Fail-Safe Or Not Fail-Safe? - January 26, 2012

[Pascal]

Due to the sparsity of the historical data, I think it is important to not only look at the expected return but also at other statistical measures of the return distribution such as percentiles (or median and quartiles). As a side note, I assume that a parameter reduction to a single MF variable and IWM price advance threshold was necessary in order to produce a sufficient number of cases to examine.

Trader D

Here is the data.
I believe that if in three days, we did not hit the stop loss and IWM is closing higher than yesterday's close, we will not do better than a "wash" on the trade. At least this is what the stats says.

In that case, we will refrain from trading new IWM Robots positions until the 20DMF issues a signal, because it means that past stats are not applicable and that the environment is on stealth QE3.



Pascal

Stats_1_26.xls

[TraderD]

Here is the data.
I believe that if in three days, we did not hit the stop loss and IWM is closing higher than yesterday's close, we will not do better than a "wash" on the trade. At least this is what the stats says.

In that case, we will refrain from trading new IWM Robots positions until the 20DMF issues a signal, because it means that past stats are not applicable and that the environment is on stealth QE3.

Pascal
Attachment 12467

Many thanks, Pascal, looking at the raw data is always best.

Out of curiosity, if you were to look back at the market reversal that triggered at the "near miss" and assuming that we are indeed in a stealth QE environment, would you be able to trace its start (ie when those who move the market got the clue that QE3 is inevitable, whether formally announced or not) back to that date?

Trader D

[Pascal]

Many thanks, Pascal, looking at the raw data is always best.

Out of curiosity, if you were to look back at the market reversal that triggered at the "near miss" and assuming that we are indeed in a stealth QE environment, would you be able to trace its start (ie when those who move the market got the clue that QE3 is inevitable, whether formally announced or not) back to that date?

Trader D

The rally started around Dec 19, which was an EOY Santa rally and nothing else.
Then, the MF stayed very weak until Jan 18.
So, I believe that if money started moving in, it was on Jan 18.
However, nothing really impressive at that date: more like a "European no-bad-news" relief rally than anything else.

Then, yesterday's announcement, which does not say clearly that we have QE3. However, zero interest rates implies QE3. So, we are trading this implication. However, we start to hear Obama talking about new taxes then next step might be spending cuts/protection against imports. These policies are also what is being pushed out in Europe.

These policies will take a long time to be played out... Much longer than stealth printing. So the market is probably trading a short term event first.


Pascal

[Wei]

Hi Billy,

Pascal just sent out the 20DMF rt, which shows that no buyer is buying into the bounce. But the tick data shows that the tick is keep going up while the SPY price is going down since this morning. How do you interpret the tick divergence? (20DMF is for big buyer and tick is for market maker? and they disagree at the moment?)

[Billy]

Hi Billy,

Pascal just sent out the 20DMF rt, which shows that no buyer is buying into the bounce. But the tick data shows that the tick is keep going up while the SPY price is going down since this morning. How do you interpret the tick divergence? (20DMF is for big buyer and tick is for market maker? and they disagree at the moment?)Attachment 12477

Wei,

After comparing daily Cum TICK and the RT 20 DMF for more than one month, RT 20 DMF is infinitely a better predictor of price action. Large institutional players are the true controllers of price action. Cum TICK seems more indicative of very short term “manipulative” moves by market makers HFT programs when liquidity is low like during lunch hours.
A good way to appreciate the real power of cum TICK strength is to compare it with the Up-Down Volume of the exchanges which are negative today with a weak MF. The lunchtime HFT (cum Tick) strength was sold into by large players and bodes for a weak afternoon.
Billy

[Wei]

Hi Billy,

Thank you so much for your insight. Truly appreciate it.

[TraderD]

The rally started around Dec 19, which was an EOY Santa rally and nothing else.
Then, the MF stayed very weak until Jan 18.
So, I believe that if money started moving in, it was on Jan 18.
However, nothing really impressive at that date: more like a "European no-bad-news" relief rally than anything else.

Then, yesterday's announcement, which does not say clearly that we have QE3. However, zero interest rates implies QE3. So, we are trading this implication. However, we start to hear Obama talking about new taxes then next step might be spending cuts/protection against imports. These policies are also what is being pushed out in Europe. These policies will take a long time to be played out... Much longer than stealth printing. So the market is probably trading a short term event first.
Pascal

I suppose one could never know whether Jan 18 MF strength is due to a European relief rally vs speculation (or knowledge) of extending zero interest rates to 2014. Regardless of explanation, it would be re-assuring to know that MF can effectively (pun intended) capture it.

Trader D