Good morning,
I was asked yesterday if the US markets can continue its’ surge after gaining more than 200 points the previous night. Honestly I can just punt a direction and hope that I am right. To be honest it is not easy to predict daily stock direction. Over the decade there are many academic studies and research done by market professionals in an attempt to predict the direction of the company’s stock and the market direction. The one conclusion that can be made from these studies is that few, if any, show a real statistical edge.
Technical surely don’t predict what a stock will do. They are only tools to alert us of the prices, based on past experience, at which there is an opportunity to take some specific buy or sell with the likelihood of a positive return. It is a tool to help us understand the current market behavior and the statistical probabilities of price direction. Stock traders buy and sell based on their interpretation of current market conditions and forecasted expectations of the future price directions. A good example is a bearish candle formation that shows more bears selling the stocks than bulls buying. Since there is more supply than demand, the probability of price decline is higher than for the stock to advance. However, if there is an important unexpected positive news announcement for the stock, the market participants will react to the news and the stock price may advance regardless of the candle formation. I have mentioned in my previous blog the theories of market efficiency. While I believe market is efficient, be it if it is strong, semi strong or weak EMH, I have observed that the market efficiency is at its weakest form in the shorter term. Price is real as it represents what the majority of the market participants know at that given time. Most of these short term inefficiencies tend to occur whenever there is either news in the stock or the economy, or there is a great deal of fear in the market.
There are many factors that determine the direction of the market price. Using systems to trade stock is to trade within the bell curve of the confidence level determined by the program. For the system to be right, the conditions for the stock price movements must fall within the bell curve. The more data is used for regressing and forecasting the less noise it will have and the system will be more accurate in its forecast. Daily data is subjected to more noise and market participants’ psychology compared with weekly or monthly data. Thus while I can forecast quite accurately the price behavior for the week, your guess for the daily price movement is as good as mine. So unless I have privileged information, how can I be sure of the immediate future direction?
So what will I do if all my positions were squared the previous night? My strategic decision is based on the macro direction of the US markets. I have expected the market to be volatile and my tactical decision is to buy at low and sell at target. The decision is to buy the stock once the market opens and set profit limit. If price limit is hit and stock sold before the end of the week, I will study the weekly and daily technical again to decide if I will trade this stock again and if I do, when I should enter to buy.
The US markets were indeed volatile last night. Stocks oscillated throughout the session as the U.S. dollar fluctuated against other major currencies after it dropped sharply in the previous session. The market ended flat with DJIA closing 0.2% higher at 10,246.97 and S&P 500 down 0.01% at 1,093.01. There were 41% advances against 56% declines in NYSE and 31% advances against 31% declines in Nasdaq. NOV closed the trading session 1.18% lower at $45.13. MIR was up 2.27% at $14.87, Magellen Health up 0.85% at $34.52 and TAP declined 0.31% to close at $44.83. I bought NOV again last night at $44.52 and am still holding to PTEN. The stock closed 1.03% lower at $16.28.
Have a great day.
Francies Cheng
BBus MAppliedFinance
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