Improving Market Structure - December 12, 2011

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IWM recovered most of Thursday’s pullback with a pocket pivot volume signature (volume higher than on any of the past ten days lower close). Friday’s RT 20DMF strength of large players was 99% above average and showed some weakness only in the last 30 minutes of profit-taking trading.

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IBD’s Accumulation/Distribution ratings structure keeps improving on a weekly close basis. If 9% of all stocks are already under best accumulation with an A rating, 46% are rated with a B and it confirms widespread institutional support. These totaling 54% of stocks with strong accumulation/distribution ratings is an ideal backdrop for successful breakouts and emergence of strong leading stocks based on price-volume analysis alone.

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On the price trend front, stage analysis remains our best guide. The percentage of stocks in weekly accumulation and mark-up stages closed above 50% for the first time since June 17 and is at a 26-week high with strong momentum. It means that a majority of stocks have now a positive alignment of their key moving averages on the weekly timeframe and the number is growing fast. This is most positive in the context of a consolidation week and shifts the intermediate term risk-reward ratio to the long side.

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On the daily timeframe, the buy signal discussed last week remains fully valid and offers a good short term reward-risk outlook to the long side. The percentage of stocks in daily accumulation and mark-up stage is approaching fast the 50% threshold where price momentum to the upside can be expected as it would be coincident with a decisive crossing above the major indices’ 200-day moving averages.

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The long position of the IWM robot was entered at 73.14 in the lower end of the trading range and the optimal ATR-adjusted trailing stop (71.02) is just below the 50-day moving average (71.25). This new week will start with two strong floor support clusters totaling a strength of 36 (15+21). They are offering a positive reward-risk ratio compared to the first two floor resistance clusters with a strength of 30 (22 +8). But the first resistance cluster is stronger than the first support cluster with a ratio of 22 to 15 and some catalyst will be needed to make real progress. Such catalyst might come from the FOMC meeting on Tuesday or from any other macro news. Some initial weakness can be expected without such catalyst. The current robot settings are favoring holding the existing position with the active trailing stop but don’t find any edge for entering a new position on Monday. The 20 DMF remains in a buy signal since 11/28/2011 but is showing signs of fatigue in the commodities/energy/gold sectors. In conclusion, one or two strong days supported by large players are all that’s needed to propel the market much higher within very positive intermediate term outlook developments. Downside risk is bounded by the 50-day moving average.
The GDX robot is in neutral settings and waiting for the next official trade setup.
Billy

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It would seem that the market gods are giving us nervous bulls another good entry point.

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Does anyone wish to shout out a louder than usual warning?

Be well...

[QUOTE=nickola.pazderic;19227]It would seem that the market gods are giving us nervous bulls another good entry point.

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Does anyone wish to shout out a louder than usual warning?

Be well...[/QUOTE]

Hi Nickola,

How would you analyse your emotional state at this moment in time :O)

Trev

I went through EV/VIT archives and found you as one of the earliest posters.

Emotional state? I'm a natural bear. So, naturally, I'm uncomfortable going long and always sell out of my positions too quickly.

I'm delighted to have a re-entry permit. But I'm thinking seriously about slapping on a TZA hedge. We might trend [URL="http://www.youtube.com/watch?v=gRlj5vjp3Ko"]down, down, down in a ring of fire[/URL].

And you?

I added a bit to my robot positions in IWM and TNA; still waiting for UWM ...

Position size is small.

Formula that I use which risk-adjusts based on ATR is:

[ Account value * Pos'n Size ] / [ ATR(20) * Share Price ]

So as volatility goes up, the amount you buy is dropping.

Entry points are below the following:

IWM:<73.17
UWM: <33.75
TNA: <45.20

Regards,

pgd

Paul,

How do you determine the ATR? On which time frame?

Thanks,

We might go to 42.80 or so. Seems we've been there before:

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[QUOTE=nickola.pazderic;19233]Paul,

How do you determine the ATR? On which time frame?

