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Deeper dive into psychology and “the narrative”

Taking the un out of unconscious

This is a follow up to my Zone blog, in which I said I’d recently quantum leaped from stage 2 trading, to stage 4, which is “unconscious competence.”

I am slowly realizing the utility of writing about my experiences in the zone.  Making the unconscious conscious.  Which is maybe the point of writing or talking in general.

It’s hard to tell exactly where the line is, between conscious and unconscious, until it’s expressed somehow.

Of course there were reasons for everything I did.   I wasn’t randomly going long or short.  So saying it was “unconscious competence” is only partly accurate.

There was a narrative playing in my head, somewhat consciously, which I sometimes commented on, but mostly not.  And that story was much more detailed than the few things I wrote in my zone blog.

In the past, when markets moved around quickly, I would get panicky, kind of freeze up, like a deer in the headlights, or try to apply some rule, but get totally befuddled by the range expansion, or a giant and quick reversal of an explosively big move.

Now I know all these things happen. 

And I know people get used to something, like small ranges, and when price explodes out of them, up or down, it makes people kind of crazy, and they react in predictable ways.

So there are some things I have a sense of knowing now, that I didn’t before, like how people act in certain market scenarios (because I’ve been one of those people, at various stages of development, living it in real time.)  And then factual things, like knowing big companies and central banks are there, and will buy plunges.  So sharp up moves off big down moves when people are panicky are expectable.

I remember someone’s (CNN maybe?) greed/fear index went from extreme greed to extreme fear in like 2 days.  Markets top when sentiment hits extreme greed, and bottom when it hits extreme fear.  For a reason.

When I was trading this, I didn’t talk about it, because I didn’t want to jinx it.  Plus I’d had winning streaks before, which didn’t last.  Plus, this wasn’t even real money, so it wasn’t anything to brag about.

I’m closer to being ashamed of my trading performance than gloating.

But after writing about it, and noticing there was as much I left unsaid, as said, or more, about how this worked for me, I saw that the important thing was to explain it to myself.

One exercise Morad suggested was narrating the market. Literally, out loud…or write it down…however you do it.  And I would try exercises like that, but didn’t really do them in a systematic militaristic or religious way.

Still, eventually, through exercises, or osmosis, reading, listening to others, a narrative of the market does constantly run in your mind.  The turning point, I think, is making this narrative your own.

Obviously your own narrative isn’t as detailed and elaborate as the whole real story.  For every thing you’re aware about, there are 1000s of indicators and tools, fundamentals, pieces of relevant information, news, political pivots, that you may or may not know about.

And early on, I think there is a paralyzing fear, constantly second guessing yourself, thinking you don’t know enough, you don’t really know some important part of the story.  So anything anyone says might change your mind.

But when you feel like you know enough, even though it’s far from everything, you can ignore the noise, and take positions with more confidence.

I remember on some of the early days of waves, thinking, the internals are rarely so clear, I can’t not play.  You didn’t really need to know anything, it seemed, other than those 3 charts of the market “internals.”

But of course, in actuality, you do know a whole bunch of other things.  But you don’t have to constantly think them and remind yourself about them.  So it “feels” like there is just the internals, and they tell you the whole story.

It’s a zen kind of thing.  Like a koan.  Thomas Cleary gave me the idea that koans are really something like acronyms, or icons that stand for a set of knowledge and related practices.

And the point of that is because our conscious mind, our RAM, is really pretty low bandwidth, pretty simple, there is only so much we can keep in RAM.

So we use the trick of accessing more information and behaviors we’ve practiced than can be stored in RAM by using some kind of short hand, like the market internals that I watch.


I’m going to insert a picture here (because pictures are nice, and because I wanted to create this for study anyway)  of the so called market internals, that I referred to in the earlier blog.  This is a snapshot of 1-22-18 through 2-15-18.

You can open and study this yourself.  This is the dashboard that I said gave me confidence in making decisions when trading in the zone.

