PPT Oversold wins again, and a look at the Russell

Hey all,

If some of you are getting bored of me writing about the Russell 2000, well, sorry – that’s my favorite trading instrument (well, index, TNA is the favorite INSTRUMENT 🙂 ). This is how I’ve made most of my money since I started trading, so there.. 🙂

The PPT oversold trade executed 2 days ago was a work of Swiss precision and beauty – buying on a dip after the day OverSold was flagged was, typically, the sweet spot (not always, but most of the time).

I sold out most of my TNA this morning, just before the jobs numbers, and then I sold the rest plus all my ERX on the pop after the numbers came out – gaining me about 6-7% in 2 days. This is about half of I used to aim for, with O/S plays, last summer, but I’m so unsure about this market here, I’m taking gains where I can get them.

I thought to myself: would I be more regretful if (a) I sold and it went higher, or (b) held, and I lost my gains? The answer is (b). There’s never anything wrong with taking profit, and I needed that profit to undo some stupidity from last week. So even though my trade was up almost 7%, overall, the whole TNA/ERX position, including some left over stuff from before, only gained me about 1.5% portfolio gain. Will be more patient next time, wait for oversold, and buy more, not having an underwater position already, which I was, in essence, averaging down.

Now, looking at what’s happening today:  the Russell futures came close to the overhead resistance which has been building over this month:

840 was my rough target, we hit almost that, so that was also a reason why I sold out this morning.

Following the high open, we dropped quite a bit, to the point where we seem to be, more or less, in the middle of the channel (I’m not an experienced chartist/technician, just drawing lines where I see them).  While the multi-day trend seems to be clearly down, in the short term (hours, 1-2 days), I feel this is a crap shoot, where we’ll go next, so I’m not too eager to go either short or long. Going short Russell this morning, with a stop somewhere above that resistance line would have been a high prob trade. Buying Russell when we get closer to the bottom of the range will be a high probability trade.

Doing anything with the Russell here is, well, a coin flip, and with The PPT hybrid RAPIDLY climbing, and approaching OverBought levels, well, I’ll stay away.  Same logic applies: will I be more regretful if I (a) don’t buy and it goes higher, or (b) I do buy, and it drops? (b) – so I won’t do it.

Last thought – for people thinking “why not just buy and put a stop loss”? TNA is so volatile that any normal/reasonable short term stop loss is very likely to get hit, just from its normal movements, and a big stop loss, when, that’s when my (a) vs (b) comes in. At this point, I want to avoid a bigger loss more than I want to try and squeeze more money out of it.

I see the futures are popping up, just now, both SPY and Russell – who knows, maybe we’ll be making new highs here. But I’ll wait for a definite confirmation of a reversal from the month-long down trend, before committing more money here. Doing 1-2 PPT/oversold trades per month is boring, but can be very lucrative. Can I find my patience again? Let’s hope so… 🙂

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It has been quite a few months since the last time there was any kind of organized group effort to play The PPT over-sold trade. I’m sure we have a lot of new members who’ve joined since that time who might not understand what we are referring to, or what the best approach is. I would like to take this opportunity to give everyone a brief summary of what we discussed to death last summer.

The PPT hybrid has proven to be very effective at flagging local/short term bottoms, via its oversold range value(s).  Two people (myself and @Po Pimp) did quite a bit of work, last summer, analyzing that phenomenon over the previous 1.5 years or so, back testing various approaches – a lot of that discussion can be found in the various PPT forum threads, I invite you to search there if you’re interested in exact details. He and I had slightly different approaches to trading hybrid oversold markets:

@Po Pimp would go long a bull instrument when The PPT hybrid flagged oversold, and would sell it when The PPT hybrid flagged a value which was either overbought or close to it (the details of what values constituted good entry and exit points  were subject to long discussions, and varied from situation to situation, as you might expect).

I had a slightly different approach: in “my” system, I would go long at oversold, and then wait for a  specific return, giving the market specific number of days, selling out at the end, if the goal wasn’t reached. I wrote a number of online back testing tools, available to PPT users, to test both of these approaches using different values for the main parameters. I found that, in the market as it existed until last fall, using my system, the sweet spot seemed to be asking for a 15% increase in TNA, giving it 10 sessions to run.

During the 1.5 years up to the fall, doing only that trade, would have given you some silly return, like 800% (this was, of course, assuming you’d go all-in at the oversold, into TNA, and I doubt anyone would have the balls to do that, so while mathematically correct, this rate of return would practically be unreachable).

There were drawdown, and there were situations where you had to sell on day 10, at a loss, but (going from memory), there were something like 8 winning trades to 2-3 losing trades. That’s right, doing only about a dozen trades in 1.5 years gave you a ridiculous profit. It only required patience, and access to The PPT engine.

Since the bull run which started in Sept we’ve really not seen any “real” oversold conditions, so this approach has fallen aside, forgotten, in favor of chasing an increasingly bullish market. Well, it seems like PPT O/S trades might need to be re-visited.

