Joined Oct 26, 2011
153 Blog Posts

Reviving OABOT


As many of you know, I made the decision to undergo a difficult project to try to convert some of OA’s teachings into code.
Along the way, I abandoned the project after I could no longer update the data with a single push of the button due to finviz automatically redirecting the page which would export to a sign-in/register/pay us money page.

The main focus was on volatility contraction and scoring a stock’s classification according to it’s own movement.
The next stage was to use industry metrics as well as location, sector & market cap size metrics to apply a bonus to those in an industry or theme that was “working”.
I also applied a bonus to stocks that were undergoing significant volatility contraction.
An additional bonus was layered for “themes” that were all showing significant scores (and likely saw significant volatility contraction as a group as well)
The next stage which I had begun working on was reclassifying stock according to how it performed relative to the industry.

After taking much time away from the market followed by some time  trading without this spreadsheet functioning, I have made the decision to find a work around and get back to it.

With a fresh set of eyes comes a new perspective.

The formulas got too taxing to make adjustments, especially if I want to make quick, temporary ones. I had so many formulas on top of formulas that I lost track at times of what the numbers in the formula meant. That made things very difficult to change.

The solution to that will be to create a tab separately for adjusting the amounts in the formula and explaining in English what the formula does. This way you can tweak a number on the formula page and it will automatically adjust without having to re-copy and paste the formulas and adjust the entire formulas.

While determining how stocks in a particular “theme” are doing relative to each other is useful, I need to do more to classify the “risk” level of a stock. Certainly determining whether a stock is consolidating off it’s 52 week high or 52 week low makes a difference in the “look” you are going for and what type of qualities you are looking for. However, I need to better fine tune definitions with seperate metrics that score the “risk factor” of a stock, it’s industry average and how it relates to it’s industry average (as well as other areas it may have in common with other stocks), to come up with an overall weghted average that converts to a 1-5 score.

I also want to use earnings data to sort of be able to X out stocks that have earnings coming up in X days.

I want to either possibly run some kind of beta test and invite all the IBCers to try it free for some time, and/or possibly even build it live, explaining the details of what I’m doing and effectively making it open source.


Less importantly, I will no longer need the sort of time sensitive data since I won’t be able to use it as efficiently as I would have hoped.
I had worked on breadth statistics of groups to try to find the stock in a group that wasn’t moving when the group was, and also try to classify where the group was in the “risk cycle”.
This was most useful for stocks in larger industries, but I’m going to focus on being productive and ignore the more taxing parts of the projects for now.


If I happen to finish these steps, the next priority will be to try to “normalize” the scores from -100-100 or -1000 to 1000 or something, and then try to make a very rough price projection.
The price projection is not expected to be accurate, but instead useful to help determine the larger rotation of where the capital is headed now, and what those movements will mean for the setups next.
The idea will be to be able to have ONE dimension of metrics based on the here and now, and another dimension of metrics based upon the anticipated movements….

In other words, what happens IF the price action occurs as projected? How does that change the scores of all of the stocks, and what’s the result of the next projection and the next one.

If a stock is consolidating, a 1-3 price move influenced by capital flows into the industry or related elements could be enough to give it the boost to understand when to expect a breakout, and a second iteration of that combined with the 5-10 day look would allow you to look forward and finetune the “YOLO” trades a bit more accurately as well as get a better picture of which 5-10 day moves are likely to fizzle, and which will do well.

The 1-3 strengthens the 5-10 day projection and narrows the timeframe, as well as helps filter the 2nd and 3rd iteration to eventually a 30 day projection

Without the time sensitive data being timely available–that influences the 1-3 day projections–in this next version, I’m probably going to instead focus on ~5-10 day projection as the shorter term and ~10-20 as the longer term and have a couple iterations forward to give me about a monthly projection, and maybe a few monthly projections to give me quarterly, and a few quarterly projections to give me a year projection.

The idea of being able to project some of the best OTM LEAP option purchases and quickly identify the run away trending stocks before they happen is very intriguing to me, but I wish I had some of the shorter term “character” movements that help anticipate sort of the breakout and fizzle, break and chase, fake out and break out, and the false moves to fast moves that really better help define what to expect and how to handle it.

