Hope Is Not A Valid Setup – October 19, 2011

[Billy]

11001

Still no “loud and clear” edges and signals from the robots to act upon. IWM was stopped in its advance once again right on the quarterly pivot (71.25) and the yearly pivot just above (71.84) also provides huge potential floor selling pressure. To successfully break the first resistance cluster with strength of 23 will require the most bullish news, euphoria and volume, while the first support cluster with strength of 11 is favoring another pullback and retest of the 50-day moving average (68.40).

11003

GDX was saved by the yearly pivot (55.19) but still needs to conquer the 200-day moving average (58.05) and quarterly pivot (58.40) to comfort the bulls. Today’s floor clusters outlook is pretty neutral but much more bullish than yesterday.

11002

Since there’s nothing to do but wait, I share with you some of my salient readings notes of interest to keep you busy.

“The leaders of France and Germany HOPE to agree…” The Guardian (in an article that sparked a sharp rally in U.S. equities Tuesday afternoon. The assertions from the paper of the deal have been denied by both the Germans and French.)

“Now, I’m not smart or close enough to the insiders to know what the real deal is. All I know is the HFTs are “jumpy” and the algos are programmed to jump on any news like this from Europe. The after the close of markets of a miss from Apple, some retractions of the Guardian article and a Moody’s downgrade of Spain should make Wednesday’s trading interesting. ” Dave Fry – ETFDigest.com

“We remain in a volatile market and despite confident projections you may hear, there is not a single person who knows with any certainty what the course of the market is for any period of time. Our most important job is to manage risk and that means honoring stops, trading reasonable size relative to your account and also objective recognition of the market environment. This market environment continues to shout uncertainty, your approach should reflect that message.” Brian Shannon, Alphatrends.net, October 18, 2011.

“SPY traded down nearly 1% Tuesday morning before rebounding to close up over 1%. The morning drop sent SPY below Steenbarger’s S2 target while the recovery left SPY above R2 at the close. This pattern has led to a lower S&P close the following session more than two-thirds of the time. The last two occurrences that coincided with a 10-day high in volume (like Tuesday) both led to down days in excess of 4%…” Rennie Yang – Markettells.com

“The move today in both the NASDAQ Composite and S&P 500 was above the threshold level required for a follow through day, but the action of leading stocks is still sub-par, and Apple Computer's disappointing earnings will have a negative impact on the NASDAQ-100 index. The model remains in cash for now.” Dr. K (Chris Kacher) - www.virtueofselfishinvesting.com

“An 'outside' day when below the 200 DMA favors a down gap the next day and fading it is risky” Scott Andrews – MasterTheGap.com

“Next Week is only 4-11 in PreElection years, since 1950 and negative in 7 of the last 8 cases.” Wayne Whiley – October 18, 2011

“The problem, of course, is that in this environment it has been an all or nothing type affair where we dramatically swing in one direction or the other and we don’t know yet if that is one trend that is going to continue within the overall range.” Charles Kirk – The Kirk Report

[nickola.pazderic]

I want to add a public confession here.

I have been faithful to the robot because (this, above other reasons) it provides very precise entries and exits. Often I find the proffered opening price so extreme; I cannot believe my orders will get filled. Usually they do.

Only one time did I find the robot out of sync, and this sent Pascal and Billy into a deep think (as chess players say) in search of improvements. That was at the beginning of Augst. the robot went strong long and Dr. K went short. Of course, the short position was hugely profitable. Perhaps as large as the silver run up in March and April. But I missed it.

Today, I tried a small position in IWM related ETFs in compliance with Dr. K's model. Again, the weakness is lack of precision. I took the worst loss in the last month today. But it is under control. No problem. Part of trading. Still, I'm faithful to the robot because it offers precision where the MDM of Dr. K does not.

[Billy]

I want to add a public confession here.

I have been faithful to the robot because (this, above other reasons) it provides very precise entries and exits. Often I find the proffered opening price so extreme; I cannot believe my orders will get filled. Usually they do.

Only one time did I find the robot out of sync, and this sent Pascal and Billy into a deep think (as chess players say) in search of improvements. That was at the beginning of Augst. the robot went strong long and Dr. K went short. Of course, the short position was hugely profitable. Perhaps as large as the silver run up in March and April. But I missed it.

