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Uncertainty With High Probabilities – July 29, 2011
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The IWM robot entered a new long position at the open (79.96) yesterday. Make sure to adjust your stop at 78.28 to take the actual entry price into consideration. The robot’s indicative stop on the robot page is always in case of an entry at the exact limit price, but the actual stop must be adjusted for the actual execution price.
After some kind of hopeful dead cat bounce that stalled at the 2-day moving VWAP (blue line), IWM came back to the starting block and right above the same 200 dma (79.51) support confluence with WS2 (79.82). New weekly and monthly pivots will be in place on Monday and can change the floor support/resistance outlook significantly, so I won’t expand much on the current multi-pivot setup. Under normal market conditions, the 200-day moving average shouldn’t give up easily after such oversold conditions where IWM lost 5% in just four days. But market conditions are not normal and remain uncertain in the context of the debt crisis political irresponsibility.
As I took my breakfast this morning watching CNBC Europe, I was struck that the dozen of pundits interviewed and debating were UNANIMOUSLY in agreement about the US equity market: avoid and stay on the sidelines! This is the first day I saw such unanimity and it makes me wonder who’s left to sell? As Pascal mentioned in his daily IWM comment, the TEV extension on inversed ETFs is suggesting that large players who didn’t sell already are fully hedged on their remaining long positions. And that TEV extension is the last reason for the robot to refuse to sell and short this market.
In spite of high uncertainty, probabilities of gains and success for a new long entry rose to a very strong ST/LT buy signal setting today. If you are a proponent of high probability opportunistic trading, this can be your day! You won’t find often a statistical 3-day gain of 2.71% with 81.3% odds for a winning trade. Pre-market is weak at time of writing, so a low entry on a gap down makes the prospects for gain even better. As a side note, there will be a POMO (QE Light) today, so liquidity will be plentiful on top of all the cash parked on the sidelines.
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GDX was stopped out of its long position yesterday for a gain of 7.38% on this last trade. The robot could not find any edge for entering a new long or short position. The second chart below and comments are from the ETF Digest website.
Billy
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Behavioral investing and the Robot
I've also noticed that the best (and worst) times to invest are at the times of greatest fear.
Regardless, I think the Robots are operating correctly even with the current headline risk. If we get stopped out again, we get stopped out again.
As for lightening up -- those following both Robots are already lightened up because of GDX being on the sidelines.
Can't think of anything else that could be done here.
Trading INTO volatility headwinds
I don't know all of the ins and outs of the model, but I think the Robot adjusts stops based on volatility. That is, if the price rises while volatility rises, the stop might rise less than the price. If the price falls while volatility falls more, the stop might actually rise.
But the Robot (if I understand correctly) NEVER lowers the stop.
Under normal situations that's entirely correct, I'm sure.
Of course, that begs the question of defining "normal." It's like what the judge said about porn "I can't define it, but I know it when I see it."
Billy -- I'm sure you've tested allowing stops to lower as volatility rises. Maybe if you shared the edge the current non-lowering approach has, that might address (on a statistical level) what would happen if you tried to adjust for "headline risk" (which would be reflected in such an approach).
That might answer everyone's questions with specific numbers.
On an anecdotal level, I'd like to compare this with poker. Do you increase the bet when you get worse cards? Or do you fold quickly for a small loss and wait for a better hand? Winning players take the small loss and are grateful for the small loss.