Unfortunately it takes a very long time to set up the calculations of how breadth within an industry and volume within an industry compares to the individual stocks and then looking at which moves are lagging on the days and weeks and determining which stocks are working in the cycle and which are next… and it can only really be used for industries with the greatest number of publicly traded stocks; which is about 10% of the market.

So this time around, I’m probably not using it.

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Topping Pattern

In the post titled The Unconfirmed Top, I went into why I thought the risk/reward favored the bears.

I sitll believe that to be the case, and now am thinking there’s a real good entry right here.

Take a look at the dow.


Major markets as a whole

The silver lining is in the optimistic line drawn in the dow and that this is a giant fakeout combined without having a euphoric, huge volume top.

However, with such thin volume, it also wouldn’t take a lot for the stock market to move upwards or downwards quickly with significant buying or selling pressure.


The all world index looks bearish as well…

However, again, there’s a silver lining. In this case, it looks like the market swiftly rejected head and shoulder breakdowns across the board.

The failure to breakdown can be very bullish IF the buying pressure allows us to take out highs. This could trap a lot of shorts and provides fuel for an explosive rally over the coming several months.

The alternative is that we fail to get past highs, bears reinitiate and eventually the buyers that bought the breakdown give up buying and capitulate which leads to swift selling.

So it’s about risk/reward, and I believe for the time being the entry can be managed most effectively to the downside here.

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Trading Marubozu Candles

If you are leaning too strongly bearish or bullish and want to find a quick hedge in the opposite direction once things begin going against you, you could do a lot worse than a marubozu pattern. A Marubozu pattern is candlestick pattern where a stock trends from it’s open to the close without reversing directions long enough to take out the low or leave a “wick”. If it’s a white candle, and without taking out the high if it’s a red candle.

White Marubozu – bullish.
Although more than 50% of the time the stock continues upwards, the real trade works when it actually fails to follow through and then breaks down. This is because the strong move upward indicates a lot of capital tied up chasing the stock higher, and once this capital is underwater, stops begin triggering and selling continues. It is a confirmed “breakdown” once it takes out the low, which is also the open the day of the marubozu. It also often creates a measured move downwards pattern on the intraday chart. Look to trade it within the last 5 minutes before the close if it’s below the marubozu candle’s low rather than waiting until the next open where a gap down may cause you to miss out.


White Marubozu stats:
white marubozo

You can see the stats show an edge even when you’re trading against the current market environment, making it a good hedge in bull markets. It also is very common to find this “bullish candle” in bull markets and likely you’ll be able to grab a put on a big down day intraday or at close if there’s a selloff.

Black (red) Marubozu – Bearish
The black marubozu indicates a bearish breakdown that likely continues, but when it takes out the highs, you potentially have a short squeeze and sellers who are under exposed and want back in. Also, the strong trend down and movement required to reverse both requires a change in sentiment as well as it tends to create a measured move on the intraday chart.

Black Marubozu
black marubozu

This is actually a trading system that can be very straight forward, and is especially useful if you focus on weekly options for a 3 day move or so on stocks with historically cheap premium.
How it works:
Black Marubozu watch list:
1)Save a word document as “marubozu” and enter today’s date.
2)At the close of the day, use this screen and convert the list to tickers http://finviz.com/screener.ashx?v=111&f=sh_avgvol_o50,sh_opt_option,sh_price_o10,ta_candlestick_mw&ft=4
3a)Save the list of tickers under today’s date.
OR )Enter the tickers into finviz and save the link that links only to those tickers in your document
OR )Set a price alert at the low of the day for each stock
4)Each day, remove tickers that have followed through or already triggered the trade and repeat the process.
Using the watchlist
1)View: Either click on the link you created in the doc or copy and paste the tickers (or wait until you get a price alert.)
2)Once the order is triggered, evaluate for a trade, in the last 5 minutes in normal conditions. (potentially you may consider a system that trades intraday if there’s a correlated sell off or negative breadth, or market index just took out the days low or if you have some sort of additional confirmation)
3)Optional:If the close is back above the low, exit the trade.
4)Otherwise sell in ~3-5 days or when price target is met.
5)Also consider anticipatory trades by running the scan 10 minutes before close and trading in the last 5 minutes, or taking an unconfirmed marubozu near the marubozu high. Stop on a close above the marubozu high. You will need to wait longer for pattern to confirm, but have a better risk/reward.
6)Also consider anticipatory trades IF the stock has failed to break out in 5 days with stop above the 5 day high.


