Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Do I bet it all? Do I ?!

3
1,344 views

Gambling title seems oddly appropriate, especially after watching David Einhorn taking down $4.3M in the ‘One Drop’  WSOP $1M buy-in tournament (which he’s donating to charity, by the way).

If you’re checking in on the 4th after an Nth round of debauchery with levels of inebriation approaching ‘that one time in college’ levels, you might want to come back and read it later. There’s a bunch of numbers and charts here that are liable to put you to sleep and miss out on the next round of ‘hey, y’all !!! watch this!’ fireworks display.

Wanted to write a quick update on the assessment of where we are in the market at this point, especially since signals I described in my ‘I bet it all’ post have just triggered (If you haven’t read the original post, it might be a good idea to do that in order to understand the 1st signal here).

First, ‘Planes, trains and automobiles’ signal update.  The breadth thrust signal triggered today. Here’s an update on performance of the signals I mentioned in that post:

click to enlarge

 

  • As you can see, there are 2 new signals for 7/2 and 7/3/2012 with one on 7/3 being especially strong and fitting well within  Whaley parameters. Typically breadth thrust like this indicates the beginning of a new sustained move higher. However, there is indeed a caveat to that. As you can see, the one outlier of poor performance in the whole set of data (at least thus far) is the 7/1/2011 signal. It certainly appears that when a breadth thrust occurs near 52wk highs it is much more likely to indicate a blow-off top than a beginning of a new bullish move. I would be much more comfortable with levering up long had we had this thrust when the market was down 10% than at this point – we are not even 3% off 52wk highs.
  • Is there anything else that can support the bull case then? Something that would increase one’s confidence in this ferocious rally? Well, there’s the 13EMA of NAHL that I like to use as the long term indicator of where the market is heading. Something like this doesn’t really catch the very tops or bottoms, but is a decent indicator for a long term direction. 13EMA first waded into the positive territory on 6/20 and after a brief dip has quickly recovered and is now firmly above 0. That has certainly been a bullish signal in the past and bolsters the bull case on intermediate and long timeframes.
click to enlarge
  • We are also approaching the earnings season, and with expectations that have been severely beaten down are likely to see a series of reports that are way over analysts expectations.
  • 50SMA on SPY has finally started to tick up today, possibly indicating the end of the correction as well.
  • And finally, election year seasonality is decisively bullish:

So based on these signals and assessment, should you lever up long and leave for a long vacation as it will be undoubtedly paid for (and more!) by the bountiful gains simply given to you by mother market?!

One thing to keep in mind is that we are severely overbought at this point, so much so that the value of NYMO reached 4th highest level in 14 years. Something like that absolutely has to be worked off through either price (moderate pullback) or time (few relatively flat sessions with indexes just drifting sideways). So hold off on getting that 2nd mortgage and selling wife’s jewelry to put it all in on a bunch of triple leveraged ETFs for just a few days.

When I look at the instances when NYMO reached very high levels (79+ in this study), short term picture (next few days) looks rather bearish (average 0.81% loss with 83% probability the next day and 1.75% with 70% probability over the next 2 days). Could it be skewed by horrendous losses of 2008/2009? Sure, but hard to guess just how much role that played in the overall picture.

click to enlarge

Then there’s also the surprisingly well fitting analog of 2011 and 2012 charts of SPY (well, more precisely 9/2010-8/2011 with an overlay of 9/2011-now). I did cheat a bit by shifting this year’s numbers by about 2 weeks to ‘make it fit better’. While I don’t think there’s a great chance of repeating the last year’s summer debacle, especially in light of election year seasonality, considering that European shenanigans are far from over, keep this picture in mind.

click to enlarge

So where does this leave us? While things can certainly change (even tomorrow since for some reason Europeans don’t celebrate the wonderful Independence Day of the United States and keep their markets open), as of the time of this writing things are looking up for the bulls on the intermediate and long timeframe. On the short timeframe we are WAY OVERBOUGHT and need to get these conditions relieved (through time or price). I did buy some TZA and SQQQ to hopefully take advantage of the pullback, but would not hesitate to cut them if it appears that we are just basing and not pulling back. Once the pullback is over (you’ll know it when you see it, but 1338-1340 levels seem like a good pullback target IF we pull back), I am certainly prepared to allocate a significant portion of my portfolio to the long side.

