All About Market Indicators (All About Series) - Softcover

Sincere, Michael

Softcover

ISBN 10: 0071748849 ISBN 13: 9780071748841

Publisher: McGraw Hill, 2010

Synopsis

ALL SIGNALS ARE GO!

Why did professional trader and Market Wizard Linda Raschke move completely out of the stock market three days before a major crash? And what motivated Fred Hickey, a Barron's Roundtable participant and editor of a monthly investment newsletter, to send out an alert to his subscribers three months before an October crash? And why did economist Bernard Baumohl recommend going long in the midst of one of the greatest recessions since the Great Depression?

Is it luck or is it really possible to forecast what the market will do next? By the time you finish All About Market Indicators, you'll have an answer when these traders reveal how they knew. 
 
In this easy-to-read book written for beginners, you will also learn from the people who created some of the most popular indicators including Richard Arms, Larry Williams, Gerald Appel, John Bollinger, Dr. Van Tharp, Ken Fisher, Thomas DeMark, and William O'Neil. 

You will also learn: 

1. How to use sentiment indicators to monitor the psychology of the market 

2. How to use numerical indicators that reveal which stocks are advancing or declining

3. How to understand technical indicators and read their signals 

4. How traders anticipate market direction 

5. The importance of price and volume 

The purpose of this book is to teach you how to use market indicators to anticipate which direction the market or stocks may move in the future. 

Michael Sincere also wrote "How to Sell Covered Calls," "Help Your Child Build Wealth," and two bestsellers: "Understanding Options," and "Understanding Stocks."

About this title

About the Author

Michael Sincere is the author of two bestselling books, Understanding Options (McGraw-Hill) and Understanding Stocks (McGraw-Hill), each which sold over 100,000 copies.

He is also the author of "How to Sell Covered Calls" and "Help Your Child Build Wealth (Wiley). 

Sincere has written numerous columns and magazine articles on investing and trading. He has also been interviewed on dozens of national radio programs and has appeared on financial news programs such as CNBC and ABC's World News Now to talk about his books.
 
In addition to being a freelance writer and author, Sincere writes a column for MarketWatch. 
 
You can find out more about Sincere at his website, (michaelsincere), where you can read his articles and blogs.

From the Back Cover

Read this book to learn about the most useful market indicators and how to use them to increase profits, protect against volatility, and help anticipate which direction a stock or the stock market will go next.

Excerpt. © Reprinted by permission. All rights reserved.

All About MARKET INDICATORS

By MICHAEL SINCERE

The McGraw-Hill Companies, Inc.

Copyright © 2011 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-174884-1

Contents

The Opening Every Indicator Tells a Story
PART ONE: THE MOST POPULAR MARKET INDICATORS
Chapter 1 Reverse Psychology
Chapter 2 By the Numbers
Chapter 3 Let's Get Technical
Chapter 4 Outside the Box
PART TWO: HOW TRADERS ANTICIPATE MARKET DIRECTION
Chapter 5 Fred Hickey: The Contrarian
Chapter 6 Linda Raschke: The Technician
Chapter 7 Trading Psychologist Brett Steenbarger and Psychiatrist 
Alexander Elder, Creator of the Force Index
PART THREE: UNDERSTANDING VOLUME
Chapter 8 Price and Volume
Chapter 9 High-Frequency Trading
Chapter 10 Effective Volume
PART FOUR: ONE STEP BEYOND
Chapter 11 Timely Advice
Chapter 12 Where to Get Help
The Closing All Signals Are Go!
Acknowledgments
Index

Excerpt

CHAPTER 1

Reverse Psychology

The more you study the stock market, the more you'll realize it's fueled by thefear, greed, and hope of millions of market participants. So it should not besurprising that the market indicators in this chapter are used to monitor whatthe crowd is feeling.

These indicators are perhaps the easiest to read and understand, but they cangive you the most revealing clues, especially at market extremes. Knowing whenthe crowds are panicked or over-confident is essential if you are going to enterthe market. The stock market is psychological warfare, and you'd better knowwhat others are thinking before you enter.

The following indicators are commonly referred to as sentiment indicatorsbecause they monitor the sentiment, or psychology, of the market. And as you'llsoon find out, it's an Alice in Wonderland kind of world, where up is down anddown is up.

Traders and investors closely follow the first indicator, the AAII SentimentSurvey.

AMERICAN ASSOCIATION OF INDIVIDUAL INVESTORS

Name: American Association of Individual Investors (AAII)

Where to find: www.aaii.com/sentimentsurvey, Barron's, Forbes,and other financial periodicals

Time period: Weekly survey

The Lighter Side: The AAII Sentiment Survey, which I nicknamed "TheLittle Guy," will keep you out of trouble when the markets get extreme. A littlesecret: do the opposite of the little guy.

