Market Direction and the Wolf Mentality

As regular readers must know by now I am a big believer in the importance of overall market direction when making my investing decisions. Combining options with stocks makes for a powerful trading method and allows me to stay invested no matter what the climate of the market. You may have noticed by now that I am neither a raging bull or bear no matter what the market direction. I look at my trading more as having a wolf mentality.  Wolves tend to be cautionary hunters. Bears are big lumbering creatures and bulls I don’t think seem overly bright as often you will see them dashing madly here and there. But wolves are different from bears or bulls and they profit in any market direction.

Market Direction and The Wolf

Wolves are natural hunters. They rarely take risks, look for opportunities before striking out and tend to work in packs both for survival and protection. In investing I think being a wolf is a good mentality to assume. For example I have a basket full of large cap dividend stocks and just the one speculative trade, which presently is Facebook Stock, so obviously I rarely take chances. You’ll never see a penny stock trade or unknown junior stock in my portfolio. I am a cautionary investor. Making consistent profits is important to me.

Wolves tend to hunt and live in packs. I look upon my combination of option strategies with stocks as my pack. No matter what the market direction I am out there hunting with my pack of strategies ready to assist. Sometimes the hunting is poor and other times a nice juicy trade appears but always my pack of strategies is with me. I never hunt alone.

To that end then, hunting like a wolf every day means being aware of market direction and while bulls and bears go crashing and rushing about, I follow the market direction they have created to scavenge for my profits.

Why Market Direction Is Important For A Wolf

Market Direction is the single most important aspect to investing through selling options primarily because most stocks tend to follow the overall market direction and that direction is driven by bull and bear mentality. Wolves do not drive market direction but instead hunt in every imaginable climate, up, down or sideways. Therefore it stands to reason that option trading benefits from understanding market direction and my wolf mentality only works if I am aware of market direction whether it be daily, weekly, monthly or annually, market direction is paramount to successful investing, especially as a wolf.

If the market direction is up, even some of the poorest performing stocks often will try to follow the market direction. This is important to understand when investing and it can make a huge difference to profit potentials.

Let’s take Apple Stock for example.

Market Direction and Apple Stock Daily Chart for Jan 11 to Feb 1 2013

Apple Stock is in a bear market all its own. No matter what analysts say about Apple Stock being cheap and the “buy of the decade”, Apple Stock is in trouble. Yet Apple Stock is still following the overall market direction. Let’s take a look and see why as a wolf I watch the market direction as it applies to stocks. I have marked the key aspects in the daily chart below.

A. The S&P 500 market direction in the chart below from January 11 until January 23 was moving higher. Apple Stock meanwhile was already under pressure as investors worried about the upcoming quarterly earnings and news that Apple had cut back on parts orders hurt the stock as well. Next came news that Samsung had shipped literally hundreds of thousands more smart phones than Apple. But through all this bad news the stock kept flirting with breaking $500 but failed. Market Direction in the S&P 500 kept pushing higher which gave Apple Stock support to stay above the $500 level. You can see in the market direction chart below that Apple Stock was even trying to rally a bit as it moved up to the quarterly earnings release. If market direction in the S&P 500 has been DOWN, there is no way this stock would have had this chart. It would have broken the $500 level simply based on all the bad news out on Apple Stock and the decline in investor sentiment which would have occurred in a market direction move lower. Luckily for Apple Stock this did not happen.

B. January 24, the morning after the disappointing earnings news pushed the stock lower. Meanwhile the S&P 500 had a flat day, part of which was caused by the poor earnings out of Apple as it impacted overall investor sentiment. But the S&P 500 still managed to close higher but only by a very slim amount.

C. The S&P 500 market direction jumped higher the next day as investors shook off the news about Apple Stock. Meanwhile Apple Stock fell but the big damage was done the day before and on January 25 Apple closed down at $439.88 but off the lows for the day at $435.00. Now imagine if the next day the S&P 500 had fallen by even half a percent. Apple Stock would have closed on the lows of the day.

D. The S&P 500 market direction continued higher until January 30 and Apple Stock followed suit. So while obviously there was a bounce in Apple Stock caused by the sell-off look how on January 30 with the little rally ended for the S&P 500, Apple Stock followed suit. It took ended the little rally.

E. January 31 the S&P 500 market direction moved lower and so did Apple Stock’s move.

F. The big 15 point gain in the S&P 500 even managed to get Apple Stock to move off the lows for the day. Apple Stock during the day fell to $448.35 but the stock managed to close up at $453.62 near the high of the day at $459.48. Because the market direction of the S&P was higher throughout the day, investor sentiment was strong enough that even cautious investors considered Apple Stock a possible buy. This “happy” sentiment among investors brought out those who look for “bargains”. They bought Apple Stock all the way from $448.35 to close it at $453.62. The fact that the S&P 500 is moving higher has been helping even those stocks that are under selling pressure like Apple Stock.

