How to Read Stock Price Movements
People trade stocks, options, and futures in the markets in search of profits. Some are successful and others fail. Several factors lead to success when trading. The most basic one has to do with how to read stock price movements. There are two things that move stock prices. Over the long term prices go up when a company makes money and go down when they don’t. This is the world of fundamentals. Over the short term prices are driven by expectations of whether or not a company or the entire market will be making or losing money. This is the world of market sentiment. An important skill to develop when trading stock options such as we do at Top Gun Options, is to accurately assess both short and long term factors.
Video: Discover the OODA Loop (Observe, Orient, Decide, and Act)
How to Analyze Market Sentiment
Everyone who trades stocks, stock options, or stock futures should learn to use tools for technical analysis. An important technical analysis tool is the moving average. Something that can be confusing is that stock prices jump up and down day by day and week by week often arriving back where they started. By using a moving average an options trade can level out this price “static” and get a better picture of where the market is headed.
Market Sentiment Data
There are some useful indicators that provide help assessing market sentiment. The VIX is a CBOE indicator based on calls and puts for the next month. Alternatively one can simply use a put to call ratio. A measure of safe haven assets is useful as is a measure of risk on assets. Stock price breadth and the high / low index are also useful. And even CNN is useful here with its Fear and Greed Index. The point is that you do not need to search for info on every stock in the market when someone is already compiling using market sentiment data.
Market Fundamentals and Options Trading
Here at Top Gun Options we have made some historic calls which have resulted in impressive profits. One such call was at the start of the Covid crash which we called to the day and another was the recovery which we only missed by two days. The key factor in each case was our appreciation of a fundamental issue that the market had not yet tuned into. At the start of the pandemic we realized that news coming out of China was inaccurate and that the new viral disease would be devastating both from a public health standpoint and economically. When the Federal Reserve started pumping money into the economy at the depth of the crash, we realized that you cannot fight the Fed and that the market was going to soar upward. In both instances a lot of “smart” money was still focusing on technical indicators and short term market sentiment and got it wrong while we essentially printed money at Top Gun Options.
Pay Attention to the DRINCs When Trading Options
At Top Gun Options we use an acronym, DRINC. It is shorthand for Democrats, Russia, Iran, North Korea, and China. The point is that we pay attention to what is going on in the world as well as in the USA. In the case of the Covid crash we were tuned into China. We recognized that China has become an important part of the global economy and that economic disruption there would cause widespread damage. We also realized that the Chinese government was not telling the truth (surprise, surprise). When North Korea starts shooting off missiles, Iran attacks folks in the Middle East, China threatens Taiwan, and Russia continues its grinding war in Ukraine, all of this drives stock price movements.
Sometimes the mix of market sentiment indicators and fundamentals can be quite clear and many times it is not. When it is not, that is not a good time to be trading options solo. Consider joining one of the squadrons at Top Gun Options where we potentially print money in all markets and at all times.
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Originally published at https://topgunoptions.com on May 2, 2023.