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On the “weeks to months” time frame, TLT may be making a topping pattern. You have a huge concentration of capital culminating in a enthusiastic type of move. You have an equal low made, and the next rip offers a manageable entry. You’ll know pretty quickly if you’re wrong, and it’s possible it’s just setting up for the next leg higher as you could interpret it as a wedge pattern as well. The enthusiastic move above makes me think lower for now.

However, the longer term time frame shows the makings of a developing parabolic market with a steepening trendline. Maybe that topped out in 2015 and simply retested that top in early 2016. Maybe not.

Meanwhile, corporate bonds are breaking out, seeing capital inflows


The ratios of TLT to corporate bonds shows it may just be temporary, and pulling back to the trendline. If the trendline holds, you would see TLT outperform corporate bonds as the ratio trends higher.


Nevertheless, there’s a huge amount of capital that is moving to and from bonds, depending both on capital flows as well as potentially indicating inflation of capital and leveraging up, or deleveraging, so it will be an important development to watch.

From time to time bonds flips correlations with stocks as well. Either both bonds and stocks trade up in a bull market of growing wealth and increased leverage in the system. Or bonds is the “flight to quality” or “risk off” trade during tough times, while stocks tend to be the “risk on” trade. If the treasury bond markets gets too saturated on this generational cycle, it’s possible that everything we know about the relationships between stocks and bonds will eventually flip for the first time since the early 1980s. The flip would be the first time bond yields reversed a downtrend and began an uptrend since the 1940 low. 1942 was the first higher low since the 1933 low. Both stocks and bond yields trended higher (bonds prices lower) from 1942 to around 1969. A bull market with rising interest rates may result. Corporate paper or just cash may be the flight to quality trade instead… But perhaps that doesn’t happen for longer still.

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3/21 chartblast

As usual, I start with a list of optionable stocks with available weeklies and look for some kind of setup. Usually I am looking for a 1-2-3 reversal.
A bullish 1-2-3 setup will form a low (1), break the longest downtrend from highest high (2) while ideally forming an equal high, and then set up by dipping to form some kind of dip or consolidation (3), which will also usually be consistent with an “aversion” type of setup.
A bearish 1-2-3 setup will form a high (1), break the longest uptrend from lowest low (2) while ideally forming the first equal low, and then set up by ripping or forming some kind of consolidation towards support (3), which may be consistent with a “subtle warning” on sentiment chart.
a few bullish setups

finviz link

Some of these bullish setups have not yet broken the longest term downtrend from the highest high, but are either consolidating some kind of triangle bottom, or at least have broken a shorter term downtrend and have set up.

I still have more to look through but for now here are some potentially bearish setups

link here

Some of these are just potentially setting up for a secondary correction within a longer term bull market as they have not yet broken the trendline from the lowest low, and I haven’t yet looked at every shorter term chart to verify the setup, or looked at volume profiles just yet. I will try to look through a deeper list to come up with a better bearish list on Tuesday or Wednesday if I have time.


edit 3/22: here’s a few more bearish setups.
Added panw,hig,dow,crm,vlo to link above



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Chart Blast Ideas 3/17/16

Posting both weekly charts and daily charts to try to show you what I’m looking at.

Method: Manual scan of all stocks that have available weekly options. Using a list that I update 2-3 times a year.

Bullish setups:Usually looking for 1-2-3 reversals. Typically the first low following equal high.. Typically focusing on finding “aversion” sentiment, or in EW terms looking to buy before wave 3.