Thanks,[/QUOTE]

I use a 20d ATR which is updated intrabar.

Regards,

pgd

[QUOTE=nickola.pazderic;19231] But I'm thinking seriously about slapping on a TZA hedge. [/QUOTE]

You may want to pick up some TZA for intraday hedge when it touches the VWAP from above.... Seems to be holding above intraday VWAP quite nicely.

[QUOTE=nickola.pazderic;19234]We might go to 42.80 or so. Seems we've been there before:

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Nickola, please calm down and focus on the robot process. By entering the initial trade, you allowed for volatility down to the stop.
Stop looking or nightmaring at your P&L is my most friendly advise at this point in time. Focus on the objective quality of the initial setup. The 20 dmf is still in buy mode and the settings are just neutral.
Billy

[QUOTE=nickola.pazderic;19231]I went through EV/VIT archives and found you as one of the earliest posters.

Emotional state? I'm a natural bear. So, naturally, I'm uncomfortable going long and always sell out of my positions too quickly.

I'm delighted to have a re-entry permit. But I'm thinking seriously about slapping on a TZA hedge. We might trend down, down, down in a ring of fire.

And you?[/QUOTE]

Hi Nickola,

I am quite long in the tooth at this investing game, 22 years full time, and I have been through the complete gamut of emotional experiences.

This long apprenticeship has made me VERY, VERY conscious of the value of the non-emotional signals of the Robots and reduced my own inputs to virtually nil. (I still tend to day-trade a little when I get bored, but this will have to stop !).

Hedges are for investors who lack confidence in their systems IMHO and are subject to our emotional state at the moment in time we enter them . We have stops to replace hedging.

How confident am I in the Robots ? I only trade the 3X ETF's which gives you some idea.

The most important thing I have learned in 22 years ? ALL HUMAN EMOTION MUST BE CUT FROM THE PROCESS.

In other words, I am not allowed the luxury of an opinion of the market direction. !!!!!

Trev.

(The only thing I am concerned about is that the Robots do not perform as well going forward as they have in the past but if they only perform half as well I will be very pleased) :O)

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An hysterical little kitty...

[QUOTE=manucastle;19238]Hi Nickola,


(The only thing I am concerned about is that the Robots do not perform as well going forward as they have in the past but if they only perform half as well I will be very pleased) :O)[/QUOTE]

Trev,

This is my concern, too. Let me list them all in random order:

1. How could something so wonderful/good happen to me? (OK, some psychological set up that allows for child-like pleasure should it succeed).

2. I'm sure no matter what, I've missed the boat. (This is a clear anxiety that a lot of post-boomers feel. I got to Taiwan/Asia too late for the biggest growth but too early for "China", 1989).

3. If an investing system really allowed us only 20% per year, we'd probably own the stock market via compounding returns in 30 years or so. Think about that!?

4. Look at all those failing hedge funds, wouldn't they love to realize returns similar to those posted on the front of the website?

5. Morales and Kacher are setting up managed accounts. Now I know we operate in a different time frames, but aren't we filling up one side of the boat or acting like the apocryphal lemmings herding ourselves into sea?

6. The stock market is....[ATTACH=CONFIG]11852[/ATTACH]

Truly, having been an academic for years, who saved pennies and dimes under the mattress, the stock market has always seemed like one of the above. In fact, as an anthropologist I can assure everyone that belief holds up the entire edifice. For these reasons, I am a predisposed bear.

7. My spouse will run out of patience with me, and something like following will occur:

[ATTACH=CONFIG]11851[/ATTACH]


Fears. Petty fears. Nightmares even.

Perhaps all these fears stem from a simple and undeniable fact: the entire edifice is so enormous I cannot imagine it. I cannot reconcile Brussels, London, New York, Shanghai, Tokyo, New Dehli, Dubai etc... with the comfortable downstairs office where I operate. Trillions of dollars, billions of people, jillions of dreams/desires/diseases...Yet here we are.

