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Trading Options For Dummies, 2nd Edition by Joe Duarte

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Chapter 5

Analyzing Mood Swings in the Market

In This Chapter

arrow Digging deeper into market results

arrow Using option activity to determine market mood

arrow Assessing indicator levels

When trading stocks, you gauge whether a market has sustainable momentum or whether some kind of reversal is more likely by using breadth tools and sentiment analysis , such as the New York Stock Exchange advance decline line and the TRIN index, to measure market breadth or put/call ratios to measure market sentiment. Both are described later in this chapter. More specifically, by carefully examining key statistics such as volume and the number of advancing versus declining stocks, you get a better understanding as to why markets are behaving in certain ways and whether gains or losses were due to just a handful of stocks or if a large number of them fueled the advance or decline. Generally speaking, market advances tend to last longer and have a better overall “health” when more stocks are advancing than declining. The opposite is true for falling markets.

It so happens that the options market can also be used to gauge the health of a stock market move. Monitoring option activity gives you a sense of ...

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