IWM Trading for May 16, 2010

[Billy]

From a multi-pivots perspective, IWM is still stalling under its strongest resistance cluster YTD. YR1 (85.68) was first unsuccessfully tested on 04/06/11 and led to a rejection toward the 50-day moving average. The second test was successful for the last three days of April before reversing nastily on May 2, from QR1 (86.66) and failing to find support at YR1.

This week’s activity is setting up a severe potential bull trap pattern, as Tuesday’s bounce was stopped once again at the confluence of SR1 (85.46) and YR1 (85.68). Another test of the 50-day moving average (82.93) is most likely next week. Due to the previous pattern with rising volatility and the proximity of the summer season when large players avoid deploying new long term strategies, a failure to hold the 50 dma next week could quickly lead to a sharp selloff. The probability of such a scenario is higher than the previous 50dma test that occurred with a neutral 20 DMF mode. The 20 DMF actually turned into a short mode on May 5 while testing the 50 dma and remained short until now. The failing bounce to SR1 (85.46) and Friday’s run toward the 50 dma on a very negative 20 DMF of -150% increases the selloff probabilities. Also IWM’s relative strength (lower pane on the chart) started to rise while approaching the 50 dma on May 4, while it is now starting to fall.
All these developments are among the main reasons for the IWM robot to hold its short position with rapidly rising 3-day short edges. The next logical area of potential support and strong bounce is QPP (81.80) since QR1 (86.66) is now the reference resistance level for the year. The highly rotational nature of the current correction will probably avoid a longer term (10-day) short edge and I expect that a buy signal might come around QPP from a very oversold 20 DMF level.
So far this year, the robot has been excellent for switching from trend-following to mean-reversion strategies and let’s simply follow its next signals once they come around.

[davidallison@gmail.com]

Hi Billy,
Congratulations to you and Pascal on the new web site. It’s great. It was certainly a good day for the Robot! I am very tempted to sell TZA particularly in after hours as I watch IWM approaching 81.86 and based on your comments of strong support above. I decided against this as who knows what tomorrow will bring and it wouldn’t be sticking to the discipline. I remember you commenting to someone else on the forum about how you adjust your buy stop orders, for robot entry signals, based on where IWM opens in the morning. It certainly appears that this has given you an optimal entry point in the past. Is this just fine tuning to account for the gap?
Thanks,
Dave

[Billy]

Dave,
I’ve had the same temptation as yours and decided to go to bed early before the close to resist such evil’s seduction! On the attached chart I have annotated the last robot’s short entry at 84.81 on 5/12 around mid-day and the three probable expected 3-day gains (expected 3D gain times probabilities) that were recorded by the robot. I have labeled them as “Target”. They are 83.30, 82.83 and 82.56. They all were hit within 24 hours of being issued. That’s why the robot refuses to sell on target.
Selling on target can provide some immediate gratification but often at the expense of soon-to-follow frustration. Let’s suppose you had sold on target last Friday at 83.30 or today at the open at 82.83. There was no advantageous re-entry price limit proposed by the robot below 84.08 yesterday, and it was never hit; so you would have missed most of yesterday’s selloff or about 3% opportunity cost on your TZA position!
QPP (81.80) can indeed be expected as the most likely area for re-accumulation by market makers and HFT algo programs and for producing some bounce. However, this is just a potential support if large institutional sell orders do abate compared to previous days. If the institutional selling orders appear strong on their books, they will easily let price fall to WS2 (81.45) or even WS3 (79.92) and MS2 (79.52) if necessary in what would become some climaxing panic selling, exactly what you want to see when short. If WS3 is hit, it has 99.5% statistical chances of being the low for the week.
So, the robot will stick to its policy of staying in a trade as long as edges do persist instead of looking for just average performance by exiting prematurely on targets. Today’s probabilities will be most interesting to analyze! Also notice how the RS line keeps declining.
My comments about how to adjust limit prices based on the open were for derived ETFs, RWM, UWM, TWM, TNA and TZA. The robot page on this new site is now automatically suggesting the equivalent entry price for these ETFs, but without any guarantee of course. But if there is a big gap at the open, I would personally always adapt the limit price as a multiple/inverse proportional to the opening price. And if my limit is not hit on the other ETF while it is hit on IWM, I would instantly execute the orders at market price.
Billy

[johnboy70]

From a multi-pivots perspective, IWM is still stalling under its strongest resistance cluster YTD. YR1 (85.68) was first unsuccessfully tested on 04/06/11 and led to a rejection toward the 50-day moving average. The second test was successful for the last three days of April before reversing nastily on May 2, from QR1 (86.66) and failing to find support at YR1.

