Other than in the rare times of manic buying or selling of stocks the majority of the market's participants are positioned on the wrong side of the market. If you cannot come to this conclusion and accept it as fact, if not stock market gospel, then we part minds as well as stock market strategy at this point. The stock market will do what it has to do to drive the majority crazy.
Given this contrarian path, the key to ferreting out effective data to read the modern tape begins with stock market sentiment readings. Prior to coming to this conclusion you must also accept as stock market fact the following: the stock market always seeks a balance between what is currently priced into its valuation, as well as what might have to be priced into its valuation. Thus, future value estimations explain why the stock market attempts to see at least six months ahead. I think of the market's desire to be able to see into the future as the market preferring order while rejecting chaos. The more orderly the market perceives things to be both currently and into that six-month future, the more sentiment readings move to the fulcrum point of sentiment's linear formation.
Those who design sentiment readings and follow the dynamics of that data use the terms overbought, oversold and in balance to label stock market sentiment. As an analogy think of a sportscaster who opines on which team in that current game has the momentum. In a similar way stock market sentiment moves along a linear path that equates to a game, the sportscaster expressing his/her professional opinion on which side of the balance/fulcrum the game sentiment lies. (See my series on S3 for further study on sentiment).
Any form of stock market analysis is an attempt to gain an edge on the majority who are investing or trading their capital. Before determining what might be an edge you must first decide that what is being analyzed is efficacious enough to do the analysis. Here is my list of what I know works for me:
1) The slow stochastic: I use this indicator for daily as well as intra-day market timing. (Yahoo! Finance does an excellent job of explaining how to analyze indicators).
2) The relative strength indicator (RSI).
3) Simple Moving Averages (SMA): If you follow my coiling pattern you know that I use for my SMA's the periods: 10/46/230.
4) S3 (previously noted).
5) The NYSE Short Interest tabulations.
6) The daily New Highs/New Lows ratio.
What I do not reference is the Put/Call Ratio or any other option-related indicators, because I have both the bias and the experience to know that the underlying stock is the cart and the option is the horse. Only if I see an entire options board light up, as almost every call and put in most to all expirations catching fire will, I take the time to examine what might be an edge in the making. What I will be looking for is almost instantaneous chaos relative to option values changing. My thinking then would quickly morph to that of seeing the situation as a valid edge to exploit.
When seeing, and especially hearing via the financial media opine about some July whatever call or put having very unusual volume, I will not waste my time doing the instant homework on that stock. Such an opinion is single factor analysis. An example of single factor analysis would be: you see a particular animal for the very first time, that animal having three legs. To then make the mental leap that this entire genus has three legs is false logic. Using single factor analysis is spurious and erroneous as per the science of applied logic. Do not go that route if you want to find an edge.
This series will continue with the above list of six edges being examined in depth.