WHAT AAII DOES

AAII polls their members via the Internet to find out how the members feel thestock market will do over the next six months: bullish, bearish, or neutral.

HOW TO READ AAII IN FIVE MINUTES

Go to www.aaii.com/sentimentsurvey to read the survey results. It willlook something like Figure 1.1.

WHAT SIGNALS TO LOOK FOR

1. Buy: When AAII members are over 50 percent bearish, you may buy. At 60 or70 percent, it's a screaming buy.

2. Sell: When AAII members are over 60 percent bullish, you may sell. At70 percent, it's a screaming sell.

3. Note: These are not actionable trades, but only guidelines. Alwaysuse other indicators to confirm before buying or selling.

THE BACK STORY

AAII is a nonprofit educational organization founded in 1978 by James Cloonan.Members are typically nearing or in retirement and have a relatively high networth. One of the organization's goals is to educate individual investors tomanage their own portfolios.

In 1987, AAII started polling individual members each week about the stockmarket. Before the Internet, random AAII members were polled by postcards; since2000, all members have to do is vote online.

It wasn't long before the financial world discovered that the poll results couldbe used as a contrarian indicator. In other words, if members are feelingexcessively bullish or bearish, traders could do well by doing the exactopposite.

WHY THE AAII SURVEY WORKS

There is nothing more fascinating than getting inside the heads of individualinvestors. After all, the market is driven by twin emotions of fear and greed,as pointed out by traders such as Jesse Livermore or investors such as WarrenBuffett.

Therefore, it is not surprising that one of the most watched is the weekly AAIISentiment Survey. The results are published on the AAII Web site or in financialperiodicals such as Barron's and give insights into the mind of thelittle guy. At times, the survey can be uncannily accurate—that is, it canbe if you do the opposite of what the members are feeling.

"The survey gets interesting when we see levels of excess," says CharlesRotblut, vice president and AAII Journal editor. "It might not be theexact bottom but that first high reading is a definite sign you should belooking for confirmation. In other words, look for additional signs to supportyour contrarian belief, such as valuation, changes in earnings estimates, andchart formations."

If you graph the results on a chart, says Rotblut, you are looking for resultsthat are at least two standard deviations away from the mean. One standarddeviation would be on the outer edge of normal. Two standard deviations andmembers are feeling either scared they'll lose their portfolio or giddy by howmuch money they're making. At three standard deviations, the survey reallyshines. For example, one of the highest readings of all time was 70 percentbearishness. The following year, the market zoomed up over 80 percent.

Typically, says Wayne Thorp, senior financial analyst of AAII and editor ofComputerized Investing, "when you start hitting 60 percent sentiment onthe bearish or bullish side, your ears should perk up."

Historically, that means the market is hitting an extreme. "I think over theshort term the market is completely driven by sentiment," Thorp cautions. "Incase of extremes, the fundamentals tend to go out the window."

The survey seems to work as a contrarian indicator because it's not just themembers who are feeling extreme emotion but also the majority of the people inthe stock market. And yet, it's hard to do the opposite of how you feel.

"At a certain point," Rotblut explains, "members succumb to irrationalexuberance or are overwrought with fear about what is going on in the markets.The hardest thing for someone to do is to buy low and sell high, even thoughstudy after study shows that you should be greedy when others are fearful andfearful when others are greedy, to paraphrase Warren Buffett. When you'relooking at the balance of your account plummeting, or you're looking at itjumping in value, it's really hard to take a stand against the tide. It's humanemotion."

One suggestion from Rotblut is that during the next bull market, write down whatyou will do in the next bear market. "When people are not under stress, theymake rational decisions. But when they are under stress, they tend to makeirrational decisions. They let their emotions take over."

It's hard to step in and buy when you're losing money in the middle of a bearmarket, he says. "From an emotional standpoint, it's extremely hard to do. Froma financial standpoint, it's often the best move you can make."

NOBODY'S PERFECT

The AAII survey is often eerily accurate, capturing extreme pessimism or panicprecisely at the exact bottom, or overconfidence at the very top. But in themonths between the two extremes, you might not learn much. Technically, thesentiment survey was not designed as a timing indicator, but many have tried touse it that way.

Even if you do use the survey to try to time tops or bottoms, more than likely,you'll be early. So perhaps the only criticism is that although it does work attops and bottoms, it's only one piece of the puzzle. When the numbers get highin either direction, you take notice, but you don't run out and trade based onthe survey's results.

WHAT'S NEXT?

