Feeling Nervous? - March 20, 2012

[Billy]

After a strong initial rise in PM Money flow until 11:45 am, large players reversed their plan and MF kept weakening until the close with GDX price making new YTD lows. If this is good news for EOD GDX robot traders who are still short and can trail their stop lower to 52.57, RT traders who are already long have some reason to worry. Maybe the quick intraday visit below the -1.45% oversold level on March 14 was too shallow to confirm a final capitulation.

It is impossible to know yet how it will evolve, but I feel nervous with my leveraged long position and a good lesson for me is to consider smaller position sizes for RT trades when they are out of sync with the EOD robot. I should have listened to Dave who warned about this in another thread! With an unleveraged position, I wouldn’t worry much waiting for an average of 2 more days before potentially exiting with a loss if the -1.45% OS threshold is revisited. But I can’t run the risk of letting my 3x leveraged NUGT compounding losses at the speed of light and will respect my initial “comfort level” stop below GDX 49.42.

From the multi-pivot perspective, the next capitulation target in case of a new selloff is Monthly S3 (47.50) and there is only the very weak Weekly S1 (48.66) to act as a speed bumper in-between. On the other hand, if yesterday’s lows are just a shakeout from the consolidation preceding a fast and furious advance to the upside, I expect Monthly S1 (52.75) to be the most logical upside target.
There is still no advised position in IWM.
Billy

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[davidallison@gmail.com]

Hi Billy,
I'm with you in that I have NUGT as well. With the gap down, I don't think I will sell right at open but rather watch money flow and price. If price improves along with money flow, I'll stay with the trade. Of concern is the price of gold which might soften this week. Interesting comments from Jim Wyckoff at kitco http://www.kitco.com/kitconewsvideo/
Dave

[sesorensen]

It is impossible to know yet how it will evolve, but I feel nervous with my leveraged long position and a good lesson for me is to consider smaller position sizes for RT trades when they are out of sync with the EOD robot. I should have listened to Dave who warned about this in another thread! With an unleveraged position, I wouldn’t worry much waiting for an average of 2 more days before potentially exiting with a loss if the -1.45% OS threshold is revisited. But I can’t run the risk of letting my 3x leveraged NUGT compounding losses at the speed of light and will respect my initial “comfort level” stop below GDX 49.42.
Billy

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Hi Billy, Also being in NUGT I would be happy to hear you trading "solution" right now... well below your comfort level: you stop the trade here, you hedge (and if so how?), or like Dave stay in...... thx. sorensen

[Billy]

Hi Billy, Also being in NUGT I would be happy to hear you trading "solution" right now... well below your comfort level: you stop the trade here, you hedge (and if so how?), or like Dave stay in...... thx. sorensen

My stop at 16.30 on NUGT was executed at the open at 15.85. for a 7.31% loss.
A stop is a stop is a stop. Period. The gap doesn’t change anything to my decision, quite the contrary; the priority is avoiding the damage that can be done by compounding losses with a large position in a 3xleveraged instrument.
My trading solution is to stay in cash until either the -1.45% OS level or the MF average are crossed. At the OS level, the RT will be in cash and the EOD model might be long if OS at the close. Then I will go long on an unleveraged position. At the MF average, both models will be long and I will go fully leverged again.
Billy

[DJones]

I wasn't stopped out at the open.

Looking at the 5 day chart on the RT, the divergence between MF and price you spoke of yesterday is still quite clear. Looking at the MF from the low to now, money has moved in and the price has dropped. Even looking only from the EOD signal (above the -1.45%), money has clearly moved in and the price has dropped.

To me, this is a real test not of the algorithm or even RT vs. EOD, but indeed of the more fundamental issues: is MF relevant to price? I believe it is indeed relevant.

I'll watch the MF carefully today, but for now I'm staying long with a stop.

[Billy]

I wasn't stopped out at the open.

Looking at the 5 day chart on the RT, the divergence between MF and price you spoke of yesterday is still quite clear. Looking at the MF from the low to now, money has moved in and the price has dropped. Even looking only from the EOD signal (above the -1.45%), money has clearly moved in and the price has dropped.

To me, this is a real test not of the algorithm or even RT vs. EOD, but indeed of the more fundamental issues: is MF relevant to price? I believe it is indeed relevant.

I'll watch the MF carefully today, but for now I'm staying long with a stop.

Frankly, with an unleveraged position either in the EOD or the RT model, there is no need to deviate from each model’s rules and protections.
The whole issue is how to manage the risk of leverage, not the risk of a normal position.
Billy

[Pascal]

I wasn't stopped out at the open.

