Update: Nov. 29, 2013: Revisiting this trading pattern for Thanksgiving: Today was a half trading day and markets continued to melt up… could Monday be the reversal that this setup predicts?
Nov. 11, 2013: It’s a holiday Monday for most traders today, which reminded us of one of our favorite market psychology studies from Mark Fisher in his book The Logical Trader.
It goes something like this: Give traders 3 days away from the markets to think about how much money they are losing in their current trade, and they will get out of the position entirely on the next trading day.
So if a stock is in a down trend, these traders will sell it. If it’s in an up trend, they will buy it.
But this day could also be the final ‘wash out’ of the current trend and mark a trend reversal. In some of of the stocks, futures, and indexes we follow, trends are reaching the very edge of their channels and would certainly be ripe for a reversal this week.
The excerpt from the book is below as well as a link to a sample of the book on Google. Enjoy.
The I’m mad as hell (MAH) trade combines the concept of the Trend Reversal Trade with along with a long weekend or a holiday, such as Memorial Day. The MAH trade requires the market to have been in a sustained trend. And as we know from the psychology of the TRT, when the market has been in a sustained trend, there are traders who have made numerous attempts to pick a top and have gotten their clocks cleaned (vice versa for a bear market).
Now, the long weekend comes.. The traders are sitting at home over Memorial Day or July 4th and they”re miserable about how they’ve been on the wrong side of the market for so long and how much money they’ve lost. Maybe their spouses are now even giving them market advice! They’ve reached the point where they can’t take it anymore. They say “uncle” and are resolved to get the hell out of their losing positions as soon as the market reopens. If they’ve been short in a rising market, they’re going to buy the opening. If they’ve been long in a falling market, they’re going to puke on the opening.
At this point, when human emotion is capitulating, the result is that you’re going to see in the market gap up or down in the direction of the prevailing trend. Those traders who are frantically trying to achieve peace of mind are basically creating that gap.
Then after these people have finally thrown in the towel, lo and behold, the market retraces back to the prior session’s trading range. The top or bottom that they’ve been trying to pick for so long is finally in, and they’re no longer involved.