Bearish setups: Typically focused more on selling retest or resistance and/or with volume profile below and/or with some kind of bear flag or rising wedge.
Bullish list.
Bearish list.
(not yet) ZTS,CYBR

Bullish (daily charts)
bullish daily
Bullish (weekly charts)
bullish weekly

Bearish (daily charts)
bearish daily
Bearish (weekly charts)
bearish weekly

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How Edge Influences Position Size/Strategy

Volume profiles provide objective support/resistance levels that can measure points of possible future orders, with the psychology of whether or not we are above or below the price often determining who’s in control.

Lets take a look at a hypothetical volume profile and what zones of price mean for the stock.

volume profile

The upside target could also represent a selling point should prices draw near, as a move lower could re-enter the fast zone and enter “price discovery lower” until there’s more substantial orders coming in where support can be found. Similarly, the downside target could represent a buying point as a move higher would re-enter the fast zone and enter “price discovery higher”.

One of the key reasons these levels measure as good locations is there’s a clear risk and reward in which the reward outweighs the risk.

As a market gets closer and closer to a support/resistance level, the risk you take lessens, assuming your stop is a particular point beyond support/resistance and your target remains the next point of control. As such, assuming the same probability of outcome, your edge actually increases.

This is the one type of pattern in which you could actually add to a losing position, provided you still maintain the same stop.

This is supported by mathematics as you will see on a kelly criterion calculator.

Say for example, you have $5 of upside, $25 of downside. We can simplify this to a risk of 1 and a reward of 5 or a payout of 5:1. If we assume 40% chance of a “win”, we can use a kelly criterion calculator to get an expected gain on an equal risk basis.


-According to the Kelly criterion your optimal bet is about 28% of your capital

-Your fortune will grow, on average, by about 15.31% on each bet.

Now let’s say the 5:1 payout changes as the price advances closer to your stop. Offering $3 risk to $27 reward or 9 to 1. If the odds stay the same at 40%,

-According to the Kelly criterion your optimal bet is about 33.33% of your capital.

-Your fortune will grow, on average, by about 31.12% on each bet.

Note: the position size can increase by about 20%, and over an infinite time horizon maintains the measurement of portfolio risk measured in this case as “one full kelly bet”.

Now let’s say the stock moves to the stop. I would suggest using a full ATR as the “risk” if you are placing the trade that day, even if you intend on closing out the trade if it doesn’t close above the stop. Let’s say this is a risk of $1 to $29 reward or 29:1. We have to at least adjust the odds of a win slightly since the order will stop out for a small loss at least a bit more often. But for the sake of demonstration, in this case we’ll say it won’t.

You can now risk 37.93% of your capital or about 35% more than the initial 28% position to reach one full kelly of risk. Assumptions are made incorrectly all the time. The infinite time horizon is an absurd assumption, as is the assumption baked into the kelly criterion of 100% volatility tolerance, as is the assumption of a perfectly, fixed, known edge. But these assumptions can still allow us to draw conclusions.

We can use this as a means for comparison and to draw some objective lessons. If you are increasing your portfolio size substantially (double and triple) because your edge improves, you are probably either under doing the first bet, or over doing the 2nd and 3rd, or both. If you are pyramiding higher position sizes, that certainly may make sense if the probability of the asset going higher outweighs the shifting risk/reward and/or if you have an undefined upside target that expands based upon the strength of the breakout.

Also, if you are adding to a loser, you still need a clearly defined exit that shouldn’t change just because you’ve lowered your cost basis.

Additionally, adding lower and reducing higher is best for entire asset classes where you are either maintaining set allocations or changing the allocations based upon the relative edge against all other alternatives on a risk adjusted basis (including cash and adjusting for personal risk tolerance). If you increase a stock ETF lower, you have very little risk that the entire market will make a huge overnight move, whereas stocks are at greater risk of gapping substantially up or down as well as far greater risk of going to zero. Even though you are setting clear stops, either that overnight risk should be reflected in your position size, or you should only consider this tactic when buying asset classes or broad funds.

So how does edge influence position size? Slightly. The difference from 0% allocation to some allocation is infinite, so there are instances where a slight change in edge from negative, zero, or a very small edge to a more significant one can make a huge difference.. but if you are talking about a single setup developing, that difference is probably going to have less impact than most people would position for.