Looking at the 5 day chart on the RT, the divergence between MF and price you spoke of yesterday is still quite clear. Looking at the MF from the low to now, money has moved in and the price has dropped. Even looking only from the EOD signal (above the -1.45%), money has clearly moved in and the price has dropped.

To me, this is a real test not of the algorithm or even RT vs. EOD, but indeed of the more fundamental issues: is MF relevant to price? I believe it is indeed relevant.

I'll watch the MF carefully today, but for now I'm staying long with a stop.

I am also keeping the long position here, but I do not have leverage. Losing less than 2% on a trade - that is still open - after earning about 9% on the previous one is totally acceptable. The GDX MF does not show a strong selling push here (even accumulation.) So, because the un-leveraged position offers the freedom of patience, I'll be patient.


Pascal

[DJones]

Frankly, with an unleveraged position either in the EOD or the RT model, there is no need to deviate from each model’s rules and protections.
The whole issue is how to manage the risk of leverage, not the risk of a normal position.
Billy

Understood. I'm in NUGT as well. I just set my stop at 10% down, so it wasn't hit.

The issue for me is confidence in the MF we're watching. Obviously confidence in the face of a clear breakdown is just being stubborn (my wife mentions that from time to time). But I have been served well watching the MF and trading when it diverged from price, as the GDX has over the past 5 days.

I move my stops based on my confidence in the trade. For example I was ready to close the previous short long before I did, but instead I just kept moving the stops closer and closer to the price. For this trade, I've done the opposite and may indeed have moved it too far down, but am doing so looking at that clear divergence of MF and price you spoke of yesterday.

By the way, thanks for this thread.

[TraderD]

To me, this is a real test not of the algorithm or even RT vs. EOD, but indeed of the more fundamental issues: is MF relevant to price? I believe it is indeed relevant.


I think you hit the nail on the head and I'm frankly surprised most of the discussion until now was dealing with minutiae and intricacies of position management. MF indicates accumulation, price making new lows, what gives? At some point there should be a resolution (or a rude wake up call at a very fundamental level to the MF concept and how it's supposed to be used). Fascinating, for sure.

Trader D

[davidallison@gmail.com]

Yes, great comments from everyone. Thank you! Technically 49.22 which was a previous low on December 29th is an important level. Not that I’m a great chart watcher, but as long as we close above that level, I’m more confident. If we have positive MF and increasing price from 49.22, GDX could have a very good day indeed. I added to my position this morning.

[DJones]

I think you hit the nail on the head and I'm frankly surprised most of the discussion until now was dealing with minutiae and intricacies of position management. MF indicates accumulation, price making new lows, what gives? At some point there should be a resolution (or a rude wake up call at a very fundamental level to the MF concept and how it's supposed to be used). Fascinating, for sure.

Trader D

Thanks, and I agree. I'll take this one step further, and maybe Pascal can comment. I'll go out on a limb and give him something specific to shoot down if I misstate / misunderstand what we are all doing here.

Looking at where we are in MF in context, the 20DMF reminded me that we are still < 0, i.e. in negative territory, and the MF trend is clearly down. In the last 5 days, of course, the MF has been clearly up, as seen by the RT charts. So compared with 5 days ago MF is up - big money moving in. Over the last 20, however, big money has moved out.

What's noise, and what's the trend? There's the question for model. In other words, what - and how much - does a clear 5 day positive change in MF mean within the context of (1) absolute negative MF (e.g. negative number) and (2) a longer term (e.g. 20D trend/change) negative MF.

Obviously there's a profound implication for the value of the RT vs. EOD model in the answer to that question. The more the long term matters, the more the short term, and therefore RT model, becomes irrelevant. The more the (immediately detected) short term changes drive future price changes, the more the RT model becomes invaluable.

I can't believe that volume (MF) doesn't drive price. That's an axiom of technical trading. So it can't be that we are watching money move in in volume with no price increase. I just won't believe that. Either (1) we aren't measuring volume correctly (and I'll trust Pascal that that isn't true), or (2) extremely short term volume (whatever that period is - 1 minute? 5 days? 10 days?) is noise.

