Do You Speak the “Language of Stocks?”

Mr. Market moved 1.72% higher yesterday, capping of the fourth consecutive day of gains for traders. If you’re a frequent Sleuth reader, that shouldn’t have come as a major surprise — but what should you expect for the future?

Today, I’ll help you translate the “language of stocks.”

Stocks have continued their volatility streak as the market continues its tentative hold on support. While that’s provided us with some gains in the last few weeks, it’s giving us some less buoyant share prices on more recent trades. And inquiring traders want to know why.

Who can blame them?

While some have been claiming that the market’s simply “irrational” right now, the notion that the market could be wrong made me think about a pretty prescient quote from one of the most important trading books out there, The Psychology of Trading by Dr. Brett Steenbarger:

When people — or markets — seem irrational to you, there’s a good chance you are failing to read their language. Dreams, the conversation of young children, artwork — many a profound truth comes packaged in ways that make more psychological than logical sense. Irrational markets suddenly make sense when you recognize that their volatility is a direct reflection of the emotionality of their participants.

Such markets are screaming their messages to you — if only you can make the proper translations.

So, let’s translate…

As traders, it’s easy to blame the market and say that stocks are irrational. The challenge comes in understanding what the market actually is telling us, and what steps we need to make next to continue to be profitable.

Right now, noise is ruling the news cycles. Economic fundamentals continue to be mixed, and political drama continues to unfold, most recently with more drama in Greece and the President’s jobs bill.

Despite last week’s selling, we remain within the uptrending channel that’s been formed by the higher highs and lows from the August 8 low in the S&P 500. That’s a very important positive sign for investors right now. As traders, we have to be ready for the potential that stocks could breakdown below that 1,120 low — until that happens, though, sound technical strategy dictates that we remain cautiously optimistic about stocks.

So far this week, the technicals are following the formula I laid out here last week.

Don’t try to predict what’s going on in stocks right now. Instead, use technical analysis to translate what the market’s trying to say — and react.