The more complex question of how one should change overall allocations as an outlook ranges from very bullish to very bearish to everything in between is a more difficult one to answer, particularly when we are talking about multiple trades held simultaneously and at overlapping intervals of time. There are other aspects of game theory that could help answer this question perhaps.

It would depend upon holding period which would depend upon fees and market’s tendency to trend and the edge and magnitude of that edge.  Nevertheless, with all things equal, a portfolio should allocate according to the probability of outperformance in the asset class, with additional capital tied towards “risk off” and cash related allocation as a person’s tolerance for risk decreases.

In other words, if it was simply between cash and stock, 50% stock would represent 50/50 chance of market up or down. If not for additional risks of margin 50% short stock and 50% cash would be acceptable as well. 80% chance would represent 80% chance of a rally, and 20% of decline of equal amount (adjusted for risk which actually would suggest holding more than 20% cash due to costs from volatility). the inflection point of 50/50 would actually shift towards shorts, but assuming shorting isn’t worth the additional risk, 80% cash and 20% stock would represent 20% chance of stock outperformance.

Your holding period makes a huge difference. For example, say there’s a 52% chance of the market going up on a given day… what’s the odds of the market finishing with more days up than down on a given year?

It turns out to be around a 72.5% chance that there are more up days than down. So a strategy that would rebalance yearly would theoretically have to be positioned much more aggressively bullish than one that rebalances daily if you assume a bull market or slight bias higher each day.


One final note: If you are aiming for targeted allocations using options, you have to also understand that a small movement in price can change the dollar amount allocated towards bullish ideas or bearish ideas substantially. So this is where finding a new bet or doubling down may make some sense, but it’s to maintain targets, or slightly increase them with your edge, not to drastically change them.

If you own 10% call options and 10% put options a small move upwards in the market can easily cause the balance to change to say 25% call options and 4% put options. This is where adding to a broad market hedge and/or holding broad market calls can be helpful in allowing you to quickly restore the balance of your intended allocation without selling individual positions short of their target or before your system dictates that you should, without having inconsistencies and over exposure to directional bias, beyond what you intend.

If you want to have 10% calls and 5% puts, mostly short dated options and the market moves, you now might have 20% calls and 2% puts. If you use index options on the dominant direction, you can quickly take off an IWM call and reverse it with an IWM put or find a put of something relatively correlated to the market (higher than .5) and have something like 15% call and 7.5% puts. This isn’t perfect, but it helps you stay a lot closer to your targets.

There is a substantial cost over time in paying additional premium for assets that perhaps have a lower edge just to normalize some of your volatility, ut it can be measured against the benefit of reducing the risk and even if you can break even on this tactic, if it normalizes your exposure you can see similar returns with lower drawdowns.


Keeping somewhat inversely correlated assets or low correlated assets can provide a substantial benefit, even if neither system is better than the other, or even if one system is break even as can be illustrated below.

normalized systems2

normalized systemsHypothetically, even a slightly unprofitable system that can virtually eliminate or substantially mitigate all risk of drawdowns can improve your strategy, as you can simply leverage up and see higher returns with the same or lower drawdown. Long term capital management failed to stress test their portfolio against a long enough history that included major credit risks and bond market collapses and/or “black swan” type of events, and didn’t protect their portfolio against the unlimited loss, and they used assumptions about liquidity that weren’t true but if they were able to adjust for these things, they probably would have been able to accomplish a better risk/reward and eliminate the big blow up. It’s the margin risk and unlimited loss potential and lack of liquidity without adequate time provided to raise additional funds that ruined their strategy, not the soundness of the strategy itself or the math involved. They also tried to keep up with a historically very strong market with enormous leverage, rather than just accepting a very profitable system without trying to benchmark their gains to an underlying market.


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The Unconfirmed Top

I believe the market provides superior risk/reward for the bears than the bulls at this time, even if the current momentum is in the bull’s favor, and even if there is no confirmed bear market yet. The IWM shows about $25 potential reward to $5 risk. I don’t think the full $25 potential will materialize, but even if you only get $10, the trade has profitable expected value as long if the market produces a win more than 1/3rd of the time.



