Expecting A Shakeout - November 30,2011

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The OB/OS indicator closed at – 82.11, rising further away from the fail-safe stop level of -90.
Money Flow was slightly positive again and fighting a very negative cumulative TICK pattern.

This is providing more evidence that large long term players are buying with conviction while small short term traders and HFTs are selling this rally attempt. Most HFT programs are used by market makers and they likely are trying to push prices down because they are short of inventories after the big gap up this Monday. It doesn’t mean that they are bearish ( they see the hurried buy order flow from institutions), but they will facilitate the rally only after reloading their own inventories at a good VWAP. The easiest way to proceed is to exacerbate any news-related weakness to manufacture a shake-out below the current consolidation and Monday’s lows and fish for all stops that are waiting there from weak hands.

If that scenario pans out correctly, our buy limit order at 68.74 is waiting at an exact 38.2% Fibonacci retracement level from Friday’s lows to Tuesday’s highs. This would be a “bullish” and normal retracement where many experienced bullish traders would be willing to enter the nascent uptrend, especially with daily S2 (68.59) as potential intraday support and low.

The setup and floor clusters haven’t changed from yesterday. Only the initial stop (64.83) is a little bit lower because of higher volatility.

For discretionary traders, if you are buying leveraged ETFs, I strongly recommend that the leveraged portion of your position (2/3 for TNA) would be protected by an initial stop not lower than IWM’s 67.50, just under the first floor support cluster. Indeed, there is only vacuum from there down to weekly S1 (65.21). You can have 1000 reasons to get in a discretionary trade, but you only need 1 reason to get out!
Billy

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Billy,

As much as we talk about this issue, is 3:1 RR cast in stone and can not be modified to make an improvement of the entry points? Yesterday we came to about 0.5% of a Buy signal. I'm sure it frustrates you as much as me to see a large gap up like today.

But there is another side of the coin - sure we are in headline driven environment and no mechanical system can predict, what authorities might or might not do tomorrow. Hence, sticking to the proven rule is the best thing we can do now... Furthermore, probably were it not for headlines, we could get out 68.74 entry today.

My main question - is a slight deviation to a 3:1 RR brings with it a worse long term performance?


Thank you.

[QUOTE=Andrei;18915]Billy,

As much as we talk about this issue, is 3:1 RR cast in stone and can not be modified to make an improvement of the entry points? Yesterday we came to about 0.5% of a Buy signal. I'm sure it frustrates you as much as me to see a large gap up like today.

But there is another side of the coin - sure we are in headline driven environment and no mechanical system can predict, what authorities might or might not do tomorrow. Hence, sticking to the proven rule is the best thing we can do now... Furthermore, probably were it not for headlines, we could get out 68.74 entry today.

My main question - is a slight deviation to a 3:1 RR brings with it a worse long term performance?


Thank you.[/QUOTE]

Andrei,
Of course it is frustrating. Like I wrote this morning in another thread:
“Both the LT and ST edges are computed using 3:1 RR multi-pivots entries. So these edges can only be achieved assuming that you enter exactly at the robot’s recommended 3:1 RR limit price. Robot’s edges can be further improved only when you enter at better prices, not worst ones.

If you review the pdfs on the IWM robot’s design and backtesting, the 3:1 RR multipivots rules have a neutral-to-positive impact on returns but lower considerably the drawdowns. They are an essential risk management component of the IWM robot’s LT risk-adjusted performance.”

I believe that most robot subscribers are generally more interested by the risk management rules included in the robot’s system than by the returns which normally take good care of themselves. Nothing prevents anyone to make discretionary exceptions to the risk management safeguards and to assume responsibility for their own decisions. Sometimes it will work, sometimes not. But discretion implies driving in the dark without backtested lights. In difficult extraordinary times, the first goal should be protection of capital and I believe the robot is fulfilling that task well. Making money is easy, keeping it is hard.

I think that the market is rewarding very bad trading habits at the moment and it won’t last long. Among good habits you need to focus on the process (quality of the trades setups), not the outcome (profits/losses). Also, you need to know what your edge is and trade only when you have an edge at the exact limit prices and stops that are providing the edge. The robot is just keeping its good habits.

Traders usually get messed up when they lose patience and try to change their rules with every exceptional event. The robot is not human, fortunately!
Billy

Billy,

A very informative write up of the market this morning as usual, thanks.

My question is simple: What do professionals do when they lack the inventory to sell into strength-- e.g., today's gap up?

Confession: knowing we had a good chance to enter at a fantastic price six or so hours prior the open, I set my limit order and dreamed of catching salmon in my office.

Too bad. Reality intrudes. The market is neither a lucky lady nor a tramp; rather she is to me[URL="http://www.youtube.com/watch?v=Qrl3n2ZtK2E"] the lady in the radiator [/URL].

[QUOTE=nickola.pazderic;18919]
My question is simple: What do professionals do when they lack the inventory to sell into strength-- e.g., today's gap up?
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Nickola,
They widen the bid & ask spreads on most individual stocks, especially at the open. A lower inventory must be sold at much higher prices than usual and the wider the gaps, the better.
But the temptation of shaking out weak hands ASAP is also growing exponentially.
You and the Lady got to be cool on Wall Street! [url]http://www.youtube.com/watch?v=kShTUmYRyCw[/url]

Billy

Billy,

I didn't know they still exist.

I only remember them from my youth,[URL="http://www.youtube.com/watch?v=Y2BavhwpIJg&feature=related"] listening to this song, which seemed to disintegrate my bedroom into bubbles with their harmonies.[/URL]

Oh no. I'm not in Love. But heavens, I rely on you and Pascal because I surely don't belong on Wall Street. I can't carry a baseball bat in the other hand as I shake someone's right hand.

Kindly,

Reminds us that rules for traders are for their own good.


P.S. Everyone's got to have that "I❤$" sign in their house :)