Although the AAII is a popular sentiment survey, it's not the only game in town.Another sentiment survey monitored closely by traders is Investors Intelligence,which you'll learn about next.

INVESTORS INTELLIGENCE

Name: Investors Intelligence Advisor Sentiment Survey

Where to find: www.schaefersresearch.com or www.market-harmonics.com

Note: You can also pay for a yearly subscription to Investors Intelligenceat www.investorsintelligence.com.

Hint: You may also type the words Investors Intelligence in a searchengine such as Google or Yahoo! to find the most recent survey results.

Time period: Weekly survey

The Lighter Side: Investors Intelligence, which I nicknamed "TheAdvisors," will keep you out of trouble when the markets get frothy or gloomy.Another little secret: Do the opposite of the advisors.

WHAT THE ADVISOR SENTIMENT SURVEY DOES

This weekly sentiment survey, published by Chartcraft, polls independentnewsletter writers for a view of what the market might do over the next sixmonths: bullish, bearish, or neutral. Chartcraft exchanges information with avariety of services, and it also analyzes newsletters received on the Internet,in the mail, and by fax.

STEP-BY-STEP: HOW TO READ THE ADVISOR SENTIMENT SURVEY IN FIVE MINUTES

1. Type www.schaefersresearch.com in your Web address line.

2. Click once on the "Quotes and Tools" tab.

3. Scroll down and to the left. Under "Market Tools," click on"Investors Intelligence."

4. The weekly survey results appear on the left.

5. The Investors Intelligence survey will look something like Figure1.2.

6. Investors Intelligence also provides the results in a table like the onein Figure 1.3.

WHAT SIGNALS TO LOOK FOR

1. Buy: When independent financial newsletter writers are over 50 percentbearish, you may buy. At 60 percent, it's a screaming buy.

2. Sell: When independent financial newsletter writers are over 50percent bullish, you may sell. At 60 percent, it's a screaming sell.

3. Note: These are not actionable trades, but only guidelines. Alwaysuse other indicators to confirm before buying or selling.

THE BACK STORY

A. W. Cohen, the founder of Chartcraft, Inc., decided to poll a group of expertsin 1963 to find out what they thought of the stock market. The idea, of course,was to follow the experts' advice and make a killing on Wall Street.

After doing a number of surveys, Cohen discovered that the majority ofnewsletter writers were usually wrong at forecasting the market, especially atturning points. He learned that you could do well if you did the opposite ofwhat the majority of the writers advised. Although officially called theInvestors Intelligence Advisor Sentiment Survey, sometimes you might see itreferred to as the bull/bear index. Their subscribers get the survey resultsimmediately along with a daily e-mail.

HOW INVESTORS INTELLIGENCE WORKS

Chartcraft polls over 100 independent financial writers not affiliated with WallStreet about their views of the market. By polling independent writers who getpaid to forecast market direction and advise their readers which way the marketis headed, you'll get a range of viewpoints. (You might wonder why no onesurveys professional advisors. The answer? More than likely, you'd get only onesentiment reading: buy.)

Just as with the AAII survey, the Advisor Sentiment Survey works remarkably wellduring market extremes, as long as you are contrarian.

It's actually intriguing because newsletter writers are supposed to be moresophisticated about the market. After all, they are getting paid to advise. Andyet, just like the little guy, newsletter writers are often swayed by feelingsof panic or euphoria.

In fact, many traders look at both the Advisor Sentiment Survey and the AAIIsurvey to compare results. Often, sophisticated financial newsletter writers andindividual investors share similar feelings about the market, especially whenunder stress.

Michael Burke, editor of Investors Intelligence, explains: "Many advisors aretrend followers, but it is human nature for people and advisors to become morebullish when stocks are rising and more pessimistic when they are falling.Rising prices also seem to bring out more optimistic news and forecasts, whilefalling prices tend to do the opposite."

NOBODY'S PERFECT

Although the survey often gives early contrarian signals of market direction,which is useful information, it's not necessarily an actionable trade.Therefore, using sentiment indicators to precisely time the market is not alwaysreliable. Generally, the survey results probably shouldn't be used by short-termtraders to enter or exit the market. Many years ago, a study was conducted thatclaimed that the results of the Investors Intelligence survey as a contrarianindicator were not statistically significant. And yet, the survey still seems towork.

In addition, just like those on Wall Street, financial newsletter writers tendto be bullish, perhaps even more bullish than the individual investor. Thatmight explain why sometimes the bullish sentiment of the Investors Intelligencesurvey tends to be a bit higher than for the AAII.

WHAT'S NEXT?

