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Is Market Timing Possible? Try Sentiment Analysis to Get Closer

July 6, 2015
Market timing and sentiment analysis

Market timing—that is, pegging exits and entries at their most fortuitous—eludes most investors. But that doesn’t stop the pursuit. Here’s a way to use sentiment analysis tools to get a read on time horizons.

The first rule of most sentiment analysis is that the figures are not tied to a move’s direction. Instead, sentiment analysis attempts to track the potential velocity of a move. In large part, sentiment measures—including the three thinkorswim® platform tools we’ll dive into below—are merely estimated ranges for a security in a certain period of time.

So what’s the point? Well, a stock trader can often use these values to help determine when a security might encounter a bumpier ride (thus signaling a time to hedge), a time to build a position, or a time to expect a potential reversal.

Vol Index, Expected Move, and the Market Maker Move

FIGURE 1: TRIPLE PLAY. Three ways on one page to track volatility and probabilities on TD Ameritrade’s thinkorswim® platform: Vol Index, Expected Move, and the Market Maker Move. For illustrative purposes only.

1. Vol Index is the composite implied volatility (IV) for an underlying security in the thinkorswim platform. IV is a percentage that represents the market’s expectation of a security’s price range in the future. From thinkorswim’s Analyze tab, the probable range of a security’s price can be determined for any given date—meaning you can see the expected stock range between any present and future time you select. You can find the Vol Index in a Watchlist column, as a snapshot within the Probability Analysis section, or on a day-by-day basis within the Risk Profile section (both are on the Analyze tab of the thinkorswim platform).

2. Expected Move can show you, the equity trader, the dollar value of an expected move by a specific options-expiration date, as priced in by options traders. This is the non-percentage value shown on the far right side of each options series header (figure 1 above). Although the expiration date doesn’t affect you directly, this kind of benchmark is a great forward-looking indicator to complement traditional charting methods.

3. Market Maker Move (MMM) is a value that’s displayed in thinkorswim when the volatility of the front-month options expiration is higher than the vol of the next expiration. When those conditions are met, you’ll find the MMM at the top right of the Trade All Products page in a yellow box when an equity is loaded, as in figure 1.

When MMM is present, it implies there’s some event in the near term, such as earnings, that might shift the price of the underlying security. The MMM is a derived figure that separates the volatility implicit to time from the “extra” volatility attributed to the upcoming event—potentially giving you the amount of movement the market anticipates the event may cause.

Are we talking about exact market timing? Nah. We’re looking to fold in sentiment analysis to narrow the time horizon around an underlying’s move. Consider it a complement to the fundamental or technical analysis that typically drives your decision-making. We’re just flipping on the “option trader” side of your “investor” brain.

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