Clockwise from top left

  1. the up vs down volume flowing in to all the stocks on the New York Stock Exchange
  2. the advance/decline chart: the net total of stocks in the NYSE that are above or below yesterday’s close (green for the day)
  3. the tick chart, that I highlighted before, which is the fastest moving of the three…it depicts in every instant, how many stocks are ticking up vs down in the NYSE
  4. the SP500 futures, the ES


week 1

The topping week of January 23-26, Tuesday through Friday, we see in the top left corner, the $VOLD chart, up vs down volume is almost non-existent until Friday.  The market action is flat in the lower right corner.  The stocks that are up or down meanders back and forth through zero all week.  But look at the tick.  What that weird -1000 tick in the morning?  And finally, on Friday, the market meanders up without enthusiasm…although “melt up” had been the modality for some time.

week 2

The next week, Monday Jan 29 – Friday Feb 2, is where the heavy selling hits the tick hard the first three days.  There is heavy down volume in the $VOLD.  And the down vs up stocks in the $ADD is pegged all day Monday and Tues below -1500.  Heavily bearish, and yet the market barely moves down at all.  (Because the “buy the dippers” have gotten used to such small down moves, that they are now constantly buying.)  Wednesday the recovery attempt is mounted, but up/down volume is flat, and the tick still hits -1000.  Thursday, with the market STILL flat-ish, the tick starts to slam through the -1000 level.  Volume and advancing stocks can’t get it up, they’re still flat.  And Friday all that selling follows through, the market snaps, falls all day, ends at the low, with multiple -1200 ticks, and the net up vs down stocks crashing to -2493.  Extreme.

week 3, the wild one

Monday Feb 5th opened the week with the big panic flush.  The big sellers probably just had to nudge it, and panic took care of the rest.  We got that -1669 tick!  Note the brief attempt up early in the day, reflected in the $ADD .  But the tick never went to +1000.  Back down through the mid and open on heavy internals was a big tell that day.  The flush ends heavily at the lows, but on a big volume taper.  Then flushes much further overnight, and bounces also during the overnight session, so that we opened Tues in range.  And you can see on the following day how the tick whips around between +1000 and -1000 (because it’s an “open auction in range”) and it’s an up recovery day over all.  But it doesn’t last…the very next day, Wednesday, the selling resume, and there is another reversal down….which follows through on Thursday.  And Friday.  But Friday is the giant reversal, where the tick ends up hitting +1682…almost the mirror image of the extreme negative tick on the panic day.

week 4

Things start to calm down in the early days of the week, as the market finds balance, and starts to drift back up.


It’s widely thought that the biggest difficulty in learning to trade is our own psychology.  Anyone can definitely learn to read charts, and how to trade technically.  Anyone can learn to trade fundamentally too.  But few succeed for some mysterious reason.

I have done the exercise of listing all the psychological problems I can imagine I might have, that might be screwing up my trading.  I have tried to do self-analysis about that.

But what I was missing was, an example of how the psychology works when you’re trading right.  A personal example, I’d lived through, that is, that I could analyze, or make into sticky notes or something.

For some reason, you can read and read and read stories of successful traders, and how they do it, and their advice, and still fail.  Until it comes together like a jigsaw puzzle, if it ever does.

The Zone, part 2

I keep thinking of things I left out of that analysis of “the zone.”

For instance, I didn’t emphasize enough that big selling days happened BEFORE the market cracked, and tanked.  They were predictive.  Very useful…although anticipation is critical, since the big gains came days AFTER the precipitating cause first appeared.

In ONiel’s IBD (Investor’s Business Daily) theory, if you saw 3 “distribution” days in a short time, it was time to dump longs.  The reason being, what you’re seeing is a sign of sellers that are so big, they have to unload in tranches.

(The reverse is the IBD strategy for investment.  You look for signs of “accumulation” after selling has dried up.  The idea being that giants have so much money, they need to buy in tranches.  So they are likely to keep doing it for days, weeks, months or whatever.)

Anyway, at the end of January, giants started unloading at the top.  As the market climbed, through 2017, and in January of 2018, volume got thinner and thinner.  There were less and less buyers, but there were even less sellers, until, suddenly, there weren’t.

So these big sellers could KNOW what their selling would cause.  But the media didn’t comment on it, as the market was hitting all time new highs (the news and pundits didn’t say, isn’t it weird how we keep getting these -1000 ticks, which we haven’t seen in months, and no +1000 ticks?)

I’m sure if you looked at Investor’s Business Daily, it would have recorded those as distribution days.  And they were predictive, which is key.

A flummoxer was, the selling waves often happened late day, which is not normally considered big money.  But obviously this time it was.

Another “wrong” thing was, the market fell from an all-time high made in an overnight session, which is not normally a top.  So they changed the rules, or made new rules, because they could.  (Although this could mean there are higher highs to come later.)

So, a series of slightly down days with big selling, finally led to a big down day with HUGE selling.  Then an EVEN BIGGER down day.  At the end of the last day, it was panic.  Price drops in big gouts, doesn’t even trade some levels.  I’d seen that movie before.

