dollar bear market that began all the way back in 2002. Is 'Wave 5' close to wrapping up? It sure looks like it to me!

Best wishes,

Jack

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in