Why Stocks Have Been Gyrating

Many 'old-school' investors have exited the market in frustration, leaving only pros and aggressive daytraders.
By Chris Vermeulen ,

NEW YORK (

www.TheGoldAndOilGuy.com

) -- Over the past two weeks we have seen market sentiment change frequently and sharply -- from extreme bullish to bearish and back to bullish.

Normally we don't see the herd (average Joe) switch trading directions this quickly. Over the past 10 years it has taken four to six weeks on average for the herd to reach an extreme bullish or bearish bias.

It is this herd mentality that creates some excellent trend-trading opportunities. But with the

Federal Reserve's

quantitative easing, thinner trading volume and a lack of trading participants (smaller herd), everyone is ready to change directions at the drop of a hat.

The old-school traders/investors who don't use real-time data or charts and who dabble in stock picks have mostly exited the trading arena out of frustration. This group accounted for a decent chunk of liquidity in the market and was also the slowest to change directions.

The new school, today's smaller herd, is much more aggressive and quicker to act on market gyrations.

It is these individuals who are using trading platforms with real-time data, charts and scanners to help get a pulse on the market so they can change directions when the big boys do.

This is the reason the market has been able to turn on a dime over the past eight months. The easy prey (novice and delayed-data traders) are few and far between, and the fight among educated traders seems to be getting a little more interesting.

Anyway, enough about the herd already...

It's been an interesting week thus far with stocks and commodities. The week started with a large gap up, then saw strong selling volume step in and reverse direction the following day. It is this negative price action that starts to put fear into the market and trigger a downward thrust. During an upward trend, like the one we're in now, I look for these bearish chart patterns to form as they tend to trigger more selling in the following days, cleaning out the weak positions. After a certain number of traders have been shaken out of their positions and are entering positions in order to take advantage of a falling market, the next rally begins, catching the majority of traders off guard as they panic and attempt to buy back their short positions. It's this short-covering that sparks a strong multiday rally and kicks off the new leg up in the market.

Currently we getting some mixed signals. Market sentiment is at its most bullish level since 2007 and is just a little stronger than it was during the January and March highs. This makes me think twice about taking any sizable long positions. Another bearish signal is the strong reversal day we just had for stocks and metals. That typically leads to more selling.

On the other hand, the market trend is still up, the holiday season is typically a strong time for stocks and market breadth is really strong.

S&P 500 Daily Chart

Above you can see the reversal candles, along with short-term and intermediate support levels. Although market sentiment is screaming that a correction is near, we must realize that sentiment can remain at this level for an extended period of time while the market continues to trend higher. Remember the saying, "The trend is our friend."

I am hoping for a pullback and would like to see market sentiment shift enough on an intraday basis to give us a low-risk entry point.

SPDR Gold Shares Daily Chart

Above is a chart of

SPDR Gold Shares

(GLD) - Get Report

. A reversal candle is seen as a sell signal or a profit-taking pattern. Short-term aggressive trades use these to lock in quick price movements. With so many traders watching gold, a flood of sell orders pushed gold down on Wednesday.

Midweek Conclusion

In short, each time we see some decent selling in the market, buyers re-emerge, pulling it back up. Wednesday was another perfect example of this, as we had an early morning selloff, then a light-volume rally for the second half of the session and an end-of-day short squeeze during the last 30 minutes. Gold has pulled back to the first short-term support level. Because of the large following in gold, I would like to see whether there will be another day of follow-through selling before possibly looking to take a trade.

If you would like to get my daily premarket trading videos, intraday updates, chart analysis and trades, just subscribe to my trading service here:

www.TheGoldAndOilGuy.com

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.

Loading ...