Just A "Normal" Day - August 12, 2011

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The GDX trade was entered at the open (58.96), found quick support at the 200-day moving average (58.01) around the mid-point of the first support cluster and finished its first day in the green. Not bad considering the revised margins on gold futures and gold weakness for most of the day.

The stop for the initial position (54.41) is very well protected under two strong support clusters. But an exit on a PM 20 DMF signal change is most likely at this stage in the trade. That’s why today’s buy limit entry (59.04) is also safe. This trade will likely become a big success if and when QS1 and SS1 (62.12) are decisively conquered, because there is very little floor resistance left above.

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I was one day too early in anticipating the death crosses that will certainly occur today and will be widely commented by others over the weekend.

If there is one indicator that is becoming essential in day trading this HFT-driven market, it is certainly cumulative $TICK as simply following its trend (higher highs-higher lows) and moving averages would have kept you on the right side of the trade for all of the day with huge gains. But it remains a one-day at a time affair with big overnight gap risks.

These HFT moves look very suspect to me as they have been unable to trigger any 20 DMF buy signal. Large players are clearly avoiding falling in an artificial rally trap and are perhaps the engineers behind the lure, waiting in ambush to suddenly unload positions massively again. IWM briefly reversed the 65,5 volatility stop before closing under its old limit. SPY and QQQ reversed exactly just before their own volatility stops could react. This can only be interpreted as yesterday’s gain being extreme, but just “normal” under current volatility. Only a solid follow-through could prove the contrary. This extreme volatility move should initially trigger new sell orders that are unlikely to help issuing a 20 DMF buy signal today if not strongly reversed intraday.
Billy

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IWM briefly reversed the 65,5 volatility stop before closing under its old limit. SPY and QQQ reversed exactly just before their own volatility stops could react. This can only be interpreted as yesterday’s gain being extreme, but just “normal” under current volatility.

Billy, could you elaborate on this when you have a moment, i.e., why it would be interpreted thus, and add a bit more explanation on the use of 65,5 vol stops. Some of this you've covered before but my recollection is a bit stale. Thanks very much.

[QUOTE=adam ali;15672]IWM briefly reversed the 65,5 volatility stop before closing under its old limit. SPY and QQQ reversed exactly just before their own volatility stops could react. This can only be interpreted as yesterday’s gain being extreme, but just “normal” under current volatility.

Billy, could you elaborate on this when you have a moment, i.e., why it would be interpreted thus, and add a bit more explanation on the use of 65,5 vol stops. Some of this you've covered before but my recollection is a bit stale. Thanks very much.[/QUOTE]

Adam,
The TC2000/freestockharts help menu links to this page for the definition and settings of the indicator they use.
[url]http://www.linnsoft.com/tour/techind/vstop.htm[/url]
On the 30 minute chart, I use a 65-period (rolling 5 days) true range with a multiple of 5 times the true range. Hence the 65, 5 setting.
So, my settings show what “extreme” moves are “normal” without warning of a trend reversal within a rolling 5-day window. I came to use these settings by trial-and-error and to use it in conjunction with the 5-day average of price and VWAP.
I don’t use it as a stop reference but as an area where to enter a new position in the direction of the former trend, especially if I see a 3:1 R/R pivot entry limit in the vicinity. Today, all 3 ETFs have reversed their volatility stop, so I am looking to enter shorts at or near 3:1 R/R pivot entries.
These are : 70.81 for IWM, 116.74 for SPY and 53.10 for QQQ. Any short entry at or above these prices do provide strong reward-risk edges for the next 5 days from my experience.
Billy

Responding to a private message, and as a precision to the above about volatility stop:
- it is for my discretionary personal use and not used at all by the robot;
- yes, I use it as a contrarian tool when I deem the trend "reversal" as indicated by the stop is a false signal.
- I normally wait for the signal failure to be confirmed by intraday price action.
- For today's setup, if the 20 DMF does not seem able to issue a buy signal near the close, I may hold all or partial short positions over the weekend.
That's just me of course!
Billy

Billy, alot of meat to digest here. Thanks for the in-depth reply.

Billy; On 8/10 you wrote "The volatility stop with settings 65,5 on the 30 minutes chart has contained all bounces in the decline. It is at 69.69 or just above yesterday’s high. A reversal of the stop could have bullish short term implications. I remind everyone that one needs to wait for the CLOSE of a 30-minute bar above the volatility stop for a confirmed signal, temporary violations are an alert, but not a confirmation."

Today the V stop reversed on IWM and is now below price. Why is this now not bullish and suggestive that the rally has further to go?
Why do you not like using this as an actual stop?
On today's chart you have moving VWAP 52 whereas on 8/10 the moving VWAP was 26. How do you decide which to use?

Thank you for all of your help.
Best regards,
Robert

[Robert,

[I]“Today the V stop reversed on IWM and is now below price. Why is this now not bullish and suggestive that the rally has further to go?”[/I]

Under normal market conditions, a volatility stop reversal is bullish once it is decisively broken. If it is a true breakout with true trend reversal, you will see price quickly gain momentum above the old stop level. On Friday, both SPY and IWM stalled and closed below the old stop. This is suggestive of a failing breakout and of a potential short term bull trap in the making. Another possibility is that the trend “reversal” is just from down to sideways, and the expected new trading range lows would be bounded by the new volatility stop underneath.

[I]“Why do you not like using this as an actual stop?”[/I]

I use my own “volatility” stop based on ATR% as my risk management technique. This is also used by the robots. It is much more advanced and parameters of ATR % do change as the trade evolves over time. I have no backtesting available for the standard (65,5) volatility stop but have extensive backtesting for my stop technique. My experience has been that entering a countertrade at or near the (65,5) volatility stop with a tight stop is an excellent reward-risk approach. There were many examples that I gave in real-time in the old VIT forum with my discretionary trading and should be found in the VIT archives.

[I]“On today's chart you have moving VWAP 52 whereas on 8/10 the moving VWAP was 26. How do you decide which to use?”[/I]

Don’t put too much emphasis on my moving VWAP parameters as I modify them all the time. On 8/10, I was looking at a 2-day VWAP (26 x 30 minutes) and on Friday’s morning it was the 4-day VWAP (52 x 30 minutes). I most often monitor the VWAP from the first bar of each week, increasing by one unit every 30 minute.
Billy

Billy, not to be pedantic, but if I read your messages correctly, Robert says the IWM ended above the vol stop on Friday, while you're saying it stalled below. Could you clarify - thanks.

[QUOTE=adam ali;15717]Billy, not to be pedantic, but if I read your messages correctly, Robert says the IWM ended above the vol stop on Friday, while you're saying it stalled below. Could you clarify - thanks.[/QUOTE]

Adam,
On Thursday, 3:00 pm, the (65,5) V Stop was at 69.69. At 3:30 pm, the 30-minute bar closed at 69.81 and reversed the stop. Since then, the high for IWM on Friday has been 70.60 on the opening bar and it closed at 69.79 or only 10 cents above the old VStop. The “stalling” was in reference to action after the open. I was wrong by 10 cents about IWM closing below the old VStop, but it was true for both SPY and QQQ. Certainly not a decisive market “trend reversal" so far.
Billy

Got it - thanks

Billy; Thank you for your very detailed answer. It is very helpful.

Robert