“Outwit, Outlast, Outplay” is the tagline of one of the most popular reality shows ever – Survivor.
To survive on Wall Street, investors need to outwit the stock market.
This is easier said than done … but not impossible.
In fact, here are three odd, effective and hardly known tricks to help investors come off victorious in the battle man vs. market:
Know Your Opponent – Look for ‘Tells’
A good poker player observes the opponents at his table for ‘tells,’ certain habits that give away the opponent’s hand. Know the tell and you win.
Like poker players, the stock market has tells. Here’s one of them: Persistence wears down resistance.
This is the most important and recurring pattern of the QE bull market and described in detail here: The Secret QE Bull Market Trade Pattern that Almost Never Fails
The Profit Radar Report (PRR) pointed to this pattern many times in recent months, most recently on November 10, when the PRR concluded that persistence around the 1,770 level will push the S&P 500 (^GSPC) higher.
A chart featured in the “Secret QE Bull Market Pattern” article shows that this pattern has kept investors on the right side of the trade 16 out of the last 17 times it occurred.
Know Your Opponent – How to Call a Bluff
Poker players will try to bluff their opponents. Your success will depend on how well you can call a bluff.
The stock market is no different. The S&P 500 chart below shows a ‘bluff’ or fake out move, where the S&P 500 briefly dropped below trend line support (green oval), no doubt stopping many investors out of their long positions.
The October 7 Profit Radar Report expected this ‘bluff’ and wrote the following:
“At first glance, the green trend line seems like a natural border between the bull and bear case. There used to be a time when trend lines like this worked like a charm. But the market’s character changed in 2011. Since then the S&P 500 has broken similar trend lines various times and recovered every time.
In 2012 and earlier in 2013 we successfully adjusted our strategy and waited for a drop below trend line support followed by a move back above to go long.
The S&P 500 gained 100 points in the next 10 trading days before consolidating around long-term trend line resistance (gray box). Persistence around this resistance led to another bullish breakout (prior resistance is now support).
Adjust to the Circumstances
Not every opponent is the same and not every bull market is created equal.
I still have a hard time calling the post 2009 rally a pure market, but have resigned myself to the term QE bull market. And yes, the QE bull market is much different than other bull markets.
There’s unlimited liquidity. This means that investor sentiment, normally a valuable contrarian indicator, is not as effective anymore.
Because of this change in the market’s nature, I actually went on record with this statement in the November 13 Profit Radar Report:
“You know we are in interesting times when the PRR recommends a small long position at times of excessive investor optimism. I would totally understand if you called me crazy for even suggesting to go long right now. There’s no arguing that investment sentiment gauges are redlining. Regardless of sentiment, technicals suggested that stocks want to move at least a little bit higher.”
History suggests that current sentiment extremes will soon catch up with the S&P 500 (SPY), but the QE bull market pattern begs to differ.
This raises the question if investor sentiment still works as a contrarian indicator in the QE bull market.
Here’s a simple answer to this complex question: Do Sentiment Extremes Still Matter in a Fed-Manipulated Stock Market?
Simon Maierhofer is the publisher of the Profit Radar Report.
Follow Simon on Twitter @ iSPYETF
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