Even a broken clock is right twice a day. It is a classic saying, but it is only partially true. In my birth region there was a pub with a broken clock that was right four times a day. It just moved backwards! I suppose it was designed as a practical joke, and more importantly, as a way to give the pub’s customers a good excuse to come home late after a few glasses too many.
How is this relevant for investors? Well, markets can be cruel, not so much because they are cruel, but because some investors have a deeply rooted habit of being cruel to themselves. Give some folks a bull market and they will start selling short or bet on put options. Then let a bear market begin, and for some reason they change strategy and start “buying the dips”. This are the backward clocks of the market. They get it right once in a while, but they are drawn to the wrong side of the market like moths to bright light. And these investors can provide as useful a service as the experts who get it right most of the time. If somebody is wrong fairly consistently you can make good money by taking the other side of their market calls. If you can find the worst investor you have found a gold mine.
Of course these investors are not easy to find, but social networks are making it a lot easier than it used to be. Because there are some typical characteristics that set them apart on those networks. They tend to be sarcastic and cynical in their remarks. They continue to repeat the evidence that supports their position while blaming the fact that their forecast hasn’t panned out yet on being a bit too early with their call. And when the market continues to go against them, as it often does, they start blaming it on manipulation by banks, markets being rigged, high frequency trading, the weather, and so on.. If you can find such traders on social networks or blogs, follow them.
Where to look? Besides Twitter, I use Stocktwits, and Scutify, which is a new social platform that is starting to grow nicely. Check them out. Some services are also starting to use social network streams to generate useful sentiment indicators. Downside Hedge is a good example. I think this kind of indicators will become better and better. With a bit of Bayesian logic these indicators will not only reflect what kind of market calls are being made, but also who makes them: a reliable expert or a broken clock.. And that will level the playing field again, because right now banks and brokers already have that kind of information. They can see what positions their clients have and what kind of orders they have in the market. Would you be able to win at a poker table if you can see the cards of some of the players, but they can’t see yours?
Let’s end with our weekly look at the S&P 500 (click for larger image):
The S&P 500 has gone mostly sideways since the start of the current lunar red period. This is completely in line with our main scenario. We have another week of red period to go, and my indicators still display bearish divergences all over the place. But as the market drifts sideways near record levels the odds are rising that the S&P will climb above 1900 before giving way. Sometimes markets take the path of max confusion.
Good luck,
Danny
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LunaticTrader 
Thanks Danny. I kind of like your approach trust it to work 60 percent of time. Only a small portion to bet.
so here is what I am thinking – TNA put butterflie for jun 20 which will be red period after this green period.
So june – 6 the TNA call spreads …your thoughts plz
Hi Bill,
Regulations do not allow me to provide individualized investment advice to readers. My blog gives my opinion on how the market will move, and that’s it. There are softwares and online calculators that allow you to compare different option strategies and see which one give you the best risk/reward based on an expected move in the market and based on your personal investing style. So, that’s the way to go.
Danny
Hi Danny,
Your LT wave peaks today when does it bottom next. Any guess where it ends. May be around 1850?
Bill
Hi Bill,
The LT wave chart for May is right here: https://lunatictrader.wordpress.com/2014/05/01/whats-in-store-for-may/
The next projected lows are May 15-17 and then May 23.
The LT wave is only for timing purposes, it doesn’t say anything about price. Price targets can be estimated by looking were major support/resistance lines are on the day of expected bottom. You can also keep an eye on the daily and weekly key reversal levels we post here on the blog and on twitter every day. If you see a major price level or key reversal level being hit on the day of an expected bottom/top in the LT wave, then a reversal is likely in the ensuing days.
Danny
Thanks Danny. I am wondering how best to play this with options.
Don’t you expect a high between may 15/17 and May 23. Lunar green period ends around may 30 th.
Bear in mind that LT wave is experimental, so don’t bet the bank on it. You see the expected highs and lows for the month in the chart, but that doesn’t mean I expect it to work to perfection. I have learned not to expect more than 60% accuracy from any tool.
If you want to play it with options, then first thing to do is see whether market is in tune with the swings indicated by the LT wave chart. If so, then you can make bets in the expected subsequent direction. Otherwise just wait for the cycles to return. That’s how I use it.
Danny