Notes for December 30, 2011

[Billy]

Forum Clusters 111230.xlsx

Here are the last clusters for 2011. All multi-pivots will be changed next week and should provide more clarity for intermediate term trading purposes.
I will comment the new levels and answer yesterday’s questions before Tuesday’s opening.
All the shakeouts we’ve seen in both robots were facilitated by the very low volume and the absence of large players strategic commitments at this time of year. Our models are optimized for large players’ historical normal positioning and trading activity, not for short term window-dressing HFT activity in low amateurish volume. This joke will end soon and serious business will start again next week. Be ready and in great shape!
Billy

[mingpan.lam]

Hi Billy/Pascal,

In that case, do we have any indicator that shows big players are quiet?
A chart of total EV, total volume and average of this two statistics may help.

Cheers,

Ellis

[adam ali]

Billy and Pascal,

I recall similar comments last year around the same time. Perhaps a "Proceed at Your Own Risk" warning should be emphasized in December, since the "normal" relationships don't appear to apply. With so few data points available I don't imagine Pascal can test this thesis, but Billy's years of experience is good enough for me (assuming he agrees).

[mingpan.lam]

An expensive lesson for me not to trade in Dec. Also agreed with Adam, a warning is a good idea, especially for some newbie, like me.

Cheers,

Ellis

[nickola.pazderic]

good to keep in mind the mind set necessary to trend trade

[grems8544]

Hi Billy/Pascal,

In that case, do we have any indicator that shows big players are quiet?
A chart of total EV, total volume and average of this two statistics may help.

Cheers,

Ellis

Volume. Simply refer to average volume and see how much the daily volume is below the average.

My GGT system is showing volume -40 to -50% of the daily average volume:



If I'm not posting, then you can always check www.finviz.com:



The lack of volume of this magnitude should remove all doubt that the large players are enjoying the Christmas break. I think a separate indicator is not needed.

Regards,

pgd

[nickola.pazderic]

The price at which GDX trades today accords with long term horizontal support/resistance line. This will be resolved down or up. It will be interesting to see where the robot takes us when the heavy hitters are back from vacation.

[asomani]

An expensive lesson for me not to trade in Dec. Also agreed with Adam, a warning is a good idea, especially for some newbie, like me.

Cheers,

Ellis

What adjustments should one make to their trading style in December (or other extended holiday periods), in your opinion? Has anyone got some insight they'd like to share on this?

The most common adjustments I see experienced traders make:
1. Cut normal position size in at least half, if not further.
2. Avoid trading altogether.

[grems8544]

What adjustments should one make to their trading style in December (or other extended holiday periods), in your opinion? Has anyone got some insight they'd like to share on this?

The most common adjustments I see experienced traders make:
1. Cut normal position size in at least half, if not further.
2. Avoid trading altogether.

With respect to #2, avoid trading, this would most likely be a mistake over the long haul.

Pulling down my handy-dandy Stock Trader's Almanac, November, December, and January are the year's best three-month span using the data from January 1950 to April 2009 (I'm using my 2010 edition since I can't seem to find my 2011 copy). To whit: average gains of the S&P are 1.5%, 1.6%, and 1.1% for the three months respectively. For the R2K, since 1971, we have 1.8%, 2.6%, and 1.9% respectively. If you want to be defensive, e.g., R1K, then you're looking at 1.7%, 1.6%, and 1.2% respectively. The NAS is along the same lines: 1.6%, 1.9%, and 3.0% respectively.

The problem isn't addressed by sitting out the market unless you simply cannot tolerate the volatility. For those of us who cannot stomach a bad year and then more volatility as we go into a low-volume period, then sitting out is the best course of action, but it's not the most prudent in terms of building wealth.

Shortening time horizons for holding appears to be the best solution. Taking profits quickly, e.g., when a profit target was hit as opposed to a macro signal changing, also seemed to be the key over the past few weeks. When we did whipsaw to the down side, I'd always placed a timed order for a trailing stop loss of 1% to be active for the DAY at 9:35 on the day where it looked like I was going to get clobbered. More often than not my TSL remained intact and expired at the end of the day. Riding through the volatility seemed to work, but again, my exposure was quite slight.

Anyways, we start a new year on Tuesday. I expect a bump in January, but then if I'm not careful, February (historically) is a really poor month and it would be quite easy to give it all up. Your crystal ball is as good as mine.

Regards,

pgd

[asomani]

Thanks for your thoughts, Paul.

Pulling down my handy-dandy Stock Trader's Almanac, November, December, and January are the year's best three-month span using the data from January 1950 to April 2009 (I'm using my 2010 edition since I can't seem to find my 2011 copy). To whit: average gains of the S&P are 1.5%, 1.6%, and 1.1% for the three months respectively. For the R2K, since 1971, we have 1.8%, 2.6%, and 1.9% respectively. If you want to be defensive, e.g., R1K, then you're looking at 1.7%, 1.6%, and 1.2% respectively. The NAS is along the same lines: 1.6%, 1.9%, and 3.0% respectively.

Long-only traders (especially if trading on a longer timeframe than a single day) as well as investors tend to do particularly well in Dec for obvious reasons (outlined by you). Long/short traders may be at a disadvantage, however. For instance, if a long/short strategy does not adequately take into account market seasonality and market volume levels in its approach, then abnormally large and/or abnormally frequent losses in the strategy developing during a holiday period, especially on the short side, would not be surprising. Short trades that would be avoided by a more sophisticated (but not necessarily ultimately better) strategy can end up being taken by a less sophisticated (but not necessarily ultimately worse) strategy, during a holiday period.

Nov and Jan both normally have a reasonable amount of volume and shouldn't be considered holiday periods, in my opinion.

Taking profits quickly is a valid option, but then the stop used on trades would also need to be tighter than normal to compensate for this approach, I would think. Otherwise one losing trade in Dec could wipe out a number of other winning trades during the same month but that were only small winners.