Neutral As It Ever Was – July 7, 2011

[Billy]

Forum Clusters 110707.xlsx

I would like to share some extracts from an email I’ve sent this morning to a robot subscriber who discretionarily exited the robot trade prematurely early last week, could never come back into the trade and asked for some words of wisdom. FWIW, here it is:

“The market is a master at teaching us humility. As soon as a trader or guru thinks he has become a big shot, he is lost. The big shots in trend-following are humbled under choppy and mean-reverting conditions while the big shots in mean-reversion are humbled under trend-following conditions.
Trend-following and mean-reversion require completely opposite mindsets and psychology. Hence, once you’ll become comfortable with one approach, you’ll take hard blows when time has come for the other approach. As soon as you’ll adapt to the fresh approach, bang!, you’ll need to revert back to the other side.
Exiting your trade early was the reflex of a “mean-reversion” mindset. But the environment was strongly trending.
I am lucky to be well versed in doing relatively well both in trend-following and mean-reversion environments, but I’ve come to realize that I am kind of an UFO as most other traders excel only in one of the environments and systematically are losers in the other.

Even so, my last year’s drawdown taught me humility again in my capacity of recognizing discretionarily in which environment I was operating. This, after 30 years of 14 hours a day daily experience!

That’s why I think the robot is so helpful: no mindset, no psychology, no reaction-time before becoming comfortable in a new trade. Like any top trader, it has rules and a clear, simple trading plan. All is optimized for the best probabilities and the best risk management. My word of wisdom is just this: Follow the robot rules and plan exactly! Your ego will probably not be flattered as when winning a chess game against other humans. But just as in chess, we are now fighting with other robots in the market. There is no chance to beat them other than by letting your own robots do the battle. At least, you have a high probability of doing better than the average human market participant.”

Both robots are in increasingly neutral buy signals and volatility is dropping. Consequently, members who are in both trades from the start can quietly raise their robot “worst-case” trailing stops until a sell signal is issued.

IWM still has a lot of wiggling room available above and below yesterday’s close before meeting any serious resistance or support. All moves between YR1 (85.68) and WPP (82.59) are only meeting daily floor levels that are good only for day-traders. A new buy entry at 83.06 remains the best reward-risk opportunity above a strong support cluster, while selling or shorting discretionarily near YR1 may trap you if the market strength continues.



GDX is receiving increasing support day after day and has a realistic chance of breaking soon above the confluence of SPP and QPP (both at 56.61). For this to happen easily and sooner than later, the 50-day moving average (55.63) must hold on a daily close basis.
Billy