Pascal and Billy have made this available to us. A gift to people. As Pascal writes in the book:

[I]...the stock market provides people with a simple way to take part in ...high growth sectors by investing in companies that offer solutions to...problems[/I]

This is a beautiful vision, and it sustains my hope.

[QUOTE=nickola.pazderic;19249]Trev,

This is my concern, too. Let me list them all in random order:

1. How could something so wonderful/good happen to me? (OK, some psychological set up that allows for child-like pleasure should it succeed).

2. I'm sure no matter what, I've missed the boat. (This is a clear anxiety that a lot of post-boomers feel. I got to Taiwan/Asia too late for the biggest growth but too early for "China", 1989).

3. If an investing system really allowed us only 20% per year, we'd probably own the stock market via compounding returns in 30 years or so. Think about that!?

4. Look at all those failing hedge funds, wouldn't they love to realize returns similar to those posted on the front of the website?

5. Morales and Kacher are setting up managed accounts. Now I know we operate in a different time frames, but aren't we filling up one side of the boat or acting like the apocryphal lemmings herding ourselves into sea?

6. The stock market is....[ATTACH=CONFIG]11852[/ATTACH]

Truly, having been an academic for years, who saved pennies and dimes under the mattress, the stock market has always seemed like one of the above. In fact, as an anthropologist I can assure everyone that belief holds up the entire edifice. For these reasons, I am a predisposed bear.

7. My spouse will run out of patience with me, and something like following will occur:

[ATTACH=CONFIG]11851[/ATTACH]


Fears. Petty fears. Nightmares even.

Perhaps all these fears stem from a simple and undeniable fact: the entire edifice is so enormous I cannot imagine it. I cannot reconcile Brussels, London, New York, Shanghai, Tokyo, New Dehli, Dubai etc... with the comfortable downstairs office where I operate. Trillions of dollars, billions of people, jillions of dreams/desires/diseases...Yet here we are.

Pascal and Billy have made this available to us. A gift to people. As Pascal writes in the book:

[I]...the stock market provides people with a simple way to take part in ...high growth sectors by investing in companies that offer solutions to...problems[/I]

This is a beautiful vision, and it sustains my hope.[/QUOTE]

Hi Nickola,

If I ever get too bullish I know who to contact !!!! :O)

Trev

Nickola,
The robot needs sustained up or down trends to make its largest returns. I don’t really care if we are heading into apocalypse or into a new 1982 secular bull market. I am confident that the 20 DMF and the robot will capture such trends early. I would even prefer the apocalypse and take a small loss in this choppy sideways mean-reverting environment before cashing big in a crash.
All I see in my analysis is that we are objectively closer to a rally of uncertain duration than a waterfall. All reward-risk measurements do favor the long side. I trade my plan accordingly until proven otherwise and shut off the billions of noises and emotions running on the planet.
Billy

Billy,

Thanks for the note.

In fact, I have taken this course over the past week or so. I'm only tuned into this website and Charles Kirk. His notebook alerts me with a groan, and, as you know, he is saying the same things about Mr. Market as you.

Presently, the groan alerts:

[I]Largest buy program of the day makes a final hour appearance to close us back within the range and above the 20 day support[/I]

Fears. What are these things that we cling to? Or do they cling to us? Our little ghosts. Electro-chemical impressions upon the recording apparatus called the brain. We can use them as the stuff of art and project them with our media devices, our voices, our computers, our photographic collections. and for a little while we're free.

I made my fears public to be laughed away (thanks Trev).

Be gone fear. Good riddance.

Nickola,

Try converting your stop percentages - say -2.48% into dollars and imagine: minus that amount amount in RED on your computer screen before you make the trade - if you are not comfortable with that; lower the trade amount until you are.

Another trick (if you have a good system - which you do with the Robot) is calculate the loss in dollars and consider it gone ........ you can be pleasantly surprised if the 3:1 risk/reward ration works in your favor.

greg

[QUOTE=nickola.pazderic;19252]Billy,

Thanks for the note.

