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Trading With Emotions

12/14/17 03:46:26 PM
by Koos van der Merwe

This past few weeks saw tremendous market fluctuation because of Michael Flynn, and also because of a vote in the American Senate on a tax bill.

Security:   DJIA, SPX
Position:   Sell

On Thursday, November 30, the Dow opened at 24013.80 and rose to a high of 24327.80, an increase of 314 points. The Dow closed at 24,272.35, rising 258.55. On Friday, December 1, the Dow opened at 24305.40 and dropped to a low of 23921.90, a drop of 383.50 points before closing at 24231.59, only 73.45 points down. Two days of interesting stress that many traders profited on and many traders lost on. So what is the answer? Simple, cut out the emotion and trade following your charts and your indicators. When you switch on your TV, don't let the news or Trumponomics influence your trading.

Figure 1. Daily chart of the Dow.
Graphic provided by: AdvancedGET.
Looking at the chart of the Dow in Figure 1, the Elliott wave count does not make sense. Yes, the count could be wrong and probably is, and future trading will resolve the error, but the RSI indicator is suggesting that a divergence sell could be in the wings. A divergence sell is where the Dow will rise higher but the indicator will fall. Also note that the index is close to the 1 x 1 Gann angle, suggesting a possible correction could occur anytime.

Figure 2. Daily chart of the S&P 500 Index.
Graphic provided by: AdvancedGET.
The chart in Figure 2 is a chart of the S&P 500 Index over the same time period as the chart in Figure 1. However, the Elliott wave count is a great deal more accurate, and is also suggesting that a WAVE V to is about to occur. Looking at the chart, we can see that although the index dropped strongly on December 1, and recovered, it did not move on November 30 the same way as the Dow did. Is this because the Index is made up of more stocks than the Dow? Possibly. Do note that the RSI Index is also at overbought levels.

Figure 3. November 30 and December 1 for both the Dow and S&P 500.
Graphic provided by: AdvancedGET.
The chart in Figure 3 is a chart of the Dow and the S&P 500 Index over November 30 and December 1. Both charts show a candlestick pattern that looks bearish.

So, does one follow the craziness that comes over the news every day, as more and more events occur that can harm the American Presidency? Or does one simply insert earplugs and follow the charts and ignore the news? Of course, following the indicators and your charts is the answer.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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