Enjoy the holidays, folks, and remember to let those bottle rockets out of your hand BEFORE they go off.

 

 

Titanic update – did you see that goddamn iceberg?!

5
446 views

As a reader of ibankcoin you’re undoubtedly aware that market looks like a thousand miles of bad road right now. There seems to be no escape anywhere except for cash and bonds (which is where I’ve parked my long term retirement accounts based on the seasonal investment strategy).  As many astute traders have mentioned already, the stubborn bulls are – ironically – keeping the market from finding a tradeable bottom. In most cases a flush/capitulation event is what will put the floor under the market (even if short term). So far we’ve had the painful slow drip, which is in many ways analogous to the old anecdote of a frog slowly being boiled to death.

Markets like this emphasize the importance of having a plan for each of your positions and sticking to it. Don’t be a frog. If you aren’t disciplined and continue to just give it another day, you’ll quickly find yourself with large loss, wondering ‘how could this have possibly happen?’ and  – to paraphrase Blake from ‘Glengarry Glen Ross’ (if you haven’t seen it yet, rent it tonight!) – ‘sitting around in a bar: ‘Oh yeah, I used to be a trader. It’s a tough racket.’

Remember why you were in the trade to begin with and stick to your plan. If you entered the trade based on a ‘good looking chart’, don’t forget to exit based on the chart as well and don’t let a trade become ‘an investment’ (sadly, I’ve done that myself many a time, but I’m getting better).

But back to the Titanic update. There was a lot of disbelief and talk about ‘crazy voodoo breadth signals’ (mostly from my friends who think this whole breadth research is a load of crap) when I first shared the results of this research, however those who haven’t considered it now certainly wish they had. Take a look at the updated chart and see for yourself. And to be completely honest and fair, I haven’t taken advantage of this ‘Titanic syndrome’ call nearly as much as I should have. While I made some money on the short side and saved my long term accounts from this disaster, it was really but a fraction of what it should have been. It was the first time I calculated it and saw it play out in reality, so I suppose next time I’ll trade it with a lot more conviction.

click to enlarge

And as horrific as that looks, keep in mind that DOW is only 5.39% off 4/4 close, while other major indexes fared much worse.

SPY down 7.24%, QQQ 9.64%, IWM 8.85% (that’s from 4/4 close, numbers are slightly worse from 52wk highs)

The question that is on most traders’ minds at this point is – where do we go from here? Well, unfortunately Titanic Syndrome doesn’t specify the maximum drop target (I wish it were that simple), but it does state that the typical drop is at least 10%. We are just about there at this point (at least on some indexes). There’s the question of a H&S pattern on SPY, which calls for a measured move of low 1280-ish, so we are nearly there as well (say, another 1.1% down or so). There is, however, more in the ‘bad news department’ as we just had a ‘Dow theory sell signal’ as reported by Stock Trader Almanac group, which may suggest that the worst is yet to come.

Also some of the breadth signals I track have gone from ‘Buy’ to ‘Strong buy’ over the last couple of days. However it’s important to remember that any long trade at this point would be going against the trend, and therefore will carry a much higher amount of risk. So far I have said ‘tomorrow’s the bounce day fo’ sho!’  several days in a row and have been obviously wrong (keep in mind that I meant a ‘relief bounce’, not another leg up just yet).

