Herd mentality is a portfolio killer.
Always has been… always will be.
The reason for that is unfortunately simple. No one thinks as an individual.
Every day, one trader follows hundreds of other trades right off the cliff, and sells. No one stops to ask, “Why am I selling? What happened?”
They look like sheep, unaware of the trouble.
At the same time, one trader follows hundreds of other traders, and buys. No one stops to ask, “What did I just buy?”
Isn’t that something they should have asked before they bought?
That’s because we’re irrational human beings part of groupthink mentality.
Look at the Dow Jones.
Every one was so fearful of “what ifs” that they didn’t trade at all. Billions of dollars flowed out of hedge funds and stock mutual funds. Each trader followed one another right off the cliff again.
Unfortunately, selling was just about the worst thing they could do. By selling, they miss the resiliency rallies that are sure to follow.
For weeks, we traded in a tight, downward sloping channel over fears of the election. Traders continued to sell out of fear for weeks. On the night of the election, as Trump was winning, Dow futures shed 850 points.
The herd overreacted.
However, once the “all clear” was sounded, that same herd piled right back in and sent the Dow Jones to a new all-time high.
But again, there’s a problem.
Every one is thrilled that all seems okay. They’re still buying, as the Dow Jones passes an all-time record high.
But if you’re not careful, you will get caught up in the next wave of selling pressure.
We may have broken out above double-top resistance at 18,500, but the latest push to new highs may not be sustainable. Relative Strength is indicating the index is greatly oversold, along with an oversold read of -20 on Williams % Range.
What we’d like to see here is a near-term correction. If the Dow can break above 18,827 on the next push higher, we could break out again.
However, if on a challenge of new highs, we fail, the Dow could refill its bullish gap around 18,000, near-term.
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These are just some technical basics to be well aware of, near-term.
Trade accordingly and remember that OPEC and a potential rate hike in December 2016 could easily force the Dow lower.