How Market Sentiment Can Help with Trading Decisions

12/30/2012 7:00 am EST

Focus: STRATEGIES

Anne-Marie Baiynd

President and CEO, TheTradingBook.com

Trader Anne-Marie Baiynd explains what information is conveyed by market sentiment, which can help you adjust your strategy to changing conditions.

My guest today is Anne Marie Baiynd and we’re talking about market sentiment and just understanding the overall feel of the market when you’re trading so you know to make trading decisions, so Anne Marie how do you judge the overall feel or the sentiment of the market before you get into a trade?

That’s a really good question, and market sentiment to me, I can clearly see from a trending perspective.  If I have solid lifts up and small pulls backward into support and the same sort of rhythm and flow, I will know that there is generally positive sentiment and people are just taking profits and waiting to get back in at a better time.

Same thing on the side for negative markets, right?  It is a little push up and then a pull back down.  Anything that’s trending we know the market sentiment is either positive or negative.  When we have retracements and Fibonacci terms, when we’re retracing more than 78.6, more than 88.6, when we’re doing 100% rotation we end up having zero momentum, and when we have zero momentum it’s the stop/go event. 

It’s like wanting to cross the street and stepping back over and wanting to cross and stepping back over.  That shows clear market sentiment of undecided.  When I see the market sentiment undecided, as it is right now, very, very undecided, I have a tendency to say alright I’m going to shift into a range-bound trading strategy where I’m taking the edges off the bottom or the top as opposed to sitting in for a trending trade because it’s just going to blow my stock.

Do you set that bias before the market opens?  Do you have a bias for the day and will trade in that direction for the day, or do you wait and see what it is after it opens?

Well, in a perfect world, I’d wait to see, but truthfully I always have some kind of bias.  Sometimes it works against me.  Oh no, I know it’s going to pull back here.  It’s got to pull back.  So, that works against me, but most of the time I’ll have a general assessment.  I will come in and I will expect that if my general assessment is true something’s going to happen.  If it doesn’t happen my assessment is not true, and so I have to change my mind.

What about things like breadth, their advance-decline line or the put-call ratio or the TICK?  Do you watch the positive and negative of those signals to determine the feel of the market as well?

I do.  I don’t normally look at the TRIN, put-call ratio, and that sort of thing.  I don’t do that, but I do look at up volume to down volume and advancers and decliners.  I look at the TICK but the TICK sometimes is very noisy, and I try especially of late because the market has been so noisy, I’ve been trying to smooth out that noise.  It’s very clear that if my up volume to down volume continues to decrease that I really am not going to have any kind of impending bounce anyplace.  Those underlying technical indicators are very, very good.  You just can’t get so focused on them that you start trading them instead of your chart.

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