As many experienced traders note in their rules, it’s correct to be neutral or bullish in an uptrend and it’s correct to be neutral or bearish in a downtrend. So what’s a trader to do? That really depends on your trading style, personality and risk tolerance. If you try to catch every intermediate top and bottom and ‘milk the mother market for every drop she’s got’, you might start initiating long positions thinking that the bounce is near and a snap-back relief rally (which could be quite viscous as shorts pile in to lock in their gains) is just about to unfold. If that isn’t your style and you prefer a sold base before you commit to a trade, then cash continues to be king and a valid position in times like this. Remember that election year seasonality in May is bearish right through the end of the month and so far this year it’s played out perfectly. Also remember that market breadth is a valuable tool and really paints the picture of what the collective participants are doing (as opposed to thinking, pondering, considering while they answer sentiment surveys). It will tell you when to step out of the market as well as when to be ‘take a 2nd mortgage on the house’  aggressive. (FB IPO wasn’t one of those occasions – there’s the mandatory mention of Facebook for today).

 

 

I BET IT ALL!!! (or when to be aggressive)

7
833 views

Much has been written on similarities between trading/investing and poker. Both are gambling activities (and yes, any trading/investing is gambling by definition); and in both cases while you can certainly have ‘bad beats’ and losing streaks short term, in the long run skill certainly dominates over luck. In both cases you have to have the chips/capital in the portfolio to bet aggressively when a great trading opportunity/poker hand presents itself/dealt to you. It’s important to have the discipline to not trade iffy setups (or play marginal hands with little or no edge), to preserve the capital and not get chopped up. While it’s obviously important financially, psychological impact of ‘getting chopped up’ is perhaps much more profound. After many losing trades/hands one can be easily driven off his or her ‘A game’ and start playing either overly tight, missing out on excellent opportunities out of fear of losing even more of his bankroll or – even worse – start playing overly aggressive, chasing after losses, which inevitably leads to throwing good money after bad and – sooner or later – more losses.

So how do we recognize the opportunities to be aggressive? There are many setups and opportunities, depending on your style of trading and I wanted to share just one of them, something I came across while reading Dow-award-winning paper ‘Plains, trains and automobiles. A Study of Various Market Thrust Measures’ by Wayne Whaley.

As with other research on the topic of ‘breadth thrust’, Whaley concludes/confirms that large market moves start with a huge increase (thrust) in either the number of traded issues, positive volume of issues, or, alternatively, just a sharp jolt higher in an index over several days.

I decided to put Whaley’s theory to the test with last 3 years of data and track performance of SPY, IWM and TNA 3, 6 and 12 months from the time of purchase. In the table below you’ll find  instances of issues or volume thrust (per Whaley’s definition) with values over 70% (I removed signals occurring within a few days of the initial one, although one could use them as confirmation and add to long positions at that time). I have not had the time to calculate maximum drawdowns from the purchase points, which is an important system parameter, something that’s still on my ‘To do’ list.

To be fair to the spirit of Whaley’s research, only signals on 7/13/2010 and 7/1/2011 ) dark green in the table) would be the ones he would consider, however other buy points in the table appear to have fared very well.

What struck me as odd is poor performance of a couple of instances, specifically 12/7/2010 and 7/1/2011 (especially surprising as this fit the definition of the ‘true signal’ per Whaley). Once I’ve added another parameter to the table – ‘% off 52wk high’ it became rather clear. It appears that market thrusts near the recent top of the market could be viewed as a warning sign of a blow-off top, exactly what happened in July of 2011. The most recent signal actually occurred on 3/13/2012, at the new 52wk high on SPX, and at this point SPX is 1.76% lower, supporting the thesis of a market issuing a warning sign when such market thrusts occur near the recent top.

So what about the results of these signals? Let’s take a look at the 6-months (126 days) performance for TNA, which is a vehicle I’d be employing to take advantage of the signals. If we exclude the signals that occurred too close to a recent market top, at this point we have results on 9 data points.

Min gain – 20.43%, Max gain – 114.34%, Average gain – 49.9%.

At this point all  of the 6-month trades are winning ones, although as you can see there are some drawdowns on the 3-month timeframe.

