The Guessing Game - August 26, 2011

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[B]“I think if the market wanted to surprise markets the most, Bernanke would completely disappoint tomorrow and offer nothing new and the market would rally anyway. In the same respect, Bernanke could launch QE3 and an even more aggressive program and the market could reverse in response. In fact, with all of the anticipation, maybe there won’t even be a significant market response. Again, I think we need to be cautious of prevailing perception as Mr. Market has consistently been keeping markets frustrated by acting in ways contrary to what the majority anticipate.” [/B]Charles Kirk, The Kirk Report.
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“ One shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences. The other shortcut is the ultimate energy saver: do nothing. The best decision makers are the ones who know when not to trust themselves. I say a complete trading plan acknowledges our blind spots and builds in a plan to keep our decision-making ability as strong as possible. ” [/B]Derek Hernquist.

Thursday was a big Las Vegas show featuring Warren Buffett, Steve Jobs and high-frequency HAL 9000’s. Today will be the appearance of the much awaited biggest superstar of all: Ben Bernanke and you can be sure that he has rehearsed every detail, pause or intonation for the big day. The script, titled “The Guessing Game” has obviously been written to promise a nice ending to the nightmarish episodes of recent past. As he’s a thriller specialist, expect more hints than facts and commitments. You’ll need to return to his next show on September 20th for gauging any concrete progress. Until then, there will be no end to the guessing game.

GDP numbers will perform the opening act, thereafter we’ll only need to wait for 30 minutes after the open for the big show. Don’t make impulsive reckless decisions today, and don’t be paralyzed doing nothing. Have a plan. The IWM robot is what you need to make an objective decision quietly ahead of the turmoils.

Clearly, the ST/LT edges are still confirming the very strong buy signal and a pullback down to 65.23 would be an excellent buying opportunity compared to probabilities on previous visits at that price level. By entering the initial long position, the robot also acknowledged the worst case risk of hitting the trailing stop (63.85). If it happens with a very bad market reaction, it will limit the loss to 6.06% from the entry price and to 5.40% from yesterday’s close. There is also a fail-safe 20DMF signal that could trigger an earlier exit on Monday morning.

My advice is never change a plan once you have committed yourself to follow it.

A good example was given yesterday by the GDX robot that came short of 4 cents from hitting its trailing stop before a strong reversal. A hit would have caused a minor loss of -0.73% from the entry price. Instead, the initial GDX position is now + 3.58% in the green at the close. That’s almost a 5:1 reward risk for being detached and sticking to the plan. Ask yourself: without an objective optimized plan, how high are the probabilities that you would have not been paralyzed or that you would have behaved emotionally reckless? Think about it for the IWM position too.
Billy

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