Today, I tried a small position in IWM related ETFs in compliance with Dr. K's model. Again, the weakness is lack of precision. I took the worst loss in the last month today. But it is under control. No problem. Part of trading. Still, I'm faithful to the robot because it offers precision where the MDM of Dr. K does not.

Nickola,
Dr. K’s MDM has a fantastic and longer proven track record than the robots. But, as it is much emphasized by Dr. K himself, there is a discretionary component in his MDM that is totally absent from the robots. One can of course wonder how does one backtest discretionary components? Sometimes, the discretionary component can change overnight like it did Wednesday morning switching from a confirmed cash (despite a qualifying FTD) after the close to a new buy signal at the open. Dr. K does manage the risk with a fail-safe stop that is usually 3-5% away from his entries, so failing signals seldom lead to significant drawdowns. And the gains on winning signals are usually fairly large once or twice a year to more than compensate for the small drawdowns.
Because the robots do use volatility-based stops, current high volatility would force them to enter new positions with initial stops 8-10% away from entry. In case of a failing signal, the loss/drawdown could be twice as high as Dr. K’s MDM.
In fact, timeframes used are also much different. The robots look at a combination of 20-day money flow with 3-days and 10-days strategies statistics to make up their directional choices, while Dr. K’s MDM is based on multi-week and multi-months price, volume and leadership analysis.
Dr. K enters and exits at market price when a new signal is issued, while the IWM robot only enters at optimal reward-risk price levels derived from the multi-pivot methodology. If it is missed, the robot stays in cash. Hence the reason you find the entry prices so “extreme” but they are indeed often filled, and at the best reward-risk setup, which compensates somehow for the wider initial stop. The robots also exit often at a trailing stop price, while there is no official trailing stop with Dr.K.

Actually, we have backtested the multi-pivot methodology with Dr. K’s MDM signals and it was very disappointing. That’s probably why Dr. K who was the first one (before Pascal) to kindly backtest my multi-pivot methodology with very positive conclusions is not using it with his model.
So, Dr K’s model and the robots are completely different animals. We are not in competition because they fill very different needs, investing/trading philosophies and timeframes. It is sound and normal that they are sometimes in clear contradiction one with another. Both Dr. K and Pascal are trading geniuses IMHO and their services both produce some of the best long term risk-adjusted returns on the planet.
Billy

[Andrei]

Billy,

and how real time 20 DMF backtesting is going? Any interesting news out there? And actually, what is the main purpose of real-time 20DMF - is it done to improve current methodology and make it more sophisticated, or to find new edges, say intraday trading?

Thank you.

P.S. Excellent collection of up-to-date trading thoughts and citations in your original post.

[Billy]

Billy,

and how real time 20 DMF backtesting is going? Any interesting news out there? And actually, what is the main purpose of real-time 20DMF - is it done to improve current methodology and make it more sophisticated, or to find new edges, say intraday trading?

Thank you.

Adriano,

I prefer to let Pascal present the new real-time system once he feels ready to introduce it to the group.
Giving bits and pieces of information at this stage is premature.
Billy

[Rembert]

Because the robots do use volatility-based stops, current high volatility would force them to enter new positions with initial stops 8-10% away from entry.

This is where position sizing comes into play. Personally I position size everything from robot trades to discretionary trades. I never use a fixed $ amount or a fixed account %.

[Adriano]

Adriano,

I prefer to let Pascal present the new real-time system once he feels ready to introduce it to the group.
Giving bits and pieces of information at this stage is premature.
Billy

Andrei... :)


This is where position sizing comes into play. Personally I position size everything from robot trades to discretionary trades. I never use a fixed $ amount or a fixed account %.

Yes, me neither.

[nickola.pazderic]

Billy--

Your thoughts on the matter are themselves very precise. And I appreciate them very much.

To know you and Pascal have worked with Dr. Kacher on these problems is once more confirmation of the high standards found here and how fortunate I am to have found you all.

(In truth, I followed a little trail: IBD --> Morales/Kacher --> HGSI --> Paul Duncan --> Value in Time and now the EV website. This trail is highly recommened).

Best,

[ericoleman]

I, too, found my way here through the Gilmo Report in 2009. Indeed a great path to follow, Nickola!

[manucastle]

(In truth, I followed a little trail: IBD --> Morales/Kacher --> HGSI --> Paul Duncan --> Value in Time and now the EV website. This trail is highly recommened).



Just cut out the middlemen and go straight to VIT and the EV website from my experience ! :O)

Trev