On an intermediate time horizon, the trendline starting from the 2011 low created a 1-2-3 topping signal which set up sometime around November 2015. This was also a retest of a triangle top which probably moved too fast for most to react to.

Unfortunately, the decline failed to take out the prior low in every market, on both a weekly and daily closing basis, so there’s some confusion as to whether we have entered bear market or bull market.

For now we actually have a couple bearish trend channels that have begun to form and either remains a viable sign of a bear market. However, the more conservative bullish trend channel has not been breached, nor has the trendline starting from the 2009 low. Additionally, the other possible bullish channel was breached briefly, however in the rally we have regained support.

So that leaves us caught between a rock and a hard place as far as predicting price goes. Fortunately, there are still clear areas from which the risk reward favors one side over the other, and risk/reward is the name of the game.

Right now we are overbought entering supply zones where the bears who sold will defend the break even and the bulls may look to sell while they have a buyer in positions that are underwater.

The areas of supply are at 205-212 range in the SPY, 110-117 in the IWM, 107-110 in the QQQ (not top heavy) and the 175-180 range in the DIA.

The QQQ actually has a more bullish volume profile in that it has history of volume from 101-106 where the bulls directly below seem to outnumber the bears directly above. Nevertheless, with the other markets suggesting greater risk of running into resistance and selling off, the nasdaq bulls could quickly end up under water and the bulls could pile on and if prices move below the 101 level things could very quickly shift to where the sellers are in control.

The overhead supply provides an easy out for sellers to get back there shares at a slightly higher price while the gap below provides potential for gains. Past price history and volume suggest the amount of future transactions that take place as well as the speed of the price movement away from volume clusters and towards price discovery through volume pockets until new transactions are found.

Apply this principal to the IWM.iwm

You can see there is risk of a fast move below. There was very few transactions as the IWM rose above 85 to 110.. There are enough transactions at and above 110 that are underwater and bears that may look to reinitiate at similar prices. This creates the conditions for selling, and without much history of transaction below, prices move until it finds new buyers. The volume profile suggest that unless new money that wasn’t interested in buying on the way up in the 85-110 range suddenly decides to on the way down, or unless short sellers begin to take profits and establish a bid, you could see the market continue to move downwards as there will likely be more selling supply than buying demand.

Even if the profile won’t tell us what will happen, it can establish an objective measurement of risk and reward locations. For selling to be a bad idea, you’d have to be wrong a much larger percentage of the time than 50/50 if you manage risk so that you have the markets moving as much as $25 down when you’re right and no more than $5 upwards when you’re wrong. Certainly it’s possible that the market catches a bid and you have to close out your gains short of the $25 reward at the $5 risk, and certainly you may be right less than 50% of the time, but the odds are in your favor that you have a profitable trade on the bearish side.

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I’m short on time. I will need to take another closer look at these but for now here are a few notes for next week.
bullish: ACHN,AMBA,ARNA,CYH,ESRX,GNW,MNK (on pullback),V (bullish @70, bearish @75?)
BCEI consider stop buy @ 2.50-2.65 or limit near $2.00


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Weekend Chart Blasts 3/6/16

A few notes: We’ve advanced significantly since the last signal set up and then confirmed as blogged about, but into further strength faces resistance above and is currently oversold. Here was the past chart provided. Much of the overhead resistance remains as we are trading above 200 on the SPY.

Although the last market outlook I made didn’t completely confirm a bear market, there was some evidence of a bear market on the horizon, and so I’m looking to mostly be a seller into strength. I’m mostly neutral here. The major overhead resistance doesn’t start until just above 205, however we are overbought on the S&P and Dow and quickly approaching overbought on the Russell and Nasdaq while the McClellan $NYMO is really high as well.

Bullish setups


YOLO setups


bearish setups


The bearish setups outnumber the bullish ones, and my intention is to gradually place more bearish positions than bullish ones moving forward into strength.

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