Responding to Adversity - Responding to Adversity A...

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Responding to Adversity – A Personal Account Brett N. Steenbarger, Ph.D. This past Thursday (3/24/05), I traded poorly. I didn’t lose a tremendous amount of money—I’m pretty good about getting out when I’m wrong—but the money was not what concerned me. What gnawed at me was that I was completely wrong about the market’s morning direction. Partly it was a problem of getting “married to an opinion”. I saw that there had been substantial weakness the prior day, and I expected that to carry over to Thursday’s trade. With each push up early in the morning, I faded the moves. Several trades briefly went in my favor only to see the market bounce even higher. Before I knew it, I was nicely in the red. Worse yet, I couldn’t figure out why . Remembering the medical advice I had so often given other traders—“Above all else, do no harm”—I packed it in for the day. It didn’t help matters that my opinion was borne out in the afternoon trade. The errant experience led me to scan the market to try to identify where I had gone wrong. The first thing I noticed was that the vast majority of stocks that I scanned were rising in the morning, even as I was trying to get short. I thought to myself, “Suppose I constructed an indicator that told me how many stocks were in an uptrend vs. downtrend during the day. Would shifts in the trending behavior of individual stocks lead moves in the large indexes?” After a couple of misfires, I figured out a way to measure “trending” on a short- term basis and apply it to the large universe of S&P and NASDAQ stocks, including both small cap and larger cap issues. Below appears a chart of the indicator for Thursday’s trade:
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Notice how, early in the morning, the % of issues trending higher (the red line) was steadily rising. We then dipped and made a second high, but fewer stocks by that time were uptrending (though at no point during the day were more stocks downtrending than uptrending). The market gradually rose to its high of the day midday, but again fewer stocks were participating in that upward movement. For the remainder of the day, the
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Responding to Adversity - Responding to Adversity A...

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