When that happens, it will usually bounce next.  Even if this was “the big one,” we’d expect sharp V shaped bounces, along the way.  That’s an important thing to know about how crashes move.

And in this case, we KNOW there are big buyers who almost for sure will “buy the dip” on a bigger scale.  I don’t know what people knew in 1929, about who was behind the market.  I myself had no clue in 2000 or 2008, but now I do.

So, due to these big players, having their Godzilla battle, you can get big rides up and down, which I did.  After the bounce, you saw the sellers again, so you got drop #2. Very natural continuation move (the C in the ABC wave, or Elliot wave) Then the double bottom was very predictable.  It was right at the 200 day moving average…

Plus, double bottoms on a big time frame are a tradition.  That’s how the whole secular bear of 2000-2012 bottomed.  And how the 2 year bobble from 2014-2016 bottomed, when I was a newbie trader, and very confused by this action.  So this was a speeded up fractal of those.

And I should mention that, at the bottom, the $tick is NOT predictive.  It looks like total Armageddon.  It’s slamming in to -1200, -1400 for hours, then 1:30 PM EST hits, and bam, sudden reversal.  To catch it, you have to just “believe” the buyers are there.  Or you can wait to see a tick reversal, but it doesn’t usually hit +1000 until price has climbed quite a ways off the bottom.

Also, if you watch the market like I do in Bookmap, which shows every trade, rather than something like candlesticks of time, there are characteristic waves at bottoms and tops, which get subsumed in derivative representations like candlesticks.

Next. Hammer time!

Wave 1

So the big sellers did their thing.  They sold in to all the late longs, who all got liquidated.  When they were done, panic took it lower.  The central banks and corporate buyers stepped and did their plunge protection.  (Maybe it was even some of the same big sellers reversing, if that was their game.)  Big bounce.

Wave 2

The sellers reappear, they are not done yet.  The second drop, and the buyers come back in right where they did before, and we get a HUGE up hammer candle….during regular trading hours!  (The Trump candle, and the first bounce on this drop were created in the overnight session…not as powerful as happening during the day, when the actual stock market is trading.)

That hammer candle was about the same size as the one formed when the market plunged and rebounded on the election news of the surprise Trump win.  You can look at charts historically, and it’s difficult to find a reversal as big as the Trump candle.  Yet, here it was again.

Sentiment in a Hammer Candle

The psychology or sentiment of these hammer candles goes: complacent euphoria, or euphoric complacency, if there is such a sentiment, erodes through stages of surprise, layers of realization the market is falling, and not stopping, complacency melts through hope and fear and finally reveals panic, which finishes the move, as the market falls on lower and lower volume, like it rose on higher and higher volume, everyone hitting the sell button, until the trade empties, exhausts.

If when there are no sellers left, suddenly buyers come in forcefully, and take back more than half of the down move, and then more than 61% of the down move, then the momentum reverses to the upside.  All the losers sit there in dismay, as price rockets up past their panicked exits, and those with their wits about them buy back in and become part of the buying force.

This whiplash of complacency to surprise to fear to panic to reversal surprise to hope to euphoria, especially all in one day, but on any time frame, typically acts like a sling shot, and the first expected move would be at least the size of the whiplash, beyond it.

Look how far the Trump candle rocketed the market!.  The shock and awe of the historic 2017 bull run.  I said to myself, self, if you ever again see a bull hammer candle that big, go long!  And stay long, for a long, long time.  But, you probably won’t see a candle like that again for years, if ever.

Wrong.  Here we are in Feb 2018 making a series of candles of this size, both up and down, or down and up that is.  This is history, happening right in front of your face.  The size and speed of these waves are huge, compared to anything you can find in recent charts.

So, up or down from here?

So, after the second bounce, and the giant hammer, it was certainly quite possible we’d rip right back up to new all-time highs.  Probable even.  But there were some flies in the ointment of this outcome.