(click to see a full size image)

While these signals didn’t pinpoint absolute bottom (understandably so as they key off market upward thrusts), they did do a good job of catching the next significant move higher and an astute investor equipped with this information could benefit quite significantly by betting aggressively at the correct time.

Bottom line is – know when you have an edge that fits your trading style and personality and pursue it aggressively (obviously that’s not a reason to completely throw caution in the wind, risk management should always be of utmost importance). Aces don’t come around all that often, so make sure to take advantage of that opportunity and don’t gamble on seven deuce offsuit. Market breadth studies will often tell you where the market is heading, are you listening?

I BET IT ALL

 

Detecting market tops and Titanic syndrome (triggered 4/4/2012)

5
2,093 views

While I’m by no means an expert on market breadth, I do follow a few breadth indicators and research as I believe them to be a true reflection of what market is actually doing, as opposed to various sentiment reviews, which are subjective at best. One of the signals that has triggered relatively recently was the – rather obscure-  ‘Titanic syndrome’, which was first coined by Bill Omaha in 1968 and detailed in ‘Patterns that detect stock market reversals’ paper. Interested readers are free to peruse the paper itself (I do think it’s worth it), but in summary, it aims to detect a major market top, predicting a market drop of at least 10%. Assuming I calculated the signal parameters correctly, the ‘Titanic Syndrome’ signal triggered on 4/4/2012. While it’s not unusual for the market to make a yet another attempt at recent highs (sometimes even surpassing them), it should be viewed as a bull trap and an opportunity to close long positions and – if you are an aggressive trader – open new short positions.

It’s of little value to reiterate what’s already stated in the ‘Patterns that detect stock market reversal’ paper, so I’ll leave you with the chart that I originally posted inside 12631 over a month ago on 4/5/2012:

 

In addition to the Titanic Syndrome signals there were certainly other clues, which I’ll leave for another post after my friend Don Julio is gone after his annual May 5th visit.

 

 

Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Creative articulation, baby

Joined May 6, 2012
10 Blog Posts

Do I bet it all? Do I ?!

3
1,344 views

Gambling title seems oddly appropriate, especially after watching David Einhorn taking down $4.3M in the ‘One Drop’  WSOP $1M buy-in tournament (which he’s donating to charity, by the way).

If you’re checking in on the 4th after an Nth round of debauchery with levels of inebriation approaching ‘that one time in college’ levels, you might want to come back and read it later. There’s a bunch of numbers and charts here that are liable to put you to sleep and miss out on the next round of ‘hey, y’all !!! watch this!’ fireworks display.

Wanted to write a quick update on the assessment of where we are in the market at this point, especially since signals I described in my ‘I bet it all’ post have just triggered (If you haven’t read the original post, it might be a good idea to do that in order to understand the 1st signal here).

First, ‘Planes, trains and automobiles’ signal update.  The breadth thrust signal triggered today. Here’s an update on performance of the signals I mentioned in that post:

click to enlarge

 

  • As you can see, there are 2 new signals for 7/2 and 7/3/2012 with one on 7/3 being especially strong and fitting well within  Whaley parameters. Typically breadth thrust like this indicates the beginning of a new sustained move higher. However, there is indeed a caveat to that. As you can see, the one outlier of poor performance in the whole set of data (at least thus far) is the 7/1/2011 signal. It certainly appears that when a breadth thrust occurs near 52wk highs it is much more likely to indicate a blow-off top than a beginning of a new bullish move. I would be much more comfortable with levering up long had we had this thrust when the market was down 10% than at this point – we are not even 3% off 52wk highs.
  • Is there anything else that can support the bull case then? Something that would increase one’s confidence in this ferocious rally? Well, there’s the 13EMA of NAHL that I like to use as the long term indicator of where the market is heading. Something like this doesn’t really catch the very tops or bottoms, but is a decent indicator for a long term direction. 13EMA first waded into the positive territory on 6/20 and after a brief dip has quickly recovered and is now firmly above 0. That has certainly been a bullish signal in the past and bolsters the bull case on intermediate and long timeframes.
click to enlarge
  • We are also approaching the earnings season, and with expectations that have been severely beaten down are likely to see a series of reports that are way over analysts expectations.
  • 50SMA on SPY has finally started to tick up today, possibly indicating the end of the correction as well.
  • And finally, election year seasonality is decisively bullish:

So based on these signals and assessment, should you lever up long and leave for a long vacation as it will be undoubtedly paid for (and more!) by the bountiful gains simply given to you by mother market?!