We closed PPT oversold on Mon, according to the current definitions of what constitutes an oversold PPT hybrid value range. I bought into TNA and ERX today, playing for the O/S bounce. No particular target in mind – I am not going to try for the 15% which has proven successful in the past, but I will try for a more modest 10%. Let’s see what happens… And best of luck to anyone else who might like to do their own version of The PPT O/S trade!

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(I had to re-type this from memory, since the first entry was lost when the browser crashed before the post was saved or published. Arrgg.. Lesson learned – Save Draft every few sentences).

“[investors] should try to be fearful when others are greedy and greedy when others are fearful.” – Warren Buffet

When the market is showing signs of breaking down, it is most natural for traders to run for the hills. Sell their positions, and/or go short. It is normal, and I share those feelings along with everyone else.

Acting on those feelings can lead you to miss out on some wonderful trading opportunities, on the long side. This is, to me, the core and basis of the type of hybrid driven trading we did very successfully last summer: buy at O/S, sell at O/B (or, at least, after a nice bounce), repeat as necessary (I choose to stay out of the ‘short at O/B, cover at O/S’ part of the cycle, which leads me to miss out on making money on the down side, but I sleep better at night for it). It works because (for most part), as Fly says, Nothing Moves In A Straight Line! The market, no matter how bearish, no matter how down-trending, WILL, from time to time, bounce back up. As traders (as opposed to investors), we can and should make money on those bounces.

The Russell 2000, since the highs of the morning after Bin Laden’s death was made public, has pulled back some 5.4%.  With another down day tomorrow (something I’m very much hoping for), the index will most likely get pushed down below its 100DMA and outside of the daily BB, bringing the pullback up to about/over 6%.  On no real news, just a general feeling of uneasiness , combined with May seasonality, and some vague fears about the Eurozone. Hardly anything  new or newsworthy.  Compare this to the pullback RUTX suffered from the back to back Libya and Japan situations: 7.4%.

Add to that the fact that we seem to be, today, in an equivalent of a PPT hybrid O/S situation, and with another down day tomorrow, most definitely will be oversold by EOD tomorrow, and we have the makings of a great bounce play opportunity.

I know, I know – everyone is getting bearish, everyone  loading up on inverses, who the hell am I to call for people to go long, and go long with the likes of TNA to boot!!!!

Let’s assume a realistic worst case scenario: that we are, currently, at the start of a last-summer-like multi-month long correction. Fine – let’s see what happened to the Russell last May:

Hmm… What do you know?? Pushing down through the 100DMA and outside of the lower BB were amazing buying opportunities, for Russell instrument!

Yes, that’s right – at the start of a multi-month long correction, buying into the Russell 2000 when it first crashed through its 100DMA and poked outside of its lower BB were excellent buying opportunities.

Buying the Russell at the 50DMA was a great trade in the past few months, but that’s over, for now. The 100DMA trade is on deck:

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Greetings all!

Overall, an interesting day in the market.  The carnage in the tech sector was extensive, but other major indices did not feel (to me) like they were in a vicious sell-off mode. Yes, a solid down day, but none of the mindless panic selling we saw before, in the past 2-3 months.

I will leave the analysis of pivot points, VWAP, Fib levels, etc to others, I’m going to just look at what moving averages on the main 3 indices we have to look forward to, just below us.  It seems like those are logical support levels, in the absence of anything specific which will cause panic to take root in the market (in which case, all bets would probably be off). Will they work as such here and now? We’ll know soon enough (in the next 2-3 days, I’d imagine). I just want to alert you to them, so you’re on a lookout for specific index behavior, when such an average is being approached.  Even if those averages fail to stop our decline, chances are they might provide a good probability entry for a day/scalp trade.

One support point on a single index is unlikely to stop the sinking of the whole market, but when multiple, different averages on different  indices lines up below us, like they are now, there’s always the chance that each individual index will find its own support level, in more or less the same time, allowing us to hold, and maybe, after some chop, reverse the slide.

The S&P500 :

The Nasdaq Composite:

The Russell 2000:

Personally, I will be on the lookout for how the Russell behaves around the 100DMA and the bottom of the BB, with an eye to trade some TNA, for at least a very short term bounce. The 100DMA proved to be solid support during the Japan situation (the only time since Sept that the 50DMA didn’t hold the Russell up), so I would be extremely surprised if we didn’t get some bounce there, no matter how fleeing.

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Hi all,

I am trying to incorporate more individual stock trading into my trading style, but I am still (for better or for worse) trading the various instruments which follow the Russell 2000 Small Cap Index (mostly TNA, TZA, etc).   Now, from a high level point of view, the Russell and the S&P 500 will move in generally the same direction, but there can be minor variations in terms of daily movements, support levels, etc. Since I trade the Russell, I tend to largely look at it as my primary tell, and rely on the excellent market recaps of @chessNwine for keeping me up to date on what other major indices are doing.

Let me summarize my thoughts here, and then I’ll expand on them, below,  item by item.

I believe the Russell is sitting on multiple, MULTIPLE support reference points now, all of which have shows to be very resilient in the past, so I feel the benefit of the doubt has to go to them holding here again. Having said that, I admit that the possibility is for those to break, but there is another layer of support just under us, and only if THAT broke, in a convincing fashion, would I change my intermediate term bullish outlook. There was also a reference to the Russell putting in a double top right here, with the 2007 highs – I feel that is extremely premature to say, and that, based on what we saw in 2007, we should have weeks to observe its behavior, before getting long term bearish.

