Mean Reversion Expected in a Trend-Following Trade - July 5th 2011

[Billy]

Forum Clusters 110705.xlsx

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From now on, I’ll spend much less time convincing readers of the robot’s design quality and I will focus instead on professional trading of the multi-pivots and floor levels in relationship with the robot’s algorithms.
For IWM, at the start of this shortened 4-session week, the most important development is that total floor selling pressure of 28 is beginning to outweigh the total floor buying pressure of 25. This implies that the current short-term overbought readings may soon resolve in a time consolidation or a pullback. However, the very strong first supports cluster (22) and the absence of any floor resistance before the Yearly R1 (85.68) 1.89% above Friday’s close, could easily resolve into an initial continuation of last week’s strong momentum.
Whether the next pullback starts from here or later from YR1 vicinity, it is most likely to retest the upper boundary of the very powerful first cluster support. If the pullback starts on this Tuesday, that boundary will be exactly at daily S1 (83.06) which is also the optimal daily long entry from the IWM robot. The stop from the day’s entry is 81.19 not far away from the trailing stop of the initial robot position at 81.33. Both stops are well protected by numerous support confluences; therefore, 83.06 looks like an ideal low-risk entry both for adding up to your position or initializing a new one.
You may remember that the robot’s initial risk was 2.20% from the entry price of 78.39. So, a 3:1 reward-risk setup would have given you a target of (78.39 * 1.066) = 83.56. On Friday’s close, IWM was already above the target with a 3.31 : 1 reward-risk ratio. We have checked with Pascal’s backtests and we found a very high probability that the current trend-following trade may be near its highest potential return. But the robot will only sell on an objective sell signal. Looking at the clusters structures, one scenario that I see as the most likely in the near term is a multi-days or weeks 4% trading range between QPP (82.28) and YPP (85.68) or a typical mean-reversion environment. Since the robot is now in trend-following mode with an excellent trailing stop, it will simply let the potential mean-reverting yo-yo game develop as long as a signal change doesn’t trigger. For discretionary traders, they may envision mean-reversion position-sizing trades within the expected 4% consolidation trading band.



The GDX robot remains pretty flat with its current long position entered at 53.26 on 6/23/2011. The statistical buy settings have remained neutral (i.e. weak) from the start and the floor structure has also handicapped the long trades with currently a total selling pressure of 33 battling a total support structure of 11.
I am looking forward to welcome only dual robots subscribers on Wednesday morning and thank you in advance for joining what we hope will become the most advanced and private professional trading forum on the internet.
Billy