One thing to keep in mind is that we are severely overbought at this point, so much so that the value of NYMO reached 4th highest level in 14 years. Something like that absolutely has to be worked off through either price (moderate pullback) or time (few relatively flat sessions with indexes just drifting sideways). So hold off on getting that 2nd mortgage and selling wife’s jewelry to put it all in on a bunch of triple leveraged ETFs for just a few days.

When I look at the instances when NYMO reached very high levels (79+ in this study), short term picture (next few days) looks rather bearish (average 0.81% loss with 83% probability the next day and 1.75% with 70% probability over the next 2 days). Could it be skewed by horrendous losses of 2008/2009? Sure, but hard to guess just how much role that played in the overall picture.

click to enlarge

Then there’s also the surprisingly well fitting analog of 2011 and 2012 charts of SPY (well, more precisely 9/2010-8/2011 with an overlay of 9/2011-now). I did cheat a bit by shifting this year’s numbers by about 2 weeks to ‘make it fit better’. While I don’t think there’s a great chance of repeating the last year’s summer debacle, especially in light of election year seasonality, considering that European shenanigans are far from over, keep this picture in mind.

click to enlarge

So where does this leave us? While things can certainly change (even tomorrow since for some reason Europeans don’t celebrate the wonderful Independence Day of the United States and keep their markets open), as of the time of this writing things are looking up for the bulls on the intermediate and long timeframe. On the short timeframe we are WAY OVERBOUGHT and need to get these conditions relieved (through time or price). I did buy some TZA and SQQQ to hopefully take advantage of the pullback, but would not hesitate to cut them if it appears that we are just basing and not pulling back. Once the pullback is over (you’ll know it when you see it, but 1338-1340 levels seem like a good pullback target IF we pull back), I am certainly prepared to allocate a significant portion of my portfolio to the long side.

Enjoy the holidays, folks, and remember to let those bottle rockets out of your hand BEFORE they go off.

 

 

Titanic update – did you see that goddamn iceberg?!

5
446 views

As a reader of ibankcoin you’re undoubtedly aware that market looks like a thousand miles of bad road right now. There seems to be no escape anywhere except for cash and bonds (which is where I’ve parked my long term retirement accounts based on the seasonal investment strategy).  As many astute traders have mentioned already, the stubborn bulls are – ironically – keeping the market from finding a tradeable bottom. In most cases a flush/capitulation event is what will put the floor under the market (even if short term). So far we’ve had the painful slow drip, which is in many ways analogous to the old anecdote of a frog slowly being boiled to death.

Markets like this emphasize the importance of having a plan for each of your positions and sticking to it. Don’t be a frog. If you aren’t disciplined and continue to just give it another day, you’ll quickly find yourself with large loss, wondering ‘how could this have possibly happen?’ and  – to paraphrase Blake from ‘Glengarry Glen Ross’ (if you haven’t seen it yet, rent it tonight!) – ‘sitting around in a bar: ‘Oh yeah, I used to be a trader. It’s a tough racket.’

Remember why you were in the trade to begin with and stick to your plan. If you entered the trade based on a ‘good looking chart’, don’t forget to exit based on the chart as well and don’t let a trade become ‘an investment’ (sadly, I’ve done that myself many a time, but I’m getting better).

