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OPTIONSMART MORNING UPDATE: Sunday Edition

1. OUTLOOK: Positive earnings surprises from Microsoft and Amazon helped the Nasdaq outperform the broader market. Materials stocks made up the worst performing sector. They dropped 2.1% as a confluence of broader market weakness and a stronger dollar made commodities look less attractive. Investors know that the earnings for the third quarter are going to be better than expected. They want to see something else. However, QQQQ implied volatility little changed. The market is poised to resume its uptrend next week.

2. TRADING OPPORTUNITY: n/a

4. OUR APPROACH TO SHORT-TERM INVESTION INCLUDES:

1. Analysis of market players’ behavior. Stock market professionals know that stocks are driven in the short-term by sentiment and not by fundamentals. Sentiment is largely created by big market players: influential big banks and investment funds trading stocks in big volumes. On average, more than 60% of trading volumes delivered by so-called “program trading” is set up by big market players. You should have an idea what are they doing: buying or selling the stock, pushing it up or down, at what level. 

Just one example. “Big boys” very often silently accumulate a stock while trying at the same time to keep the price low. After that, they publish the positive comments that push the price higher. You will lose without a clear understanding of what is going on.

 2. Advanced technical analysis based on econometric models. The OptionSmart technical analysis models help to identify reliable short-term trends and reversal points. Technical charts cannot lie because they show how investors vote with real money.  

There are two ways to analyze charts. The most popular way is to consider it like any other statistical process (physical, for example).  We use a different one, a behaviouristic approach that helps to understand what investors are going to do.  

3. Fine-tuned investment vehicles. After analysis of the markets, we should determine what kind of investment vehicle is most suitable to benefit from an anticipated short-term movement. Straightforward buying of stocks would be not the best way. There are two reasons for that. Firstly, you put a lot of money under risk. Secondly, these short-term movements account for less than 1-2% of price changes. At the same time, options give you a chance to increase this return by 5-10 times.  

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