Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 7

Reading the Market and Implied Volatility

Market Sentiment

There is an well-known expression within the industry that I couldn't agree with more: The stock market goes up like an escalator but down like an elevator. This analogy refers to how slowly the market increases over long periods of time, grinding higher and higher over weeks, months, or even years; yet it only takes one correction for the market to come crashing down in as little as a day or two.

It is interesting to me that the stock market always has huge volume on the bearish days, and as the stock market grinds higher it is usually on light volume.

■ Make Money in Any Direction

Most traders are biased in either the bullish or bearish direction. Some traders are always bullish and some are always bearish; but the best traders are consistently split: sometimes bullish and sometimes bearish. Personally, I don't believe that traders can make money consistently if they are always bullish or always bearish. Traders who trade this way will make money when things lean in their direction; but will lose money when the stock market moves in the other direction (and it will).

I compare trading and the stock market to a basketball team. If the Los Angeles Lakers have won seven games in a row, is there a better chance that they will win or lose the next game? I would say win the next game. If the Chicago Cubs have lost 10 in a row, is there a good chance that they will win the next game? No; they are a losing team, hence ...