Crowd Psychology

October 19, 2000
Kevin Haggerty

Crowd
psychology and the madness of groupsÂ —
combine that with the professionals taking the emotion down to a level and you
end up with a great contra rally like yesterday. It was also an excellent
opportunity for those of us that have been scaling into long-term positions in
the QQQs and/or SPYs to buy emotion at a discount preceding the higher seasonal
probability trade.Â

There is no need to explain
the logic of yesterday, because there is none. Things get blown way out of
proportion and that is what makes trading the volatility bands so profitable,
because you are taking the contra side to crowd psychology and trading with the
market makers and specialists. They knocked it out of the park yesterday.Â

For example, let’s look at
the S&P 500 and what your trading plan should have been. The closing S&P
500 cash price for Tuesday was 1349.95. The combined implied volatility for the
at-the-money call and put was 24.625, using numbers from IVolatility.com, which
I alerted you to at the seminar. Other vendors have these implied volatility
numbers also, such as AT Financial. IVolatility.com uses an average implied
volatility of the calls and puts while other vendors just use the implied
volatility of each at-the-money call and put. It’s not that much of a
difference.Â

Calculating your bands —
and we will cut right to the chase — gave you the two standard deviation for
Wednesday at 1313.74. The actual intraday low was 1307, before the band was
reversed to the upside and volatility started to revert to the mean.Â

Translated: The fleecing of
the lambs was completed and it was time to lighten up on inventories as the
market makers and specialists moved them back up in conjunction with
institutional bargain hunters taking advantage of what is known in the business
as a “puke shot.”

The S&P 500 traded up
to an intraday high of 1356.65 after recrossing the 95% probability, two
standard deviation band of 1313.74. Forty three points of upside on the recross
makes for a nice trade in either the futures, SPYs, or related big-cap stocks
that were at the extreme bands.

The NDX 100 was a classic
case in taking it down to the level. It opened 3045.70, down 4% from the
previous close of 3172.19. It took
out Friday’s low of 2991, trading down to 2982, then reversed to the upside to
an intraday high of 3245.60. That’s a nice little 8.8% off the bottom and the
extreme volatility band.

In my next life, I want to
return as a market maker with a large retail order flow both over the counter
and listed. Why do you think they pay for that order flow and
why do you think some of the major brokerage firms are trying to buy up these
market makers?

Yesterday was a new low day
for both the S&P 500 and Nasdaq 100
(
NDX |
Quote |
Chart |
News |
PowerRating). The snap back was great for
daytraders but the seasonal probability trade doesn’t have a chance until we get
a close above 1356.65, the high of
the new low day. Follow-through from there would be above the last swingpoint
high of 1381. Hold your long
positional powder until then if you plan adding to any longs and waiting for
continuation entry. The NDX must
close above 3246 and then above the swingpoint high of 3326.Â

face=”arial, helvetica”>(December Futures)
Fair Value	size=2>Buy	size=2>Sell
12.75	14.20	11.55

Pattern
Setups

Have a good trading day.

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Crowd Psychology

BUY THE FEAR, SELL THE GREED

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