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Over the weekend, one of our paying subscribers asked us:

Who Is Buying The Market Here?

The true answer on the surface is that its a market question nobody can answer. However under the surface?

We'd rather talk about the chemical make up of the market and how emotional states come into play because the market is full of emotions and people making decisions off of those emotional states, so lets talk about that a bit.

Keep in mind for every buyer here has to be a seller and every seller a buyer.

If you subscribe to the theory that Wall Street sells greed and buys fear then when markets get pummelled for months on end (Sept Oct Nov 2012) at those lows just who does Nervous Nellie think she is selling to AFTER the damage has already been done.

At extremes and AFTER a move, stocks move from weak emotional hands into the strong hands. At peaks, it's the opposite, stocks move out of the strong hands (those who bought Nervous Nellie's fear) and into the hands of Greedy Gus (greed is an emotional state) who is emotionally weak – who buys out of fear of missing a rally AFTER they already missed it.

Think like the house and the house always has the edge and this is the house's edge — playing off the fears of average investors.

So as to who is buying here? Well it's not smart money because you don't get coined being smart by buying AFTER a market has already ran for 4 months. The buyers right now are mostly the retail investors because the fear of missing it comes in to play AFTER they already missed it.

The other person who is buying here out of fear are short sellers who are covering their short sells out of fear of more losses AFTER they've already lost.

Again, it's all about emotional states.

You have to sell your peanuts while the circus is in town (when the circus leaves town who are you going to sell your peanuts to anyway — the crowd is gone?) – another way of saying get out while the getting is good.

The other thing that comes into play here is impressions. Wall Street sometimes gives the impression that everything is fine by just moving a few key select names that make up the biggest percentages of the indexes. IBM alone makes up 13% of the DOW, GOOG is 8% of the NASDAQ comp, so you see the market makers (and tradebots) can move those stocks (and every time they do they suck in the little emotional Greedy Gus guy) to give the impression everything is great. This is called PAINTING THE TAPE.

As for the indexes here with regards to our trading style here it's really simple:

We Buy Trend Channel Support And Sell Trend Channel Resistance