If you follow my charts, you probably notice there is an orange line that looks like it is placed in a random spot. This is what I call the YTD break even line and it is where the instrument closed out the previous year. Not many in the technical analysis space track this but the market as a whole understands it. Whether it is something checked at the end of each week/month or just something that sits in the subconscious, it is aware of it and it is powerful enough to sway people's judgement. Charts in the positive territory have a more easy going vibe to them like MSFT this year since any decline would just be giving back gains. Charts in negative territory have a fearful vibe like LNKD this year since any decline would be loosing even more. At least that is what the charts tell me. Hopefully I can explain that a little better here.
What it does best for me is put the chart into context for the big picture and adds personality to each instrument you are tracking. For example Facebook (FB) was one of the momentum stocks that held up best when the large sell offs were occurring in April/May 2014. I believe this is because of where this price action was happening in relation to how it had performed for the year, which is such a huge concept for me and defines how I look at sentiment.
It came into the year in a strong daily uptrend, went negative on the year barely for a few days, and ripped higher on a gap up continuation. When the sell off came it gave back all the gains it had for the year but never went negative. Giving back and loosing are two different things to the market. The big money was in the clear on this name and it shows in the chart and how the price action is playing out now (resuming the uptrend). Let's look at a name that couldn't ever go positive.
Groupon (GRPN) has been a dog all year long. There has been absolutely no rewarding price action for the bulls this year. Notice that the YTD break even line right at the highs, this situation is very common. It set the tone for whatever the market wanted to do. I track what the market wants to do with
trend analysis across
multiple time frames. It works the same in reverse, when the break even line is at the lows the chances for a strong uptrend increase greatly because of the tone it has set. In fact, lets take a look at an example of that.
Hewlett-Packard (HPQ) started the year in a strong daily uptrend. YTD performance went negative barely for a few days, the up trend continued and hasn't gone negative since. Understanding the difference between recovering vs. advancing, or giving back vs. loosing is so critical to truly understand market sentiment. That is what I use the YTD break even line for.
In conclusion, the whole point of understanding this principle is to be able to gauge the real sentiment of the market, understand the environment you are trading in without the need for any outside noise. This isn't something that I think about before every execution, it is part of the instrument's personality. I hate calling it sentiment though because it is more than that. It is the psychology of the price action. Not the surveys, or the social media, the actual market. Actions speak louder than words, and actions speak 10x louder than words in the market. Take some time to study it, watch it play out in real time, and back test it. It is powerful when understood and paired with trend following. Hope I explained it well. Feel free to ask any questions, please use the comments if you do.
Trade well,
-Michael