Now that you have an understanding of how to use sentiment surveys to monitorthe crowd, we're going to do something different. To learn about the nextindicator, you'll need a computer and the ability to bring up a stock chart.I'll take you through the process step-by-step.

The next set of indicators has been derived from the options market. If you arefamiliar with options vocabulary such as calls, puts, and impliedvolatility, you can skip the following sidebar. If you need a briefintroduction to the options world, the information in the sidebar should help.

CHICAGO BOARD OPTIONS EXCHANGE PUT/CALL RATIO

Name: CBOE Put/Call Ratio

Symbol: $CPCE (for "equity only") if using www.stockcharts.com

Where to find: www.cboe.com and many other financial Web sites

Time period: Daily and weekly volume

The Lighter Side: The Put/Call Ratio, which I nicknamed "TheSpeculators," tracks the buying and selling of options. Not surprisingly, you'llprobably do well if you bet against them.

Beginning with this indicator, we're going to use charts. In fact, the mostchallenging part of writing this book was finding a chart program that everyonecould use. After all, there are dozens of brokerage firms and hundreds of onlinechart programs. Fortunately, I found a free, easy-to-use Web site that isdevoted to market indicators: www.stockcharts.com.

Obviously, if you use your brokerage firm's charts, continue to do so. But ifyou don't know where to begin, you can follow along with me, step-by-step, as Iintroduce you to various market indicators. (For your information, I'm notaffiliated with StockCharts.com in any way and receive no compensation forrecommending them. They just happen to be a good place to visit if you'regetting started with market indicators.)

Note: All of the "step-by-step" instructions below are aimed at anyonenot familiar with chart software. If you are an experienced trader or you use adifferent chart program, feel free to skip the step-by-step instructions.

WHAT THE CBOE PUT/CALL RATIO DOES

The Put/Call Ratio tracks the volume of put and call options that trade on theChicago Board Options Exchange (CBOE). Specifically, the idea is that option putbuyers, who are aggressively bearish, are frequently wrong. And option callbuyers, who are aggressively bullish, will also be wrong. When the indicatorhits bullish or bearish extremes, it might be a clue to do the opposite.

STEP-BY-STEP: HOW TO READ THE PUT/CALL RATIO IN FIVE MINUTES

1. Type www.stockcharts.com in your Web address line (or open anychart program).

2. On the right side of the screen, enter the symbol $CPCE, and press"Go."

3. The CBOE equity Put/Call Ratio will appear on the screen. It willlook something like Figure 1.4.

4. Hint: You might notice red and blue lines displayed on the screen. Theseare moving averages, which we'll discuss later.

5. Note: You can also go directly to the www.cboe.com Web sitefor the current Put/Call Ratio. Under the "Quotes and Data" tab, select "CBOEDaily Market Statistics." Scroll to the middle of the page for the equityPut/Call Ratio. It will look similar to the chart in Figure 1.5.

WHAT SIGNALS TO LOOK FOR

1. Buy: An equity Put/Call Ratio higher than 1.0 (more puts are beingbought) is a buy signal. Higher than 1.20 is a screaming buy.

2. Sell: An equity Put/Call Ratio lower than 0.75 (more calls are beingbought) is a sell signal. Less than 0.50 is a screaming sell.

3. Hint: Look for a series of consecutive days of high or low Put/CallRatios before taking action.

4. Note: The buy and sell ratios are not actionable trades, but onlyguidelines. Always use other indicators to confirm before buying or selling.

THE BACK STORY

Trader and author Martin Zweig has been credited with being the first to use thePut/Call Ratio to identify tops and bottoms by betting in the oppositedirection. Zweig introduced the ratio in a series of articles after using it tomake several accurate market forecasts. Although first launched in 1995, theCBOE added the equity Put/Call Ratio in 2003.

HOW THE CBOE PUT/CALL RATIO WORKS

The Put/Call Ratio is updated every 15 seconds by the CBOE. The purpose behindthis contrarian indicator is that put and call buyers are generally wrong aboutthe market, especially at tops and bottoms. Historically, retail speculatorshave a rather poor record of guessing market direction.

Although the Put/Call Ratio is constantly updated, it only flashes "actionable"signals a few times a year. Like other sentiment indicators, this ratio excelswhen the market is at one extreme or another. As speculators get more emotional,they'll buy loads of put options (because they think the market is going down)or loads of call options (because they think the market is going up).

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Excerpted from All About MARKET INDICATORS by MICHAEL SINCERE. Copyright © 2011 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw Hill
• Publication date: 2010
• Language: English
• ISBN 10: 0071748849
• ISBN 13: 9780071748841
• Binding: Paperback
• Edition number: 1
• Number of pages: 224