Outlier Day Ahead – September 21, 2011

[Billy]

Forum Clusters 110921.xlsx

“Among the outlier events to be worried about are so-called “runaway algos”. And, you have to remember that the computers run in packs too. So “live by the algo, die by the algo” might be an appropriate motto. Whether through direct programming or via some artificial intelligence, the computers do what has worked, just like humans. Therefore, a previously-winning strategy can come unwound quickly. The quant fund bath of August 2007 is a good example of that.” Tom Brakke, Algo City, http://researchpuzzle.com/blog/2011/09/20/algo-city/

My trading plan: After posting today’s comment, I’ll enter my stop order GTC at 72.20 on my existing unleveraged IWM short position then go to bed and sleep until 2:00 pm ET. Then, I’ll be back to my screen fresh and ready to discretionarily decide to add leverage or not with TZA after watching the reaction to the FOMC announcement. Freshness of mind can be a powerful edge versus a nervous competition that will most likely be confused and hesitant after following the deafening noise of the tape and pundits all morning long.

Today will certainly be an outlier day, not only for our robot but for most other programs too. That’s because the dominant inputs in the market programs will principally be derived from subjective human decisions to trigger either the “sell all in a hurry” or “buy all in a hurry” algo buttons. This creates more often than not an initial false move by lone deciders who can act instantly in autonomy but soon faded by “committee deciders” who are slower to decide but much more powerful and deep-pocketed –hey, that’s why they need a strategic committee in the first place!

This introduction is simply to acknowledge the robot’s and my own inability to gauge the probabilities for any end-of-day closing level. Total resistance/support cluster strengths are about equal at 34/31. But support is much looser and WS3 (62.26) could be hit within 2 days in case of panic selling. Resistance is much more concentrated and the 50-day moving average (73.58) could be hit within 2 days in case of euphoria. With an initial short entry at 70.81 and a trailing stop at 72.20, the potential maximal loss on the robot trade is -1.96% and the potential gain at WS3 is +12.07% in case of extreme good or bad reaction to the FOMC event. That’s better than a 6-to-1 reward-risk ratio. Make your choice!



The multi-pivots outlook remains bright for GDX up to SR2/QR2 (69.65) where serious resistance will probably activate the next major consolidation or pullback.
Billy