What Really Drives Prices? RAMOUTAR REPORT VOL. 6

To reiterate the disclaimer:

The ignorant and malicious are free to reveal themselves with replies that I will not acknowledge. The inquisitive and intellectually stimulated are invited to post constructive replies, and or questions.



What Really Drives Prices?

Demand, Supply, Greed, Fear, Support and Resistance

These six words dictate price and make the market move. Too often many of us get caught up in over analysis and the dynamics of the market, and we lose sight of what’s really driving the prices. All of the analyses we perform are based on these six components; regardless of what studies you’re using you must not lose touch with the fact that all of these studies are lagging indicators, I’m going to break down each component, and then show you how they relate to one another.

Demand – the need or desire for something

Supply – the availability of something that is needed or desired

Greed – an aggressive pursuit of something

Fear – insecurity and heightened uncertainty

Support – an area marking the transition from supply to increased demand. The majority who believe the price cannot go any lower form this area.

Resistance- and area marking the transition from demand to increased supply. The majority who believe the price cannot go any higher form this area.

The relationship between supply and demand is clear, however, the ratio between the two is really formed by perception. Most traders neither know nor care about how many shares are outstanding on a particular stock or how many are actually available. We as traders, trade without regard for that information. That often times can becomes a very expensive mistake, because these two are the alpha of all prices. In everyday life we see the perception of these two change prices all the time. Where I live, snow is common in the winter months, but when a “storm” is expected, the supermarket parking lots are jam-packed. People are rushing out to buy milk, bread and ice melt or salt. Why? The perception is that the supply of these items will drop as the event draws closer. In a macro sense we know that the supply of any stock we want to buy is very robust. We have learned that the demand is not always as robust, that is one of the primary reasons why shorting is so much more lucrative than being on the long side of the market. Using the snowstorm example, we know that the distance we are willing to travel for them only limits the supply of milk, bread and salt. With stocks, the supply is limited by the amount of capital one wish to use in acquiring them. Our demand in both situations is regulated by our perception of supply.

The emotions of greed and fear are the by-products of one’s perception. Again, the popular subscription to these emotions forms support and resistance. Only after seasoning in the market does one really start to embrace and respect these emotions. The biggest key and challenge is letting greed and fear run their course, as they always do, and then following them until they transition into the next phase without letting your own greed and fear interrupt the internal process. Support and resistance are temporary floors and ceilings for demand, supply, greed and fear. The area between these two zones is where we find the most opportunity. The longer the price action in these areas the more potent the breakdowns and breakouts are. My understanding and respect for these areas reached new heights after I read, “Secrets of Profiting in Bull and Bear Markets”. The author, Stan Weinstein, wrote this book in 1988. He did such a wonderful job in explaining support and resistance, referring to these areas as a “war between the buyers and the sellers”. That one line summed it all up for me, I looked at charts with a brand new perspective, and then I discovered that the price action was secondary to the emotions, the emotions actually begin this chain reaction.

This may certainly seem basic to many; however, from time to time I revisit this eternal process. Go back and revisit this chain of events, and then look at the charts. You’ll see a lot more than support and resistance when you scan. I hope this helps you!

Volume 1 – “Fear and the Market”

http://www.elitetrader.com/vb/showthread.php?s=&threadid=19559

Volume 2 – “Switching TimeFrames”

http://www.elitetrader.com/vb/showthread.php?s=&threadid=19881

Volume 3- “Elements For Successful Trading”

http://www.elitetrader.com/vb/showthread.php?s=&threadid=20208

Volume 4 – “What Are YOU Looking At?”

http://www.elitetrader.com/vb/showthread.php?s=&threadid=20285

Volume 5 – “Building Your Trading Stable”

http://www.elitetrader.com/vb/showthread.php?s=&threadid=20510

 

I disagree...

In reality the most profitable markets are trending ones. Thats how everyone made millions back in 2000 trading tech.

A perfectly trending market has no horizontal support or resistance level. The support resistance is based off a key Moving Avg.. or trendline. This is contra to the floor - ceiling analysis.

Recently the big $ was made in biotechs.... again they were a hot trending market.. as were the homebuilders.

Trying to trade ranges is one of the most difficult type of trading.. because the moves are usually contained and the whipsaw is the greatest. Also the volume usually tails off during this period which adds to the difficulty.

Your average trader should be focusing on finding trending stocks.. and trying to develop a technique that allows them to buy/ short the corrections.

For example look at a stock like RYL.. from March to June the stock was a perfect trending stock...

Now look at RYL from 8/02 to 4/03... thats pure trading range chop...

I would rather be developing a strategy that tries to make me money when the stock is behaving like it did from March to June..


--MIKE

 

Ramoutar,

A few comments which you may find helpful...

The above sounds more like a defense-mechanism than a "disclaimer"... gives me the impression that you will label anything that is not in accordance with the "Ramouter School of Thought" as somehow ignorant and malicious, which is a somewhat arrogrant attitude... in a nutshell and in my view, your "disclaimer" makes you sound conceited and somewhat aloof... just my 2 cents...

Regards,
Candle

P.S. Who are you to judge who is and who is not inquisitive and intellectually stimulated?