  1. The huge down move ended maybe the longest run ever of monthly one time framing. That was not likely to be meaningless.  If the market is going to go up, going sideways first, at least, if not falling more first, would certainly be “healthier” to the long case, if not more likely than immediately ripping back up.
  2. The last time there was any wave action of similar magnitude, in, say Amazon, which was leading the up charge of this recovery, the stock went sideways for over a year, before continuing higher. Yet, here was Amazon, right back at all-time highs.
  3. If we do rip to all time new highs, even any time in the next few months, and get very far beyond the current high, the action is likely to be frenzied, euphoric, and then crash, because, the pace would be parabolic.
  4. The leader of the rebound has been the Nasdaq, because it’s heavily weighted to the FANG stocks. Those few giant tech companies, mostly with absurd PE valuations, were leading the whole market up.  Late stage.  The small cap Russel (RUT or futures RTY) “should” lead a rally that is going to break out and trend up.
  5. The Russel was the weakest index. It hasn’t even gotten out of its 2017 range, after the Nasdaq was nearly back to all time highs.
  6. The conspicuousness of bursting out of the 2017 range, on a historically big opening month, and then immediately plunging back in to that range, breaking a historic winning streak, and holding that 2017 range, especially the RUT…all eyebrow raisers.
  7. The Trump candle was pointed out of the top of a 2 year consolidation, which was fuel for a breakout. The down move in that candle was caused by dumb money panicking that Trump was a disaster, when the smart money knew otherwise.  The down move that started our current turbulence was as big as the Trump candle, only pointed down from the top of parabolic move, forming a mountain peak like look, and it was started not by dumb money, but by someone big, who must be some version of “smart money.”

I could go on and on.  Maybe a numbered list isn’t the best format.  It seems factually unhealthy, economically, for a few giant companies to be the main drivers of a bull market.

It’s similar to the unhealthiness that the bull-run in assets since 2009 has mainly only benefitted a very small percent of the population.

The overall economy is sluggish, wages are stagnant, debt is accumulating, and so on.

So as we hit record overbought conditions, at some point things are likely to snap.  Even if this is not the top.  Even if we go sideways or higher, the winning streak HAS snapped.  The story has changed.  If it went on another bull run IMMEDIATELY, that would be weird.

It certainly could happen though.  And the giant hammer candle, that I told myself to never ignore if I ever saw it again, supports that theory.  The down move DID lead to a reversal, that made a hammer candle as big as the Trump one, pointing up.

And the fact that companies had reported that they had hundreds of billions of dollars that they intended to use to buy their stock, now, and all year.

So there are pretty strong cases to be made for both bulls and bears, big bulls and bears!

This could lead to whippy-ness, higher highs and lower lows, or vice versa, making a megaphone pattern, a big one!

the guts of this particular bounce

In the bounce, the Nasdaq got almost back to new all-time highs.  Amazon did make all time new highs, and Netflix too.  (And, btw, what’s up with that?  Why is Netflix the strongest company in the world?  Amazon or Google seem more plausible).

And then the SPX (SP500) broke 61% of its down move.  So technically, the down move was negated in the large cap indices.  And the RUT then also broke the down momentum.  However, it still hadn’t made it out of the 2017 range, when the big brothers had.  So there was that clue.

Then the sellers started to appear again.  The same series of -1000 ticks, on moderately down days.  Even though technically, everything looked bullish again.  So a smaller fractal of the same story played out again.

3 or so big selling days, leading to an even bigger panicky sell, which was bought back up from a technical reference (50% of the up move, in RUT and SPX.)  All of that was very playable, and brings us up to date.

Where this leaves us is, with the up momentum so far holding.  But real and big sellers that we’ve seen repeatedly now.  The SPX and RUT still inside of the 2017 range, the Nasdaq above it.  Netflix bizarrely leading the market up.

Tops and bottoms

Market tops are said to be complex.  Whereas bottoms tend to be sharp and v shaped.  So this could be how it tops, and it might take months or a year or more.  And it might make higher highs in the process.

A top could be a slightly higher high,that plunges back in.  Or it could go on a manic run straight up, then come straight back down.

Fast up moves cause fast down moves.  Slow up moves also cause fast down moves.  Down moves are faster than up moves in general.

But when a market is moving up really fast, generally it’s expected to make a parabola shape, by coming back down at a similar pace to how it went up.

When markets move up slowly, they could break at some unknown time, and come down fast and hard, or the opposite…they could accelerate up, again and again.  The sharper the up moves, the more likely they will form a parabola.

These are just rules of thumb, about how things moves in auctions.  Not something that is tradable directly, but a helpful sense to develop.

It’s said the market’s job is to cause the most pain to the most people it can as often as it can.  I’m not sure I believe that.  But it’s certainly easy to be one of the people who get the pain.  And knowing that is common, probably because it’s happened to you, is part of understanding why things move the way they do.

In any case, now we know there are big forces lined up both on the up and down side, so it is possible the waviness will keep up, throughout the topping time, and certainly will return for any serious down moves.


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