Market Direction and Apple Stock

Market Direction and Apple Stock

Using Market Direction To Prey On Stocks For Put Selling Opportunities

As explained, I look upon my style of investing as more like a wolf than a bull or bear. The wolf is a natural hunter. So too am I when it comes to stocks. Wolves use different strategies when hunting their prey. I too use strategies when hunting for the next profit potential. Knowing market direction and what it does to stocks is one of the better hunting methods. Let’s look once more at Apple Stock and watch the market direction and Apple Stock direction on Friday Feb 1 to see how I hunt for trade opportunities.

S&P 500 Market Direction and Apple Stock Price History – 5 Minute Chart Feb 1

Below is the 5 minute chart for both the S&P 500 and Apple Stock. I have marked all the key points on the chart. Let’s take a look.

A. The S&P 500 opened up and market direction climbed higher. Apple Stock opened up and fell but look at 11:00 AM. The S&P 500 stalled, fell slightly and then bounced back. Now look at Apple Stock. The selling stalled, stopped and then jumped back. Sellers realized they were mistaken in their selling and buyers meanwhile were looking for that signal to jump in, especially day traders. You have to understand selling mentality. Sellers rarely look at the overall market direction but are driven first by emotion and then by the realization they may be making a serious mistake selling when they are.

At 11:00 AM sellers suddenly realized that while they are busy selling out of Apple Stock, the investing world is busy buying stocks and pushing the entire market direction higher. Sellers in Apple Stock stop and buyers quickly pounce. In my case I would be day trading the put options on Apple Stock, selling the Feb 8 options not the 1st as premiums are not strong enough since those options expired on this day.

At 11:05 the move higher commenced in Apple Stock. The stock was around $448.70 when I sold the Apple Stock Feb 8 $445 naked put for $5.50.

B. With the S&P 500 moving still higher, I sit back and watch the Apple Stock Chart. Look how similar the charts are. This is why I use the S&P 500 daily chart when doing any kind of day trading. The S&P 500 because it represents the main bulk of industries remains the best index in my opinion for following daily, weekly, monthly and annual market direction. By point B shortly before 2:00 PM the market direction in the S&P 500 topped out for the day and started to fall. So too did the direction of Apple Stock. The price history of Apple Stock at point B was $456.73 at 1:55 PM. The $445 naked put for Feb 8 had fallen to $2.29. A few moments later Apple Stock began to pull back to the Middle Bollinger Band and I bought to close my naked for $2.40. Total profit for the day was $3.10. Not bad for a few hours work.

C. The S&P then began a pullback which is extremely common in the afternoon usually starting at 2:00 PM. This is why traders refer to the 10:30 reversal and the 2:00 PM reversal. Markets tend often to change market direction in both bull and bear markets. For wolves I just know that both of these are good points to enter and exit option trades.  Note how similar Apple Stock price history is in reference to the S&P 500 chart. It is almost identical within a few minutes.

D. Even the little rise at the close was also reflected in Apple Stock.

Market Direction and Apple Stock Price History 5 minute chart Feb 1

Market Direction and Apple Stock Price History 5 minute chart Feb 1

Being A Wolf Has A Lot Of Advantages

To sum things up, consider joining the wolf pack and forget being a raging bull or bear. For one thing being a wolf affords opportunity constantly no matter what the market direction is. Consider too that by being a wolf and thinking more in a predatory manner you stop being attached to losing positions. Wolves hunt for a reason and rest for a reason. The same when hunting for stocks. There are trades every day that can be made but only through the use of strategy will those trades truly result in consistent winning results.

The S&P 500 chart should be up on everyone’s trading system. Even if you are selling covered calls or puts, doing spreads, strangles, straddles or butterflies, the market direction of the S&P 500 can assist during the day to earn the peak premium for that day or when putting on either side of a trade. As you have seen above, overall market direction of the S&P 500 influences just about every stock most of the time. Even stocks in severe bear markets like Apple Stock are influenced by the overall market direction of the S&P 500. Investor sentiment is a powerful trading tool and by thinking more like a wolf than a bear or bull I enjoy substantial profits no matter what the overall market direction may be simply by being aware that the S&P 500 influences the majority of stocks most of the time.

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Profiting From Understanding Market Direction (Articles Index)

Market Timing Articles Index

How I Use Market Timing

Understanding Short-Term Signals

Various Market Timing Systems

Market Direction Candlestick Daily View (Members only)

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