Lady Market and Intangibles – October 27, 2011

[Billy]

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“Again, I’m just a trader…so what do I know? I would prefer a REAL market with REAL stock setups and REAL leadership, but for now, we simply have to make adjustments based on the intangibles and take what the market gives us. It’s what keeps this game interesting, right?”Joe Fahmy - http://joefahmy.com/2011/10/25/plunge-protection-team/

Don’t miss this latest blog post by Joe Fahmy. It suggests to me that being a disciplined trader (like the robot) is not bound to be much rewarded for a while… Intangibles are just too numerous at present but absent from any rational and historical framework of lessons learned from the past.

I’ve spent 30 years doing my best to become a consistent and profitable trader. It’s been all about systematically practicing good professional behaviors. Lady Market taught me to only try to kiss her when there was a high probability to be welcome, when she was in the mood and well positioned (setup) and near the exits in case she would turn suddenly angry at me.

Today, only bad behavior is rewarded. You just rush in impulsively, forget about all the rules and make a million overnight for raping the girl! Oh yes, Lady Market is not herself anymore, she’s become the toy of liquidity manipulations, intangibles and politicians.

The Brussels accords have, once again, just bought some time for rewarding more bad behaviors.

IWM is now in a position to go testing the 200-day moving average (77.89). Weekly R3 (75.90) is within easy reach with light floor selling pressure. The robot will respect his code of good conduct and stay in cash. Make your own discretionary adjustments if you wish to take what Lady Market is giving right now, but don’t fall in the trap of believing for one minute that she will be a good teacher for your future trading practice.
Billy

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[Riskslayer]

Hi Billy & Pacal,

Based on current circumstances, can you guys confirm (or correct) my understanding that the 20D MF will only signal a long entry after we have 1st moved to oversold conditions and then retraced back up?

So, if the market moves immediately higher from here without pause or their is only minor pullbacks that does not bring MF into the oversold range, can the IWM robot get long? I guess this would be sort of over-ruling the 20D MF?

btw - I spoke with Fahmy last night, he seems convinced the US (or, PPT) is intervening on the long side. Also, I double checked the Operation Twist start date - see http://seekingalpha.com/article/298379-is-operation-twist-juicing-the-stock-market This references says the first purchases were made Oct 3 and then again on Oct 4 ... interesting coincidence with the Oct 4, last 45 min end of day 7% run in IWM?? Someone how I missed this date/information and should have been more on guard for the snap back.. Maybe we are back into a psuedo-POMO trading regime??

Thoughts?

Shawn

[manucastle]

Hi Billy & Pacal,

Based on current circumstances, can you guys confirm (or correct) my understanding that the 20D MF will only signal a long entry after we have 1st moved to oversold conditions and then retraced back up?

So, if the market moves immediately higher from here without pause or their is only minor pullbacks that does not bring MF into the oversold range, can the IWM robot get long? I guess this would be sort of over-ruling the 20D MF?

btw - I spoke with Fahmy last night, he seems convinced the US (or, PPT) is intervening on the long side. Also, I double checked the Operation Twist start date - see http://seekingalpha.com/article/298379-is-operation-twist-juicing-the-stock-market This references says the first purchases were made Oct 3 and then again on Oct 4 ... interesting coincidence with the Oct 4, last 45 min end of day 7% run in IWM?? Someone how I missed this date/information and should have been more on guard for the snap back.. Maybe we are back into a psuedo-POMO trading regime??

Thoughts?

Shawn


Lots of emotional headless chickens running around just now. I have been in this type of market many times and it is very easy to get sucked in. I will wait for a better entry.

We probably all feel we are missing something but fear and greed are the enemies at the gate !

Just my 2c

Trev

[manucastle]

Lots of emotional headless chickens running around just now. I have been in this type of market many times and it is very easy to get sucked in. I will wait for a better entry.

We probably all feel we are missing something but fear and greed are the enemies at the gate !

Just my 2c

Trev

It is a pity we don't have the Motley Fool 'Poll' function here e.g.

Which would be the best investment decision now :-

A. Going long at the open today.
B. Going short at the open today.
C. Patiently waiting for a new strong Robot signal either long or short which has been thoroughly tested over the medium term .

For me it is an easy decision. How about you ?

Trev

[adam ali]

Trev,

I'm particularly interested in how the RT 20DMF indicator will handle this type of environment. I've been following Pascal's advice that once the 20DMF is above the '0' line, markets remain a buy, but am looking to other tools (as opposed to the Robots) for guides on potential buy setups and price levels.