This week’s activity is setting up a severe potential bull trap pattern, as Tuesday’s bounce was stopped once again at the confluence of SR1 (85.46) and YR1 (85.68). Another test of the 50-day moving average (82.93) is most likely next week. Due to the previous pattern with rising volatility and the proximity of the summer season when large players avoid deploying new long term strategies, a failure to hold the 50 dma next week could quickly lead to a sharp selloff. The probability of such a scenario is higher than the previous 50dma test that occurred with a neutral 20 DMF mode. The 20 DMF actually turned into a short mode on May 5 while testing the 50 dma and remained short until now. The failing bounce to SR1 (85.46) and Friday’s run toward the 50 dma on a very negative 20 DMF of -150% increases the selloff probabilities. Also IWM’s relative strength (lower pane on the chart) started to rise while approaching the 50 dma on May 4, while it is now starting to fall.
All these developments are among the main reasons for the IWM robot to hold its short position with rapidly rising 3-day short edges. The next logical area of potential support and strong bounce is QPP (81.80) since QR1 (86.66) is now the reference resistance level for the year. The highly rotational nature of the current correction will probably avoid a longer term (10-day) short edge and I expect that a buy signal might come around QPP from a very oversold 20 DMF level.
So far this year, the robot has been excellent for switching from trend-following to mean-reversion strategies and let’s simply follow its next signals once they come around.

Billy,

Please help me to understand the terminology a bit better. When you use such terms as QR1, SR1, YR1 and QPP, my presumption is that the prefixes Q, S and Y refer to daily, weekly, monthly or yearly support and pivot point levels somehow? That terminology is not explained in "Forex Conquered". Can you please help me to understand. Thanks, John

[Harry]

Billy,

I am also interested in learning more about your pivot work and terminology.

Thanks!

[Billy]

John,

I will soon start a multi-pivots methodology tutorial series that will help novices starting from scratch. I plan to do one per weekend.

The formulas for calculating pivots are as follows:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

They are the same for all timeframes.
W= Weekly
M= Monthly,
Q = Quarterly,
S= Semester or Half-Yearly
Y = Yearly

Billy

[johnboy70]

John,

I will soon start a multi-pivots methodology tutorial series that will help novices starting from scratch. I plan to do one per weekend.

The formulas for calculating pivots are as follows:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

They are the same for all timeframes.
W= Weekly
M= Monthly,
Q = Quarterly,
S= Semester or Half-Yearly
Y = Yearly

Billy

Billy, Thanks John

[nickola.pazderic]

Hello,

I'm new. This is my first post here or elsewhere in a financial blog for that matter.

I appreciate this new format very much. It makes it very easy to find my bearings. Thanks, thanks.

My point: look at either the SPY or IWM charts. One can draw a line or even a small channel from Feb 21/22 to May 17/18 and discover that, in essence, the market has not moved at all, minus some volatility.

I have played a simple and stupid game with this market: I choose a back month put; buy it when its cheap, sell a day or two later for a profit. go flat and wait for the market to return to me, and try it again. I got a good price today, as you can imagine.

All market indicators that I follow, including this one, say the market is in a sell mode. I have a load of short ETFs, including TZA. And I'm betting that the down trend line from May 2 holds. The next move must break "the line" from Feb 2. If not that, then all lines converge during the last week of May and contrary to American evangelicals who claim the world will end this Sunday, the market will disappear and there will be no June. (Insert smily face)

Ok-- waiting some reply, gratefully yours,

Nick in Seattle.

[Charl]

Hi Billy,

I'm in !!!!

Glad you can find the time to teach !

What format will you use to conduct the training, and what time zone?


Regrds
Charl

John,

I will soon start a multi-pivots methodology tutorial series that will help novices starting from scratch. I plan to do one per weekend.

The formulas for calculating pivots are as follows:
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

They are the same for all timeframes.
W= Weekly
M= Monthly,
Q = Quarterly,
S= Semester or Half-Yearly
Y = Yearly

Billy

[Billy]

Hi Billy,

I'm in !!!!

Glad you can find the time to teach !

What format will you use to conduct the training, and what time zone?


Regrds
Charl

Charl I hope I won't disappoint you if it is simply a word document or powerpoint format!
Billy