This week is shaping up to be an interesting one for the U.S. stock market. With many factors at play against one another, including a poor jobs report last week, the market has seemingly returned to the state of volatility it was in at the beginning of the year. Tuesday, May 10th, saw huge gains across the board, but without any substance behind them, they were erased on Wednesday. Thursday and Friday should have more conservative movement as a result, but with the large drops that the market experienced Wednesday, the ground is also fertile for value investors to swoop in and push prices upward.
The Dow Jones Industrial Average dropped by roughly 200 points on Wednesday, largely thanks to the overinflated prices that emerged at the end of Tuesday’s trading, where the Dow saw gains of about 150 points. Large Dow leaders, like Apple and Disney, also experienced substantial losses. Disney had just missed on its earnings report by $0.04, and thanks to the fact that the stock was already in such a precarious state, the stock dropped by far more than it probably should have. Still, the confidence is not there, and investors are wary of leaving their money in places where loss is a likelihood.
That is what the general tone of the market is likely to be for the rest of the week, and probably into next week, too. There is very little confidence amongst larger investors right now, and at the first sign of trouble—even if that trouble takes the shape of quick growth—they are likely to pull out, and send prices tumbling downward again.
As a short term trader, this is something that you need to understand, even if you don’t necessarily agree with it. Trader and investor confidence is a key momentum maker when it comes to short term movement, and being aware of what the general sentiment is can give you an edge over other short term and day traders, especially in a market like the binary options one where trades can be precisely timed and exit points are clearly defined ahead of time. This knowledge allows you to pinpoint the best trading points for you and your methods and make quick and large profits off of them.
There are tools that you can use to gauge sentiment, and many technical indicators placed on charts can give you a numerical approach to this. These are a helpful gauge, but they are not precise thanks to the fact that they rely on past data to evaluate future trader emotions. Using this as a backdrop for your decision making is helpful though, just keep in mind that you need to have a finger on the pulse of trader emotions and psychology, too. For example, we know that investors are being very cautious right now with their money. They have good reason for this as the market has been volatile very recently and undue losses have occurred, and a lot of these losses have hit people personally. Of course they’re going to be moving forward with extreme care. So, when something comes out about poor earnings, like what Disney saw earlier this week, the psychological setup leading to this points to the fact that prices will drop. Yes, a 4 penny per share miss in earnings isn’t a lot, even when millions of shares exist, but the kneejerk reaction should have led to a drop, and it did. Disney fell by more than 4 percent on Wednesday. An aware trader would have seen this occurring, and would have set trades in motion to profit from it.