[Billy]

Hi Billy & Pacal,

Based on current circumstances, can you guys confirm (or correct) my understanding that the 20D MF will only signal a long entry after we have 1st moved to oversold conditions and then retraced back up?

So, if the market moves immediately higher from here without pause or their is only minor pullbacks that does not bring MF into the oversold range, can the IWM robot get long? I guess this would be sort of over-ruling the 20D MF?

btw - I spoke with Fahmy last night, he seems convinced the US (or, PPT) is intervening on the long side. Also, I double checked the Operation Twist start date - see http://seekingalpha.com/article/298379-is-operation-twist-juicing-the-stock-market This references says the first purchases were made Oct 3 and then again on Oct 4 ... interesting coincidence with the Oct 4, last 45 min end of day 7% run in IWM?? Someone how I missed this date/information and should have been more on guard for the snap back.. Maybe we are back into a psuedo-POMO trading regime??

Thoughts?

Shawn

Shawn,
The IWM robot can issue a long signal as long as the 20 DMF is on a buy signal with non-neutral LT/ST settings. Because the 20 DMF is still on a buy signal, the LT/ST settings must now issue a buy signal for the robot to enter a new position. It could most probably happen either with a consolidation through time or a pullback that doesn’t switch the 20 DMF back to a sell signal.
If the 20 DMF turns neutral, the LT/ST settings will decide the robot’s stance.
We would need to wait for an oversold 20 DMF and a new 20 DMF buy signal only after a sell signal is issued by the 20 DMF.
I fully agree with Joe Fahmy and, yes, I think we are back in a pseudo-POMO regime which is maybe the most powerful one we’ve seen because Europe is now engaged too in a massive QE program on its own, coordinated with Japan and the BRICs. It will be hard to fight a planetary Fed no matter how insane their program for the long term (paying debt with more debt).
Billy

[EB]

I fully agree with Joe Fahmy and, yes, I think we are back in a pseudo-POMO regime which is maybe the most powerful one we’ve seen because Europe is now engaged too in a massive QE program on its own, coordinated with Japan and the BRICs. It will be hard to fight a planetary Fed no matter how insane their program for the long term (paying debt with more debt).
Billy

Indeed, this looks like panic buying. 126.71 opened the year and fund managers want to close with what they perceive to be a central bank facilitated bang. One caveat is that, since the equities top, a gap open near daily R3 has been a sell signal. Conversely, if today's gains hold in the coming days, it could be a major risk-on indication.

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[Pascal]

Indeed, this looks like panic buying. 126.71 opened the year and fund managers want to close with what they perceive to be a central bank facilitated bang. One caveat is that, since the equities top, a gap open near daily R3 has been a sell signal. Conversely, if today's gains hold in the coming days, it could be a major risk-on indication.

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I could not agree more. The 20DMF does not show money chasing high prices right now.
Also, the inversed ETFs do not see money moving out (except for TWM).
I believe that we are witnessing a Pavlovian reaction where traders think to be in the POMO days again.
EV tells us the bounce is a fake.
Sound trading says to wait for good settings, which are not here yet.
Usually, large gaps are faded and this is what we are seeing today (not in terms of price, but in terms of MF.)
Tomorrow will tell us what to do. I suspect a pull-back. If this pull-back is bought, then this "all clear" signal might have legs.



Pascal

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[nickola.pazderic]

This trending day is fascinating insofar as IWM has basically held the 20 MMA since 8:30AM PST.

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Even the slightest pullback is bought; and yet, the money flow shows a different picture. Thanks Pascal.

[Pascal]

This trending day is fascinating insofar as IWM has basically held the 20 MMA since 8:30AM PST.

11140

Even the slightest pullback is bought; and yet, the money flow shows a different picture. Thanks Pascal.

Only price counts to make money.
A topping pattern will take time to form.
As of now, big money does not chase this gap, but it could chase it in the next days.

In other words, do not chase this up, but do not short either.

Pascal

[Pierre Brodeur]

Only price counts to make money.
A topping pattern will take time to form.
As of now, big money does not chase this gap, but it could chase it in the next days.

In other words, do not chase this up, but do not short either.

Pascal

I have been using P&F charts for over 30 years, a subject which is not discussed here very often. I believe in this approach to identify intermediate and long term trends. I would suggest that people take a look at most if not all recent P&F charts of North American indices Dow,S&P, Rut, NASDAQ, TSX and you will notice that the bearish resistance line has been BROKE UP which essentially means that the trend is now UP and thus shorting is not a very good idea as mentionned by Pascal.

