This is for Friday’s market March 6th, and the sentiment numbers are out.

I had talked about the investment newsletter writer’s poll out for this week, expecting them to be a bit weaker than last week was, adding to a more negative environment, which would set the stage for a bigger rally. It did not work out that way.

We may still get a rally but when is the big question? The numbers changed in the positive direction, which is a little bit of a surprise. They were 28.6 bullish last week and they moved up to 29.7 bullish this week. A reading below 35 is typically a bullish sign, with a rally potentially at hand. With this sell off, extremes are difficult to time and it can take longer for the signals to have their usual counter effect. The reading only went up by 1.1%.  That may help in prolonging the coming rally. We will have a rally, that is for sure, but we don’t know if it is going to be from 1,ooo dow points lower. These numbers are just something to watch and keep in the back of your mind.

Most people who write investment newsletters have their opinion taken each week and some of them became a little more bullish this last week as of  the Tuesday reading. The point is they are usually wrong when polled as a group. It is just like so many other investors, they follow the trend and as the trend continues in the initial direction for some time more and more of them become bullish or bearish, whichever the direction.

Basically, they are late to the party and become bullish at the top of the market, when it is only then apparent to them The herd mentality. The same is true during a market sell off, they then think it is going to continue down, since that is the direction of the current trend. Last week 45 percent of them thought the market was going down. This week only 44 percent had those same feelings. That lets up the pressure a bit for the market to continue down possibly, but I would say, not by much. It is not a science. I have posted and explained this before, but for the benefit of those who are not aware of it, there you have it.

There is another point to all of this. Learn how to read the markets for yourself and you won’t be victimized by other people’s opinions. There is a way to do that. It is kind of like a language. If you don’t know it, you will be lost, wandering from place to place, looking for your way. I am not the only person who knows how to read the markets, for sure.  But I would say, there are very few who can do it effectively and consistently. I will be talking more in the future about just reading the charts themselves, with no indicators at all, just the price action.

This is a great way to start understanding what is happening on the screen. There is a struggle going on, constantly. A change in ownership, from weak hands to strong hands. Those that want to sell to others who want to buy – but at what price. It is their price, the price that they are willing to pay. In the case of a sell off, it is people who cannot handle the heat (weak hands) who sell to those who can assume the risk and are at that moment strong (hands). It usually takes only a short while of seeing lower prices until those strong hands soon become the new weak hands and begin to offer their shares and/or contracts to other stronger hands, but at their price (the new strong hands). This is how a sell off is carried on and how we get continued lower prices.

There is always someone buying, all day long, but again at their price, which often times does not hold and then the selling continues. This process stops when there are no longer a majority of sellers left to sell to and the buyers are taking the upper hand, taking all of the available supply the market has to offer and the struggle continues. There is always someone selling and there is always someone buying – but at adjusted prices. That is how and why the price changes.

We step in now and then and help them out. We create liquidity for the market place. When a mutual fund manager is faced with selling a large portion of his portfolio to meet redemption requests, but feels the drop is only short term, he can sell futures contracts by the thousands and give himself the insurance that he needs from a large market drop. If he had to sell all of the shares in the open market, he may be pushing the market down with his large size and thus adding fuel to a down market. If the drop comes, he is protecting his portfolio ( a kind of insurance ) from a market decline. When the market comes back up, the original value comes back into his portfolio but he has made a big profit from the decline. If the market does not come back, his portfolio has taken a big loss in the drop in value, but he has large gains in selling the futures contracts so he has offset his portfolio and has not lost money for his clients. If there was no one to take the other side of the trade, when he wanted to sell thousands of contracts over time, he would not be able to do what he did in the example above.

Traders and yes, day-traders, provide an essential part to the process. We make it possible for so many to buy the insurance they need to protect themselves. The market would have so much more volatility to it if we traders were not there to help smooth out the process. So there is a purpose being served here.

It is the same for the farmer growing corn or the company selling orange juice or coffee beans. By them selling futures contracts in the future, they are agreeing on a price they can live with, a set price in the future. If at that time the current price is much higher, they do not get to enjoy that higher price. Their contract says they agreed on xyz price and that is the price they will get 2 or 3 months from now when the crop come to harvest. By same token, if the current price at the time of harvest is 20% lower, they will still get the agreed price of xyz at the day the contract was agreed on.

Traders take the other sides of those trades and speculate that the price will be higher or lower in the future. The farmer is guaranteed on his price and he is happy to get it. If he came to market in the future and received  30% lower than current price, he may get financially destroyed and he can’t afford to take on that risk. But others are able to.

Those are just a couple of examples in the financial and commodity markets of the functionality of the instruments that we trade and why. On a personal note, most traders trade for personnel profit and that is understandable. They are taking a risk, and for that risk they can be rewarded when they are right.

The trading day was good today, picking up 1 & 1/2 times daily goal. I have some of those trades in a small recording from the session. I think it may be helpful for some to see the market trade in a live environment. I have had technical problems in posting my equity chart so this is the next best thing and probably better for most. As soon as I can get it fixed, I will post them again.

http://www.screencast.com/t/m8FOo2HQwNj       some live trades from Friday’s session