 

absolutely right.
You can kill yourself trading ranges. Completely wrong advise for new traders.
The best money even in bear market is made in best trending stocks. Both on long and short side.
Look at the following sectors over last three years.
Auto Dealership
Auto Parts stores
Sporting good stores.
Gold
Dairy products
Auto parts wholesale
Residential construction
Education and Training
After the overall market direction the most important thing which drives stock prices is sector. Sectors play a very important role in price moment. If you learn to identify sector trends you can make money in the market.
All analysis of stock market will show that long strategies make more money than short. The stock market has a historical long bias.

 

I completely agree with you, the most profitable markets are trending ones. I’m sure that you’ll agree that after March 2000. There are still plenty of stocks out there, like RYL that have a somewhat perfect trend. Even these stocks are not immune to the support and resistance areas in other timeframes. RYL is very impressive IMO, since it was able to take out its 5/02 highs with ease. In most stocks where there is a perfect trend in the context of larger and crappy trend I find many opportunities.

Moving averages do act like support and resistance, but most the buying and selling pressure are camped out the prior highs and lows. I’m sure you have filtered out many perfectly trending stocks on the daily, after seeing a lot of resistance on the weekly. I made long money trading the biotech’s uptrend right before they ran into resistance on the daily. BGEN for example had a nice trend until it got slapped by the lows ($48 range) in ’00 and ’01. KBH on the other hand had no overhead resistance, and that’s why I think the homebuilders will have a much better rally than the biotech’s, if and after they bounce off of and consolidate above the ’02 highs.

As far as ranges go, they are a lot tougher to trade compared to a perfect trend. For every stock I find with a perfect trend, I find 10 that have a possibility of a “shorter” term perfect trend with a larger range. QCOM, AMTD and COST are the last three stocks I have traded that met this scenario. They had nice pops, followed by shorter strong trends, and for a short time during and after; I was able to trade them in smaller timeframes.

Volume is the first key for me. The first thing I look for in my scans is a substantial increase or decrease in volume, compared to the average volume, and then I look at the charts. These sharp deviations of volume have helped me find stocks in transition, something about to happen. I do it this way; my opinion is that volume is the “mother of all price action”.

I would love to find trends like we had from March to June, however, since we don’t always have them, I trade the shorter-term trends as well.

If you’re interested, PM me and I’ll send you the marked up charts I have on QCOM, AMTD and COST. Thanks for the chit chat,

Be well, MIKE.

 

I see the way you interpreted the disclaimer, and I did not intend it that way. Unfortunately, there are plenty of folks on here who use lots of profanity and malice to smear a member and or their threads, and you’re right, that’s not my school of thought. If that and my decision not to acknowledge negative posts makes me arrogant, conceited and aloof then so be it, I just enjoy hanging out, helping and chatting here.

The "person" who replies to thread is the one that "judges" whether they’re inquisitive, intellectually stimulated, ignorant or malicious, I don’t. In effect, they "judge" and “reveal” themselves and decide what they post. If I put a list of the members that shouldn’t post replies than I would be judging.

All the best, candle.

 

Ok here's my ignorant and malicious revelations.

Since I don't care if anyone thinks I'm right or wrong about this and I don't really even care if I'm right or wrong about it, I'll just say that these are my *Suspicions.*

DA BOYZ drive prices - that's right, I think that possibly ole gdz 1-17 isn't so far off the mark with his "manipulators" theories.

While much is to be said for support/resistance and the emotions of the bagholders waitng at the prior S/R etc., sometimes, not always, it's still DaBoyz that are going to determine whether or not it holds or breaks out.

For instance, have you ever wittnessed GSCO or MSCO holding a stock and taking on all comers for hours on end, when almost all of your favorite T/A would indicate otherwise? I call it "Big Fish Eats the Market"

I believe that these big fish or other big fish play the futures and every other market that they so desire, whenever they desire.

I also suspect that some big fish may be being handed freshly printed money from time to time (actually pretty often) by the Fed.
I've also heard tell that the Federal Reserve Bank is a privately owned bank.

These are my *suspicions* I do not intend to debate them on this thread. I don't care who/what moves the prices, only that the prices move. What I care about is getting on the hayride after it starts moving and I can identify the path of least resistance and getting off the wagon before the darned thing stops and reverses. (different timeframes for different wagons )

Seeing as how prior support and resistance often do create obstacles then yes, I pay attention to them and often sell at [R]and buy at , but I also believe that it's only support if enough traders, market makers, buyers, manipulators, whatever, believe that it's support and likewise for resistance. (therefore I tend to wait and see if I can see rather than try to do it myself with my piker hand )

I also suspect that sometimes T/A becomes a self fullfilling phophecy. BUT ! - when DA BOYZ are ready to take the most from the most, all the T/A in the world can be tossed out the window cause we are going for a ride!!! YeeHaa !!!

When the market tells T/A to kiss off, I just do my best to try to recognize it as soon as possible and adapt. Sometimes I see it coming and sometimes I get blindsided. (but what the heck, that's what I use stops for)

Just my ignorant and malicious suspecting 2 cents on the mattter.

plumlazy

 

Hmm. I wonder if that wire's hot?

Bruce

 

Yes it's hotter than hades :eek:

 

Good enough.

Bruce