I was reading this CNBC article featuring this quote:
The Dow Jones Industrial Average is repeating a pattern that appeared just before markets fell during the Great Depression, Daryl Guppy, CEO at Guppytraders.com, told CNBC Monday.
“Those who don’t remember history are doomed to repeat it…there was a head and shoulders pattern that developed before the Depression in 1929, then with the recovery in 1930 we had another head and shoulders pattern that preceded a fall in the market, and in the current Dow situation we see an exact repeat of that environment,” Guppy said.
I guess, maybe, this is wisdom, if a loosely quantifiable technical pattern can define a market “environment.” To call it “an exact repeat,” we would need to see the evidence. Let’s take a look. Note that the CNBC article did not include any charts.
Click on the charts to enlarge…
Dow Jones Industrial Average 1929-1931
Dow Jones Industrial Average 2008-2010
Okay, sure, we have a head and shoulders pattern in both charts. Honestly, I see numerous H&S patterns in both charts. But to call this “an exact repeat” is quite a stretch. That doesn’t mean we won’t see a brutal market swoon, a la 1930, over the next several months. There are certainly similarities, but there are also clear differences.
The take-away from this is to be careful when dealing in absolutes (an exact repeat?) and technical chart patterns. Unless the patterns are quantified, there simply are no legitimate absolutes.
With the exception of some, who are truly good at it, I think many see what they want.
Wood,
Today I tried the system with good results. And tonight I’ll be purchasing two more on the opening tomorrow with a market order tonight. Also, I noticed that one of the picks for the opening tomorrow had a really high ATR, making the stop around 17% or so. So I decided to avoid that one.
Question is: Is your system based on the idea that you should buy everyone listed or is it acceptable to pick and choose base on stop %. In other words, do I lower the odds significantly by avoiding the high ATR stocks?
Thanks.
Hawaii, if you haven’t already, look at the 2 help files that are permalinked at the top of the main power dip page (where the blog is).
Actually, the ATRs for those 3 stocks are pretty low, with the one exception. If you take the highest and give it a 3 multiple, you’ve got a stop of 5.72*3=17%.
Actually, the higher ATR stocks are more likely to move farther than lower ATR stocks. So you chance a larger gain or loss, but if you use percent-risk position sizing, since it has a higher ATR, your position is going to be smaller anyway. Anyway you slice it, your risk will still be the same, no matter how large your stop is. Go back and review those 2 posts I did on position-sizing here:
http://ibankcoin.com/woodshedderblog/2009/12/23/atr-position-sizing-and-stops/
http://ibankcoin.com/woodshedderblog/2009/12/27/atr-position-sizing-and-stops-can-be-superior-part-2/
As for lowering odds, no. Every pick has a positive expectancy. By not taking enough trades to fill up whatever part of your portfolio you’ve segregated for the Power Dip, you are reducing your opportunity, which will hurt performance over time. Remember this formula – expectancy*opportunity=profits.
Hope this helps. I’m just getting home so I’m kind of rushing things. Let me know if I can explain things further.