But back to the Titanic update. There was a lot of disbelief and talk about ‘crazy voodoo breadth signals’ (mostly from my friends who think this whole breadth research is a load of crap) when I first shared the results of this research, however those who haven’t considered it now certainly wish they had. Take a look at the updated chart and see for yourself. And to be completely honest and fair, I haven’t taken advantage of this ‘Titanic syndrome’ call nearly as much as I should have. While I made some money on the short side and saved my long term accounts from this disaster, it was really but a fraction of what it should have been. It was the first time I calculated it and saw it play out in reality, so I suppose next time I’ll trade it with a lot more conviction.

click to enlarge

And as horrific as that looks, keep in mind that DOW is only 5.39% off 4/4 close, while other major indexes fared much worse.

SPY down 7.24%, QQQ 9.64%, IWM 8.85% (that’s from 4/4 close, numbers are slightly worse from 52wk highs)

The question that is on most traders’ minds at this point is – where do we go from here? Well, unfortunately Titanic Syndrome doesn’t specify the maximum drop target (I wish it were that simple), but it does state that the typical drop is at least 10%. We are just about there at this point (at least on some indexes). There’s the question of a H&S pattern on SPY, which calls for a measured move of low 1280-ish, so we are nearly there as well (say, another 1.1% down or so). There is, however, more in the ‘bad news department’ as we just had a ‘Dow theory sell signal’ as reported by Stock Trader Almanac group, which may suggest that the worst is yet to come.

Also some of the breadth signals I track have gone from ‘Buy’ to ‘Strong buy’ over the last couple of days. However it’s important to remember that any long trade at this point would be going against the trend, and therefore will carry a much higher amount of risk. So far I have said ‘tomorrow’s the bounce day fo’ sho!’  several days in a row and have been obviously wrong (keep in mind that I meant a ‘relief bounce’, not another leg up just yet).

As many experienced traders note in their rules, it’s correct to be neutral or bullish in an uptrend and it’s correct to be neutral or bearish in a downtrend. So what’s a trader to do? That really depends on your trading style, personality and risk tolerance. If you try to catch every intermediate top and bottom and ‘milk the mother market for every drop she’s got’, you might start initiating long positions thinking that the bounce is near and a snap-back relief rally (which could be quite viscous as shorts pile in to lock in their gains) is just about to unfold. If that isn’t your style and you prefer a sold base before you commit to a trade, then cash continues to be king and a valid position in times like this. Remember that election year seasonality in May is bearish right through the end of the month and so far this year it’s played out perfectly. Also remember that market breadth is a valuable tool and really paints the picture of what the collective participants are doing (as opposed to thinking, pondering, considering while they answer sentiment surveys). It will tell you when to step out of the market as well as when to be ‘take a 2nd mortgage on the house’  aggressive. (FB IPO wasn’t one of those occasions – there’s the mandatory mention of Facebook for today).

 

 

I BET IT ALL!!! (or when to be aggressive)

7
833 views

Much has been written on similarities between trading/investing and poker. Both are gambling activities (and yes, any trading/investing is gambling by definition); and in both cases while you can certainly have ‘bad beats’ and losing streaks short term, in the long run skill certainly dominates over luck. In both cases you have to have the chips/capital in the portfolio to bet aggressively when a great trading opportunity/poker hand presents itself/dealt to you. It’s important to have the discipline to not trade iffy setups (or play marginal hands with little or no edge), to preserve the capital and not get chopped up. While it’s obviously important financially, psychological impact of ‘getting chopped up’ is perhaps much more profound. After many losing trades/hands one can be easily driven off his or her ‘A game’ and start playing either overly tight, missing out on excellent opportunities out of fear of losing even more of his bankroll or – even worse – start playing overly aggressive, chasing after losses, which inevitably leads to throwing good money after bad and – sooner or later – more losses.

So how do we recognize the opportunities to be aggressive? There are many setups and opportunities, depending on your style of trading and I wanted to share just one of them, something I came across while reading Dow-award-winning paper ‘Plains, trains and automobiles. A Study of Various Market Thrust Measures’ by Wayne Whaley.

