From the National Guard to the Trading Floor
Fifteen years ago, trading wasn’t even on my radar…“Greed Gauge.”And as soon as I heard about it, I knew I had to be involved…I was in the National Guard at the time. As part of my duties, the Guard loaned me out to a state agency, where I worked undercover in law enforcement. I also deployed to Iraq. My work had meaning. It was fun. I planned to make it my lifelong career. Then… serendipity pushed me down a different path. I met Mike Carr. He showed me how to apply my skills to financial markets. I saw that I could have a career without risk — at least, without the risk I was used to as a member of the National Guard. (As a new mother, risk was at the top of mind.) So I made the tough decision to hang up my fatigues and dive headfirst into the financial world. I started as a trader at Mike’s firm in 2010, then went on to develop my own career researching and trading options. But late last year, we joined forces again… Because Mike had a new project in mind — something he called the
The Origin of the Greed Gauge
For his latest innovation, Mike wanted to find a way to spot surges of greedy buying activity. These surges would, ideally, indicate short-term trends to profit on the upside.This is where other analysts would fire up their programs and run a series of back tests to develop a formula. But Mike and I take a different approach to our research. Before we even touch a computer, we sit down and talk things through. After weeks of conversation, we landed on a rather simple principle… Trends show us whether buyers or sellers are acting more urgently. Uptrends unfold when buyers rush into positions. When sellers urgently want out of positions, the trend reverses. Once we had this general idea down, our talks turned to math. And in a matter of minutes, Mike had a formula to define how urgently buyers are entering new trades. Seconds later, the prototype of the Greed Gauge was sitting at the top of my inbox.
Starting with an idea might sound like common sense, but many analysts don’t…green means buy, and red means sell.See, “curve-fitting” is a common practice in our industry. Rather than thinking through an idea first, other analysts crunch numbers until they get a 90% win rate in their back test. They precisely fit the formula to the past… Only to realize the future is different. What worked 20 years ago may not work now — and their strategy quickly breaks down. We avoid that by developing the formula after we define the objective. But we don’t stop there. We search high and low for any flaws in our formula… Once we’ve both coded the formula into our software, the testing begins. We run the code for different indexes, stocks, timeframes, markets… You name it, we test it. And on the rare occasion that we get an unexpected result, we analyze it closely. It almost always results from bad data — penny stocks or foreign markets, which we never trade. Finally, once we’re sure our idea is sound, we work on making it easy to read on a chart. The Greed Gauge is one of the simplest indicators I’ve seen —
A buy signal means greedy traders are buying in and pushing up the stock. That pushes the momentum of the stock back to bullish.such a simple system. But if you ask Mike and me, that’s exactly what this type of research should set out to achieve.Sell signals mean greed has left the building, and is giving way to fear. That’s when you want to take profits and wait for the next buy signal. As for right now, the Dow Jones Industrial Average (DJIA) is on a buy signal. As long as those bars at the bottom are green, you want to learn bullish on the Dow. Simple as it sounds, that’s it… It’s incredible to think that months of research and testing can result in
Regards,Amber Hestla Senior Analyst, True Options Masters
Chart of the Day:At Least 7% of the S&P 500 Is Bullish
By Mike Merson, Managing Editor, True Options Masters
Apple (AAPL), one of the largest companies by market cap and a whopping 7% of the S&P 500, looks super bullish to me right here. And that means the next likely move in the S&P 500 is WAY up.AAPL has pulled a W-shaped recovery out of those perilous lows in the $130s, put in a higher high, and has officially begun to reverse the damage done to its moving average stack. Are there risks to consider? Of course there are… Any headline news these days is enough to send markets into an unjustified tailspin. But in times like these, you have to watch the strongest performers. And AAPL sits distinguished from the FAANMG stocks as the one that’s lost the least since the beginning of the bear market. Not to mention its continued streak of strong earnings reports. If AAPL breaks and holds above $152 in the next few days — which I expect — bank on the entire market moving higher.
Regards,Mike Merson Managing Editor, True Options Masters