All in a day's work

STI is currently near a resistance as seen from the insert and we are now faced with a gap to cover.
Last Friday we had a selling volume, if my chart is right, and a spinning top on resistance.

In my opinion, we are now at another critical level which might decide if this will become a bearish or bullish scenario. For me, as long as Monday did not break out.. it's bad. But to not be so negative, Wednesday should be the latest we will see any movement.

Personally, I'm still in the camp of... we are too optimistic. Ha! I'm sorry.

Have you ever wondered why do companies always seem to declare liquidity problems only when it's too late?

The last time I shared my opinion on a bottom is on 7th Jan 09 when Dow Jones seems to break a resistance of 8900. But in that post I did not refer to the charts. To read about my previous post, click here

However, this time round, I'd still see this as a potential rally but not the end of the bear run.

I've used arrows to indicate technical support formed in recent times and highlight the levels with a horizontal line, as you can see from the chart. This time round, I am in the opinion that we should have the "strength" to test 7,500 again, the resistance line formed since Aug 08, a breach of this resistance line would then lead me to rethink abt a sustained rally. Previously, a rally don't last longer than a week, 7 days and at this current time, we have about 3 days left.

I've removed all indicators in my analysis as I think indicators do not work in the current market. The tracking of the change in sentiments by indicators is too slow, in a way. Nevertheless, I do hope that most of you saw the bottom and caught the rally the last 2 days.

Finally, this is just my opinion and open for discussion/critics.

“I AM the most offensively possessive man on earth. I do something to things. Let me pick up an ashtray from a dime-store counter, pay for it and put it in my pocket—and it becomes a special kind of ashtray, unlike any on earth, because it’s mine.”

The endowment effect is a hypothesis that people value a good more once their property right to it has been established. In other words, people place a higher value on objects they own relative to objects they do not.

The endowment effect was described as inconsistent with standard economic theory which asserts that a person's willingness to pay for a good should be equal to their willingness to accept compensation to be deprived of the good. This hypothesis underlies consumer theory.

‘Thaler (1980) coined the term “endowment effect” to refer to the finding that randomly assigned owners of an object appear to value the object more than randomly assigned non-owners of the object.

Example: Look around your house. Pick something. How much would you sell it for? How much would people really pay for it? How much would you pay for something like this at a second-hand store?

What is Gambler's Fallacy?

Am i having a traits of a gambler in my investment decisions


Gambler's Fallacy, in Behavioral Finance, is the belief that if deviations from expected behavior are observed in repeated independent trials of some random process then these deviations are likely to be evened out by opposite deviations in the future.

This simply means this:

If a coin is tossed repeatedly and heads comes up more often than tails, a gambler may incorrectly believe that heads is more likely to appear in the future. But as a matter of fact, a coin has two sides and the chance of heads or tails is always 50-50.

An experiment carried out by Amos Tversky and Daniel Kahneman shows that people see (streaks of) random events as being non-random when they are actually much more likely to occur in small samples than expectations.

In relation to investing:

Do you gamble on the bottom more often at the start of a certain drop?
Have you considered the reasons of an entry/exit or are you just hopeful?
Do you see IPO as a sure-win opportunity?

Make sensible decisions based on analysis and not hear say or gut feeling as regret on a loss is always a worse feeling that the joy of a profit, Loss Aversion.

What is Loss Aversion in Behavioral Finance?

First and foremost. I am not a guru in this area but I've been interested in this for some time and did some readup. My posts on this topic, for sharing, might be fairly shallow and critics would be apppreciated.

"Behavioral finance is a rapidly growing area that deals with the influence of psychology on the behavior of financial practitioners."

"Behavioral finance is the application of psychology to financial behavior—the behavior of practitioners."

"Behavioral finance is the study of how psychology affects financial decision making and financial markets."Shefrin (2001)

For a while, theoretical and empirical evidence suggested that CAPM, EMH and other rational financial theories did a respectable job of predicting and explaining certain events. However, as time went on, academics in both finance and economics started to find anomalies and behaviors that couldn't be explained by theories available at the time. While these theories could explain certain "idealized" events, the real world proved to be a very messy place in which market participants often behaved very unpredictably.

Important Characters to BF:

Daniel Kahneman and Amos Tversky

• Fathers of behavioral economics/finance in the late 1960
• Published about 200 works, relating to psychological concepts with implications for BF
• In 2002, Kahneman received the Nobel Memorial Prize in Economic Sciences for his contributions to the study of rationality in economics
• Focused much of their research on the cognitive biases and heuristics that cause people to engage in unanticipated irrational behavior.

Richard Thaler

• This field would not have evolved if it weren't for economist Richard Thaler.
• During his studies, Thaler became aware of the shortcomings in conventional economic theoryies as they relate to people's behaviors.
• After reading a draft version of Kahneman and Tversky's work on prospect theory, Thaler realized that, unlike conventional economic theory, psychological theory could account for the irrationality in behaviors.
• Thaler went on to collaborate with Kahneman and Tversky, blending economics and finance with psychology to present concepts, such as mental accounting, the endowment effect and other biases.

The presence of regularly occurring anomalies in conventional economic theory was a big contributor to the formation of behavioral finance. These so-called anomalies, and their continued existence, directly violate modern financial and economic theories, which assume rational and logical behavior.
Examples of Anomalies: The Winner's Curse, January Effect, Equity Premium Puzzle and etc.

Conventional financial theory does not account for all situations that happen in the real world. This is not to say that conventional theory is not valuable, but rather that the addition of behavioral finance can further clarify how the financial markets work.