Predicting Major Market Moves By Detecting the Smart Money
In today’s economic climate, investors are faced with a multitude of different sources of information, from Facebook, stock twits, business news, stock newsletters and anyone who is willing to give you their opinion – which is everyone.
Unfortunately, statistics show that over 85% of investors generally lose money. In fact, in a recent documentary I watched discussing the value of ‘experts’, it was reported “economists have studied the wrongness rate in economic journals and have concluded it’s very close to 100%”. In conclusion, “virtually all the studies published in economic journals are wrong”.
Therefore, how does an investor know how to find the true story of what is going on? More importantly how can you find good investment ideas knowing that the likelihood is that 85% of them will be wrong?
The most valuable method I have found to predict major market moves and capture significant profits is by tracking the smart money, how it moves and the key indicators signaling which way the money is flowing. In this e-Book we will discuss the ways in which we do this and key elements and checkpoints.
A complimentary workshop discussing the concepts and patterns discussed in this e-Book will be provided at the end.
MARKET STRUCTURE AND DYNAMICS
Firstly, to set the premise of the ideas set out in this article, we must first look at the nature of how money moves through the stock market in today’s modern age. It is currently estimated that as much as 80% of volume in the stock market is accounted for by buy and sell decisions made my computerized trading. These powerful systems of algorithms make investment and trade decisions almost entirely based on certain patterns. These patterns occur in the charts of a stock and follow extremely precise pre-determined buy and sell targets based on the relative rules for the algorithm being used. Often fundamentals won’t be factored into the decision making at all.
Love it or hate it, we therefore feel that regardless of what opinions we may have of the fundamentals of the market, or what we feel ‘SHOULD’ happen next, it is far more important to track what the patterns are saying. Once we know the pattern we can then utilize quantifiable indicators to look at what the’ smart money’ is doing. Based on this approach, we can observe how some of these techniques predicted the market crash of 2008 long before so called ‘experts’ even started talking about it.
We will break down the reasons into several categories.
1. THE POWERFUL PATTERNS
Upward Channel Break
The most easily identifiable pattern on the S&P 500 is that of the longer term upward channel which can be observed by looking at a monthly chart dating back to the lows of 2011. While this is an upward moving pattern the rules almost always dictate that after three touches of the support line there is a very high probability of a breakdown correction to occur. As indicated in the chart below (fig 1) it can be seen that we have indeed touched three times and on the fourth touch on the week ending Friday Aug 21st , we broke through support and have confirmed this bearish move by rallying back to this line and being unable to break above it.
This ‘Rule of Three’ not only applies to upward channels but also to other highly traded patterns such as ascending and descending triangles, head and shoulders, rising and falling wedges and almost all other oscillating patterns.
Often investors are sucked into buying support they have seen touch multiple times feeling the more times support has been respected the better, however, it is quite the opposite. By understanding this rule, we can anticipate when big money is about to step in and short the stock and avoid getting sucked into buying into perceived support at the worst time.