One of my favorite trading books of all time is “The Nature of Risk” by Justin Mamis. In it he helped me to learn that technical analysis is simply a way to visualize market sentiment and human behavior through what might otherwise be considered random price fluctuations. The following graph is something that Mamis outlined that helps us understand the nature of investor sentiment through price fluctuations. This by far, has had the biggest impact on my trading in the last 5 years. 
Bookmark this chart, copy it, save it, print it out and frame it next to your trading terminal. Once you understand it, it will help you recognize what stage a stock or market is in based on its correlation to this road map of investor sentiment. You can outline almost any market correction on any time frame, and see the two charts line up pretty consistently. The chart below is a total hack-job, but I’ve highlighted various sentiment cycles over the last several market corrections. Note the striking resemblance… 
I will continue to blog about the effectiveness of this tool over time, but I want to present a longer term oriented idea that I mentioned earlier today; Monster Energy. I made an incredible amount of money on this stock in 05-07, and have only traded it on a few occasions since. Most recently I’ve come to the conclusion that the sentiment cycle favors a unique opportunity here. Take a look…
I like the structure down here, and the stock was aggressively bought into weakness today. Over the next few days I will be lining up a longer dated call purchase; something I have seriously lost track of over the last several years.
Longer term trading, that is.
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I like it!
I’ve witnessed many times how well this sentiment chart works from OA.
Do what he says, print it out, #study
most excellent
OA, thanks on this chart. Do you look at overall sentiment for the mkt, before placing a trade like MNST, or do you view each chart mutually exclusive?
James,
Yes, I always understand what sentiment stage the market is in so I know whether or not to press risk, and what stocks the market will collectively look to buy.
Great question.
Welcome, Option Addict: glad you are on IBC again.
I just started researching options a few months ago, and I thought it would great to see more options discussion on IBC: now my prayers have been answered!
On the subjects of charts, I see from your http://www.traddingaddicts.com website that you have a section on Point and Figure charting: do you still use that in your planning and what do you like to focus on with P&F ?
Crud, I typed your website link in wrong (in case anyone clicked on it): http://tradingaddicts.com/
I am a huge fan of point and figure charting. In fact, the PnF chart for MNST aligns perfectly with this set-up.
I like to break out these charts into market corrections. They define razor sharp reference points for risk management.
Do the emotions/psychology of the market always follow the same kind of rhythm, or is it possible for Aversion to occur twice or something before all the other stuff to happen again between.
Is the pattern fractal? Does it work just as well on a intraday chart as on a yearly chart, or do you just focus on a daily or weekly?
Could the “enthusiasm” of the market be “denial” instead?
Bob,
First, I focus on daily and weekly charts for this. I find that the market does follow the same rhythm more often than not.
In regards to your question, Could the “enthusiasm” of the market be “denial” instead…yes. This is why I like to take a weekly view in conjunction with a daily.
Your anxiety charts reminds me of the classic Economist cartoon from the early 90s showing this exact cycle
was addicted to options.used to study chains hours on end.one can learn a lot of sentiment and what option writers and buyers are thinking from quarter to quarter. traded options before ever owning stocks. been in rehab for a while though.good to see someone else here in serious options trading…..
I remember on the webinar you looking for a stock that made a big move that you said had a similar volume pocket. Then you talked about how unfortunately you can’t really show what a pattern looked like prior to it’s move into a volume pocket because a lot of volume fills in and changes the volume profile.
However, I started using the relatively new “Think On Demand” function for paper trading. Found that by changing the date to before the big move you can see what the volume profile looked like BEFORE the move.
This way you can study some of the past big moves and see how the volume profile looked and compare it to current patterns.
Thanks for the great post, Option Addict. I’ve seen this sentimental chart years ago and thanks for bringing this back out to remind everyone.
I’ve learned that the antidote to the emotional up and down of the market sentiment is to simply follow the price action. You end up riding the roller-coaster with your hands high up instead of holding on to the support bar for fear of your life…
Cheers!
how are u playing mnst?
June OTM Calls, Good Sir