In 2005, 450 sheep jumped to their deaths in Turkey, as reported by USA Today.
First one sheep jumped to its death. Then stunned Turkish shepherds watched as 1,500 others followed… all jumping off that very same cliff.
In the end, 450 dead sheep lay dead on top of one another. One by one, the sheep followed other off the cliff, not knowing what would happen.
Herd mentality prevailed.
As wild as it may sound for hundreds of sheep to walk off a cliff, humans do the same each and every day. As humans, we think and act as one. We feel safety in numbers. We don’t want to be left out of a “big thing.”
It’s herd mentality – that “pack-like” thinking that’s wiped out a great deal of money. All rational thought goes right out the window, as the herd ignores economic and global realities masked by a Fed program not well thought out.
The herd will never learn. You can rub its nose in the mess over and over again. It won’t learn.
But that’s fine by us. It makes our job easier. Each time the herd screws up and walks off the cliff, we can spot buyable moves in the charts.
For example, we can literally spot when the bulls or bears have gotten ahead of themselves. We can tell when things will fall apart, as the herd makes a mess. We can do it by watching technical setups alone.
When the Dow gets far too stretched, RSI tops out above its 70-line. MACD spikes. And MFI tops out and reverses lower. It tells us the market is about to come down.
Look at the December 2014 top, for example. RSI topped out above 70. MACD sat at 200. And MFI was already reversing from 80. We were over-extended all these indicators. We saw similar sell offs in May 2013, July 2013, September 2013, January 2014, August 2014, and again now.
Reverse the technical reads and we can call bottoms, too.