IMHO, buying the forth coming pullback is therefore the less risky trading plan.

Pierre Brodeur

[grems8544]

Pierre,

I see it, but could you please post the charts for all to see? Do you have good experience that the breaking upward on the P&F will not whipsaw?

Thanks,

pgd

[lulzasaur]

Pascal,

I thought something of interest was that on your charts, SKF appears to have been attracting a lot of buy interest especially after the dip. Could this be an indication of what's to come?

[Pascal]

Pascal,

I thought something of interest was that on your charts, SKF appears to have been attracting a lot of buy interest especially after the dip. Could this be an indication of what's to come?

It could, but you'd need many of these, especially in critical inversed ETFs (FXP for China, SMN for materials, SCO for oil)

Pascal

[adam ali]

Paul,

In regards to the P&F charts, they are easily accessed for free at www.stockcharts.com.

In my experience, the point and figure methodology relies on a progression of indicators to tell its tale. There are short-term indicators (Hi-Lo, 10-Week measurements) and longer 30-week indicators. As each turns, the advice is to push more chips on to the table. In this respect, the methodology is similar to yours, and it becomes a weight of the evidence call. The more oversold/overbought the body of indicators, the greater confidence one has that once a preponderance of indicators do turn in the opposite direction, the reversal can be relied upon.

I have not seen a quantitative study that specifies how often a turn up/down in the short-term indicators is reversed before the long-term indicators have an opportunity to turn as well (i.e., a whipsaw).

[grems8544]

Thanks Adam.

I have P&F charts up, and TradeStation makes viewing these easy too.

I was simply asking for the charts that Pierre was looking at so that we could see his box size, etc. It's always good to see a graph of what others are commenting on, simply to reinforce understandings/setups/conclusions. I'm in agreement with everything you wrote -- thanks again!

Regards,

Paul

[Pierre Brodeur]

Pierre,

I see it, but could you please post the charts for all to see? Do you have good experience that the breaking upward on the P&F will not whipsaw?

Thanks,

pgd
First of all sorry for the delay.
It is the first time I upload a file to this web site. Hope I did this well.

There is no guarantee of a whipsaw back down towards lover levels. I "specialize" in the Canadian market and thus I can only speak about that market as an "expert" trader in that market. If you look at the TSX chart, during the last bear phase you will notice at least two (2) bull traps. Typically on the traditional Box and REV, whipsaws will be after 1 or 2 "X"s after the breakout. This is not the case right now thus my conviction of a new opposite trend upwards.

I believe another person compared P&F with your system. I don't get the comparison; nor do I get the point that it uses (or is a function) of other indicators. Yours is a MA and derivative MA system while P&F is a Support and Resistance identification system. The philosophies behind their design is IMHO dramatically different I believe. P&F is a breakout/ breakdown trade system and therefore is imperfect on its own. It allows for target projections which if done well can be helpful. One needs to add its own indicators to confirm "trade targets" which are not the standard double top or double bottom break out/downs. I have been using cycle analysis to complement my P&F trading decisions with what I call channel support and resistance points. And I keep it very simple.

Hope this anwers your question

Pierre Brodeur

[grems8544]

Hope this anwers your question
Pierre Brodeur

Outstanding. Thank you.

[adam ali]

I believe another person compared P&F with your system. I don't get the comparison; nor do I get the point that it uses (or is a function) of other indicators. Yours is a MA and derivative MA system while P&F is a Support and Resistance identification system. The philosophies behind their design is IMHO dramatically different I believe.

In regards to using other indicators, what I was referring to is how Tom Dorsey, of Dorsey Wright, a major proponent of P&F analysis, uses P&F indicators. As mentioned earlier, he identifies certain P&F charts (10-Wk BP, HiLo, etc.) as more sensitive to short-term changes in market behavior; other charts such as 30-Wk BP are longer term in nature and will take longer to turn. My point, which I should have made clearer, is the P&F system can be used as a timing tool to manage market exposure. However, all "indicators" are merely different P&F chart measurements.

In regards to P&F and MA, simply put, how one measures something can be quite different than what one measures. For instance, MA can certainly be used to identify support and resistance levels, just as P&F does. And to the degree Paul is using moving averages (slope and slope of the slope) over different timescales to gauge market behavior, one can use P&F charts (e.g., an increase in the number of individal stocks' P&F bullish percentage) to effectively "see" the same behavior.

To me, it's opposite sides of the same coin.