So, without further ado, here are my reasons (probably from weakest to strongest)

a) we’re sitting on a short term support trend line, since the post-Japan bounce:

The fact that we failed to follow up Thur’s impressive recovery with a strong day on Fri was disappointing, but not unprecedented. Just like we didn’t bounce straight up in mid Apr, we don’t have to bounce straight up here. Back then it was the S&P downgrade which sent the markets down, on Fri it was the dollar strength, from renewed worries about the Euro and Greece (how many times will that particular shock/surprise move the markets, eh? Anyone else getting tried of this?) But considering that, even with the dollar ripping to the upside, we still failed to make a new lower low on the Russell, I don’t take that as a bearish sign for the immediate future.

b) we are sitting on a multi-month support trend line, dating back to Sept:

Now, to give bears their due, I should admit – support lines, like rules, were meant to be (sooner or later) broken. The multi-month support trend line had a different slope  going into Jan.  In fact, that support trend line did NOT hold in Jan, failing us even before the full extend of the Egypt situation hit the other indices:

c) the comment in the above  chart leads me to ,y strongest reason(s)  why I have so much faith in the intermediate term, for the Russell: the moving averages:

The 50DMA has provided  a great deal of support for the Russell, lately, managing to hold it up through the Egypt problem, the Libya issues, and the S&P downgrade. The only time, in the recent months, when the 50 proved unable to support the index was with the Japan catastrophe, hitting us while the markets were still little jittery from the Libya worries. But then the 100DMA proved to be a great backstop, holding us and pushing us back up.

I am not so foolish as to believe that we cannot crash through the 50DMA here and now.   The answer to that question will depend on (i) what happens in Greece  together with (ii) how much of that is already priced in.  However, the 100DMA is just below us, and I believe, based on what’s happened in the recent past, that will hold as our backstop. That is my short/intermediate term theory, and that is also my stop loss, on any bull  Russell instruments I might be holding, when that happens. A confident push below the 100DMA on the Russell means to me, in the short/immediate term, bail on the likes of $IWM and $TNA.

On a slightly different, but Russell related topic, I just read Scott’s blog post about the Russell, in which he calls (or suggests?) a double top for the Russell, with a target of 800 followed by 760. I don’t know what time frame he means, but let’s look at the long term weekly chart of the index:

Last time the Russell has come up into what proved to be the ultimate top, it hovered there for 8 weeks, before finally pulling back. Eight weeks! And even then, after the pullback, it tried to re-test those highs again, and only having failed in that attempts, did we see the beginning of the bear market.  Are we seeing anything like that here and now? Not even close.  Of course that doesn’t mean that we won’t start a new bear market on Mon, anything can and will happen, right, but, in my opinion, one cannot put up a chart, and use only one piece of information from it to draw conclusions, ignoring the rest (in this case, using the fact that we’re near the previous market top to call for an immediate  reversal, without giving the chart time to show us if it’ll mirror the previous topping pattern).

The current trend is higher. It’s been higher on different time frames since Mar 2009 and  since Sept 2010.  But nothing moves in a straight line. I will doubt my intermediate term “trend is higher” theory with a break of the 100DMA on the Russell.  There’s no point in even thinking about a new bear market now:  in 2007, after a 4 year run, we needed 2 months, plus another attempt 4 months later, before the market gave up, and reversed into a bear market. Here and now, we’ve only been running for 2 years, latest batch of earnings is good, the Fed shown it wants to support the market and the economy, and we’re consistently making new highs (we just made new highs less than 2 weeks ago!!!)…  Come on…

The Trend Is Your Friend, and currently, until proven otherwise, The Trend Is Higher:

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Greetings, all!

I see myself, in the coming two weeks, writing posts which comment on what other fine people of the iBC/PPT universe have said, in other blogs. Sometimes I’ll be agreeing with them, sometimes I’ll be disagreeing with their comments… As such, I would like to offer this one disclaimer up front, get it over with, so there’ll be no need for me to do it with every post.

This place (iBC/PPT/12631/etc) is filled to the brim with wonderful, super knowledgeable, experience traders and/or investors, whom I could never, ever hope to match in their market skill or knowledge. I admit and acknowledge that.

However, I feel it IS ok to, sometimes, on individual issues, disagree with such an individual, without generating in anyone the feeling that I’m being arrogant or full of myself (the “who does omen think he is, disagreeing with (whoever)” situation).  Any comments I might make, which run counter to what someone else has said will only reflect my own, personal feelings and attitudes about THAT specific topic/issue, and will, in no way, be a reflection of my thoughts, feeling, or respect for that person as an individual or a market professional…

There, it’s said, we’ll always take that as read, so now, I’m ready to blog!

Lol, the first time I was elected KoPG (last year) I had to abdicate after few posts due to health issues… Now I’ll do it for the rest of May, so between those two together, I’ll now have a full, month-long tenure under my belt.. J

Looking forward to it!

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