In fact, I have taken this course over the past week or so. I'm only tuned into this website and Charles Kirk. His notebook alerts me with a groan, and, as you know, he is saying the same things about Mr. Market as you.

Presently, the groan alerts:

[I]Largest buy program of the day makes a final hour appearance to close us back within the range and above the 20 day support[/I]

Fears. What are these things that we cling to? Or do they cling to us? Our little ghosts. Electro-chemical impressions upon the recording apparatus called the brain. We can use them as the stuff of art and project them with our media devices, our voices, our computers, our photographic collections. and for a little while we're free.

I made my fears public to be laughed away (thanks Trev).

Be gone fear. Good riddance.[/QUOTE]

The big difference with Charles Kirk is that he is a reactive trader while we are trying to be proactive.
He knows the tricks of reactive trading well. The robot is mastering the nuances of proactive trading.
If you mix the two, you'll be confused more often than not.

About our inner fears, they must be part of our trading plan. Is the initial worst case stop loss too big for your stomach? Just bite a smaller chunk in the position and be ready for smaller thrills. That's proactive trading.
Billy

Thanks for taking the time, and I hope I didn't wear out my welcome. All the thoughts are deeply appreciated and will be subject to continuous consideration. Cheers.

The big difference with Charles Kirk is that he is a reactive trader while we are trying to be proactive.
He knows the tricks of reactive trading well. The robot is mastering the nuances of proactive trading.

If you mix the two, you'll be confused more often than not.

Billy, this last sentence is a very interesting comment and one that I hope you will flesh out over time.

[QUOTE=Billy;19251]
The robot needs sustained up or down trends to make its largest returns. I don’t really care if we are heading into apocalypse or into a new 1982 secular bull market. I am confident that the 20 DMF and the robot will capture such trends early. I would even prefer the apocalypse and take a small loss in this choppy sideways mean-reverting environment before cashing big in a crash.
Billy[/QUOTE]

If I understand correctly, you're implying that an extended choppy environment will inevitably drag the robot into a losing territory, yet in the long run, the mix of trends vs chops is such that the robot cannot afford to be left out of a position when the big swings materialize. It strikes me that the most recent trade could have been quite profitable already (rather than criss-cross above and below the entry price) if it were to have taken multiple ATR-size profits off the entry limits (e.g. 73.14->75.00 =~ +2.5%) but that would have required the robot to change its plan (it simply doesn't know the stats associated with that scenario). As you say, statistically there's that big swing chance awaiting that will dwarf all these small losses to chop so sticking to the robot plan, as tested, is the best course of trading action.

Trader D

[QUOTE=TraderD;19257]If I understand correctly, you're implying that an extended choppy environment will inevitably drag the robot into a losing territory, yet in the long run, the mix of trends vs chops is such that the robot cannot afford to be left out of a position when the big swings materialize. It strikes me that the most recent trade could have been quite profitable already (rather than criss-cross above and below the entry price) if it were to have taken multiple ATR-size profits off the entry limits (e.g. 73.14->75.00 =~ +2.5%) but that would have required the robot to change its plan (it simply doesn't know the stats associated with that scenario). As you say, statistically there's that big swing chance awaiting that will dwarf all these small losses to chop so sticking to the robot plan, as tested, is the best course of trading action.

Trader D[/QUOTE]

The IWM Robot's trade record is below.
You can see that after the string of small losses during the summer, we changed the robot settings to avoid trading weak signals. We are up 18.38% since March, while with the new model, we would be up 27.51%. This means that the new model can handle choppy environments.

One last point concerning the current trade: we entered the trade on December 1. However, the IWM Robot had been searching for a long position since the 20DMF issued a buy signal and its entry point of 68.74 was almost hit on 11/28, as the low of the day was 68.91. To me, this means that the current settings are "in tune" with the market.


