IWM Robot discussion of May 13

[U]Question1 received on May 13:[/U]
[I]Are you taking the short signals from the Robot even when the 3 day probability is a negative –0.11% ?[/I]

[U]Response:[/U]

Yes, you are right that the probabilities were favoring a neutral stance.

I however took a short at the advised price, for the following reasons:

1. The -0.11% is taken from the close of the previous day. The advised short point was higher than this small negative percentage and hence at the advised short price, the potential earnings by going short was slightly positive.
2. Two days ago, the robot found a strong short term edge, because the market was experiencing a weak bounce into a short signal. I felt that we had the same situation yesterday and thus that the Robot using the same algo would again find the same strong negative edge at the close, which is the case as you can see it.
3. My third reason and the most important one is that I saw that gold miners were producing a buy signal. I therefore bought a large position in the first dip after 20 or so minutes after the open. By the time the IWM short price was about to be reached, these GDX positions were already producing good money so I figured out that a short position on IWM/SPY would hedge my GDX position. So this decision was purely based on my own portfolio. If the uptrend continues, GDX would be lifted with all the other stocks, otherwise is GDX is dragged down by more general market selling, my shorts would make things easier to accept.

We are still in a very nervous market where a more neutral stance is somewhat recommended I believe.

[U]Question2 received on May 13:[/U]
[I]Forgive my misunderstanding - but where do you see that -0.11% 3 day probability?[/I]

[U]Response[/U]:

This message was produced yesterday. Today, we have a different message:

[I]The LT algo found a short edge of -1.5%. This is lower than the -0.75% limit
The ST algo found a strong negative edge of -3.23%
The LT edge is less negative than -4%. In the past this combination led to a 3D short gain of 1.37% from the previous day's close. The trade became positive after three days in 71% of the cases.[/I]

This message is not part of the decision process of the robot.
The IWM robot's decision process is to look for a LT edge. If it cannot find one, then it switches to a ST edge and decides.

What I consecutively did is to recombine the two edges (LT/ST) and see what sort of return we could expect from such a combination for the following three days. This is what the above comments in bold characters are for. 1.37% gain after three days looks excellent to me. Indeed, we are in an almost neutral situation, close to a "cover your shorts" signal, but if the robot is right and we go down from here, this move could easily snowball. However, to have a snowball effect on the upside, we would need a lot of new liquidity supporting the market (earnings season is out). The only liquidity move that I see is a removal of the debt ceiling. If this is decided, my opinion is that it will be "known" in advance - as most political decisions are - and the big money will show up early enough for us to catch the move.