[sesorensen]

My stop at 16.30 on NUGT was executed at the open at 15.85. for a 7.31% loss.
A stop is a stop is a stop. Period. The gap doesn’t change anything to my decision, quite the contrary; the priority is avoiding the damage that can be done by compounding losses with a large position in a 3xleveraged instrument.
My trading solution is to stay in cash until either the -1.45% OS level or the MF average are crossed. At the OS level, the RT will be in cash and the EOD model might be long if OS at the close. Then I will go long on an unleveraged position. At the MF average, both models will be long and I will go fully leverged again.
Billy

Thanks for revealing your trading tactics for today and strategy mid-term. I’m still in NUGT based on current positive divergence of RT MF and price. As it looks now today’s candlestick may end as a white body hammer (highly bullish)….. wouldn't such an indicator have any decision making influence on your trading, particularly after so many continuous down days? thanks again, sorensen

[Billy]

Thanks for revealing your trading tactics for today and strategy mid-term. I’m still in NUGT based on current positive divergence of RT MF and price. As it looks now today’s candlestick may end as a white body hammer (highly bullish)….. wouldn't such an indicator have any decision making influence on your trading, particularly after so many continuous down days? thanks again, sorensen

Let’s see first how the candle ends. I believe that a daily close below December 29th low of 49.22 would at least negate any hammer bullishness.
The March downtrend gapped and leapt from monthly floor level to monthly floor level. The February 29th top was at March MR1 (58.00), the first consolidation was at MPP (55.34), two successive down gaps led to a consolidation at MS1 (52.75), last week’s gap led us down to MS2 (50.09). So I see a clear risk that the current gap might lead to MS3 (47.50). There we would have a 95% probability that the March low is made and the MF would probably hit the OS level again. If GDX avoids MS3 and reverses back up from here on strong MF, the MF will be quick to reach the declining MF average (now at -0.24%) triggering a confirmed buy signal both for the EOD and RT models. I think that will be the next smart spot to reenter for reconciling oneself with the mechanical systems’ risk-reward logic.
Billy

[Pascal]

Thanks, and I agree. I'll take this one step further, and maybe Pascal can comment. I'll go out on a limb and give him something specific to shoot down if I misstate / misunderstand what we are all doing here.

Looking at where we are in MF in context, the 20DMF reminded me that we are still < 0, i.e. in negative territory, and the MF trend is clearly down. In the last 5 days, of course, the MF has been clearly up, as seen by the RT charts. So compared with 5 days ago MF is up - big money moving in. Over the last 20, however, big money has moved out.

What's noise, and what's the trend? There's the question for model. In other words, what - and how much - does a clear 5 day positive change in MF mean within the context of (1) absolute negative MF (e.g. negative number) and (2) a longer term (e.g. 20D trend/change) negative MF.

Obviously there's a profound implication for the value of the RT vs. EOD model in the answer to that question. The more the long term matters, the more the short term, and therefore RT model, becomes irrelevant. The more the (immediately detected) short term changes drive future price changes, the more the RT model becomes invaluable.

I can't believe that volume (MF) doesn't drive price. That's an axiom of technical trading. So it can't be that we are watching money move in in volume with no price increase. I just won't believe that. Either (1) we aren't measuring volume correctly (and I'll trust Pascal that that isn't true), or (2) extremely short term volume (whatever that period is - 1 minute? 5 days? 10 days?) is noise.

Djones,


Your observations are totally correct in the sense that MF and EV are similar animals: they are useless if you do not use them in a "value" context. When I studied EV, I observed that the three days trend of EV usually moves in opposite direction to the three days price trend and hence, EV is a misleading indicator if you use it out of context - I wrote about this in the VIT book.

However, EV and more specifically LER (the ratio of LEV to the total volume) offer good opportunities when they are used with a specific "value" detection method. AB is a good value detection method. Support/resistance are also good methods. Another aspect of the EV tool calculated on a single stock is that the price of that stock will also be influenced by the price of the stocks in the same sector, simply because funds diversify through a sector and many individual traders now use ETFs, which is similar to spreading money across one sector. This is the reason why I always advocate the use of EV in the context of a sector's buy signal for example.

In the case of the GDX MF, we have the advantage of measuring EV for all the stocks of the ETF, transforming this measure into a weighted MF measure. This means that this measure is stronger than an EV measure on a single stock.

But still, it is important to use this MF "in context." The GDX MF model uses its OB/OS levels - and other levels - as a context. When the MF hits the OS level and moves back above it, then it simply means that large players have been "flushing things out" and buying. So the model (RT model here) buys.

The EOD model however looks at the same context only at the close. It is therefore slower to react, which means that it is better to trade EOD signals with non-leveraged instruments.

The RT MF shows a different aspect of the trading context: the MF/Price relation. It allows to see in RT how the big money reacts to price. For example, when we have a down-gap, is this perceived as a buying opportunity or as a sign that the sector is largely oversold and that it is better to move out.



Pascal

PS: By the way, The Figure below also shows what the right handle is used for (Bob's question)



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