As with other research on the topic of ‘breadth thrust’, Whaley concludes/confirms that large market moves start with a huge increase (thrust) in either the number of traded issues, positive volume of issues, or, alternatively, just a sharp jolt higher in an index over several days.

I decided to put Whaley’s theory to the test with last 3 years of data and track performance of SPY, IWM and TNA 3, 6 and 12 months from the time of purchase. In the table below you’ll find  instances of issues or volume thrust (per Whaley’s definition) with values over 70% (I removed signals occurring within a few days of the initial one, although one could use them as confirmation and add to long positions at that time). I have not had the time to calculate maximum drawdowns from the purchase points, which is an important system parameter, something that’s still on my ‘To do’ list.

To be fair to the spirit of Whaley’s research, only signals on 7/13/2010 and 7/1/2011 ) dark green in the table) would be the ones he would consider, however other buy points in the table appear to have fared very well.

What struck me as odd is poor performance of a couple of instances, specifically 12/7/2010 and 7/1/2011 (especially surprising as this fit the definition of the ‘true signal’ per Whaley). Once I’ve added another parameter to the table – ‘% off 52wk high’ it became rather clear. It appears that market thrusts near the recent top of the market could be viewed as a warning sign of a blow-off top, exactly what happened in July of 2011. The most recent signal actually occurred on 3/13/2012, at the new 52wk high on SPX, and at this point SPX is 1.76% lower, supporting the thesis of a market issuing a warning sign when such market thrusts occur near the recent top.

So what about the results of these signals? Let’s take a look at the 6-months (126 days) performance for TNA, which is a vehicle I’d be employing to take advantage of the signals. If we exclude the signals that occurred too close to a recent market top, at this point we have results on 9 data points.

Min gain – 20.43%, Max gain – 114.34%, Average gain – 49.9%.

At this point all  of the 6-month trades are winning ones, although as you can see there are some drawdowns on the 3-month timeframe.

(click to see a full size image)

While these signals didn’t pinpoint absolute bottom (understandably so as they key off market upward thrusts), they did do a good job of catching the next significant move higher and an astute investor equipped with this information could benefit quite significantly by betting aggressively at the correct time.

Bottom line is – know when you have an edge that fits your trading style and personality and pursue it aggressively (obviously that’s not a reason to completely throw caution in the wind, risk management should always be of utmost importance). Aces don’t come around all that often, so make sure to take advantage of that opportunity and don’t gamble on seven deuce offsuit. Market breadth studies will often tell you where the market is heading, are you listening?

I BET IT ALL

 

Detecting market tops and Titanic syndrome (triggered 4/4/2012)

5
2,093 views

While I’m by no means an expert on market breadth, I do follow a few breadth indicators and research as I believe them to be a true reflection of what market is actually doing, as opposed to various sentiment reviews, which are subjective at best. One of the signals that has triggered relatively recently was the – rather obscure-  ‘Titanic syndrome’, which was first coined by Bill Omaha in 1968 and detailed in ‘Patterns that detect stock market reversals’ paper. Interested readers are free to peruse the paper itself (I do think it’s worth it), but in summary, it aims to detect a major market top, predicting a market drop of at least 10%. Assuming I calculated the signal parameters correctly, the ‘Titanic Syndrome’ signal triggered on 4/4/2012. While it’s not unusual for the market to make a yet another attempt at recent highs (sometimes even surpassing them), it should be viewed as a bull trap and an opportunity to close long positions and – if you are an aggressive trader – open new short positions.

It’s of little value to reiterate what’s already stated in the ‘Patterns that detect stock market reversal’ paper, so I’ll leave you with the chart that I originally posted inside 12631 over a month ago on 4/5/2012:

 

In addition to the Titanic Syndrome signals there were certainly other clues, which I’ll leave for another post after my friend Don Julio is gone after his annual May 5th visit.

 

 

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