Posted by Derek on February 4th, 2012
Everyone knows the following:
1) Stocks are in a raging uptrend showing no signs of letup
2) They’ve travelled a long way in a short time and are entitled to a break
As traders, we constantly walk a tightrope between identifying an emerging opportunity and recognizing when it’s too obvious. I’ve learned through many mistakes that obvious doesn’t mean sell(or cover); for me, it just means find something else to buy or short. Is there a way outside of the fuzzy sentiment polls to measure “obviousness”?
Keep in mind that the market is made up of intraday, swing, and position traders, and also covers the spectrum from mean reverters to trend followers. The successful traders I’ve seen lean heavily to one side or the other but acknowledge that the other side has the power to steamroll their best idea at any moment. Having relied on “gut feel” for years, I needed ways to quantify “obviousness” to prevent me from giving myself(or the other side) too much credit. I read the polls but more for entertainment than anything; the best real-time sentiment indicator is price itself.
One such measure I apply across my universe is “Change in ATR over X periods”, which I track on a 6-8 day basis, 5-7 week basis, and 5-7 month basis as I find that’s the time needed to turn doubters into believers in their respective timeframes. As I’m plowing through charts looking for trends, this is a simple and objective way for me to make sure I’m not chasing someone’s expiring idea. I’ll highlight the weekly one today because it’s the one that just went “obvious” on Friday. Take a look at the following chart of $SPX:
Read the rest and see the graph here.
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