Pascal

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[QUOTE=Pascal;19259]The IWM Robot's trade record is below.
You can see that after the string of small losses during the summer, we changed the robot settings to avoid trading weak signals. We are up 18.38% since March, while with the new model, we would be up 27.51%. This means that the new model can handle choppy environments.
Pascal
[/QUOTE]

Pascal, many thanks for the clarifications. It may well be that skipping the weak signals altogether is the best decision for the robot. However, I'm still pondering whether an alternative trade mgmt plan (e.g. taking volatility-based profits) would have been able to address the chop (presuming it coincides with the weak signals) and provide for competitive returns.

[QUOTE=nickola.pazderic;19249]Trev,

This is my concern, too. Let me list them all in random order:

1. How could something so wonderful/good happen to me? (OK, some psychological set up that allows for child-like pleasure should it succeed).

2. I'm sure no matter what, I've missed the boat. (This is a clear anxiety that a lot of post-boomers feel. I got to Taiwan/Asia too late for the biggest growth but too early for "China", 1989).

3. If an investing system really allowed us only 20% per year, we'd probably own the stock market via compounding returns in 30 years or so. Think about that!?

4. Look at all those failing hedge funds, wouldn't they love to realize returns similar to those posted on the front of the website?

5. Morales and Kacher are setting up managed accounts. Now I know we operate in a different time frames, but aren't we filling up one side of the boat or acting like the apocryphal lemmings herding ourselves into sea?

6. The stock market is....[ATTACH=CONFIG]11852[/ATTACH]

Truly, having been an academic for years, who saved pennies and dimes under the mattress, the stock market has always seemed like one of the above. In fact, as an anthropologist I can assure everyone that belief holds up the entire edifice. For these reasons, I am a predisposed bear.

7. My spouse will run out of patience with me, and something like following will occur:

[ATTACH=CONFIG]11851[/ATTACH]


Fears. Petty fears. Nightmares even.

Perhaps all these fears stem from a simple and undeniable fact: the entire edifice is so enormous I cannot imagine it. I cannot reconcile Brussels, London, New York, Shanghai, Tokyo, New Dehli, Dubai etc... with the comfortable downstairs office where I operate. Trillions of dollars, billions of people, jillions of dreams/desires/diseases...Yet here we are.

Pascal and Billy have made this available to us. A gift to people. As Pascal writes in the book:

[I]...the stock market provides people with a simple way to take part in ...high growth sectors by investing in companies that offer solutions to...problems[/I]

This is a beautiful vision, and it sustains my hope.[/QUOTE]

Hi Nickola,

I don't quite understand your point 3. Can you elaborate a bit please.

3. If an investing system really allowed us only 20% per year, we'd probably own the stock market via compounding returns in 30 years or so. Think about that!?

Trev

I exaggerated the time needed and the result by half, but here is the analysis I recalled,[URL="http://pragcap.com/beat-the-market-good-luck"] Pragmatic Capitalism[/URL]. The message is the same. Such returns will [URL="http://blog.empiricalfinancellc.com/2011/06/mission-impossible-beating-the-market-over-long-periods-of-time/"]tilt the market[/URL].

I listed this point as a fear. I also noted that my fears are a little, well, like ghosts; and ghosts are not quite rational, are they? That said, I emphasize that the system developed and deployed by our leaders is a well thought out system. As Billy noted, the fear factor has been calculated into the mix, so has the max draw down.

Nonetheless, no one and no thing can last and multiply without change forever.

[QUOTE=nickola.pazderic;19299]I exaggerated the time needed and the result by half, but here is the analysis I recalled,[URL="http://pragcap.com/beat-the-market-good-luck"] Pragmatic Capitalism[/URL]. The message is the same.
[/QUOTE]

I don't think such a return is absurd, but I guess that one cannot totally reinvest the earned money forever, for the basic reason that there is not infinite money in the markets.

At some point "size" must become an issue. I base this thought on intuition, because I unfortunately have no way to know based on experience.

Maybe someone here has an idea of the treshold beyond which the size of the money invested in a trade becomes a matter.