Tutorial Intro: Path Of Least Resistance

[Billy]

Billy, given where the S&P futures are currently trading, and where the 20DMF currently stands, is there a high chance the IWM Robot changes its bias to either neutral or long at tomorrow's close?

Would you take the current recommended entry like any other, or be more cautious and reduce position size - or avoid a trade altogether?

Thanks.

Aly,

If you've read my last alphascanner blog update, you already know my discretionary feeling.
I think that the robot short entry at a minimum of 85.10 could still pay well on a 3-day horizon. But the signal is weak and we could indeed see the robot looking soon to enter a long position!
This could turn into a major follow-through upside day and you may want to see confirmation of a reversal before shorting. If one can afford to follow the market real-time and full-time, one can wait to observe how today's furious gap up will develop during the day if ever 85.10 is hit.
My inner bias is to stay in cash and planning for the nexr best long entry from the robot, but the robot has always beaten me up for ignoring its guidance! I sincerely hope that 85.10 will not be hit as it would satisfy most everybody to stay in cash ahead of a possible long entry from the robot.
Individual psychology and control of emotions are in play here, so anyone vulnerable or hesitant should better stick strictly to the robot guidance.
Billy

[Pascal]

As the 20DMF is detecting some weak selling in the first hour of trading and since IWM has reversed from its resistance cluster, I believe that the robot will not reach its ideal short position.

So, we'll probably be in cash for the close of today. Without a bounce to the shorting zone, it will take a break down through the 50MA for the robot to find a new ideal set-up.



Pascal

[Pierre Brodeur]

The new (June) monthly levels will make a big difference in favor of the bulls.

... because the weight of the support cluster is now greater than the weight of the resistance cluster!

Correct or Incorrect?

[Billy]

... because the weight of the support cluster is now greater than the weight of the resistance cluster!

Correct or Incorrect?

Pierre, you are correct. But clusters strengths are only valid for one day at a time. The real major resistance remains Yearly R1 (85.68) and Semester R1 (85.46) and the most likely area for a new top. Hence, an entry around 85.10 is not so risky as it seems at first sight.
Billy

[Pierre Brodeur]

Hence, an entry around 85.10 is not so risky as it seems at first sight.

You actually got my attention with this comment and for a good 10 minutes I have been staring at the chart you provided trying to coldly (froidement) evaluate the risk of that particular trade visually. It allowed me to appreciate the beauty of the cluster approach and make the hypothesis that the weights that you cleverly devised are really probabilities that the individual resistances will not be penetrated within a trader's investment horizon which I presume is relatively short.

When one focusses on the specified entry price, it seems to me that this number is probably calculated using a weighted sum of the resistance prices and weights (1,2 ... or 8) for the first resistance cluster as a whole or in other words penetrating WR1(2) and MPP(3) is more likely than SR1(6) and YR1(8) and therefore the ideal entry point must be closer to the weakest part of the cluster.

Whether this is true or not, the exercise has been fruitful for me as this adds another tool in my trading kit. Thank you Billy (and Pascal for the Stop part I presume) for bringing such a powerful tool to this community.

[Billy]

You actually got my attention with this comment and for a good 10 minutes I have been staring at the chart you provided trying to coldly (froidement) evaluate the risk of that particular trade visually. It allowed me to appreciate the beauty of the cluster approach and make the hypothesis that the weights that you cleverly devised are really probabilities that the individual resistances will not be penetrated within a trader's investment horizon which I presume is relatively short.

When one focusses on the specified entry price, it seems to me that this number is probably calculated using a weighted sum of the resistance prices and weights (1,2 ... or 8) for the first resistance cluster as a whole or in other words penetrating WR1(2) and MPP(3) is more likely than SR1(6) and YR1(8) and therefore the ideal entry point must be closer to the weakest part of the cluster.

Whether this is true or not, the exercise has been fruitful for me as this adds another tool in my trading kit. Thank you Billy (and Pascal for the Stop part I presume) for bringing such a powerful tool to this community.

Pierre, thank you for the feedback.
In fact, the cluster parameters have been optimized for IWM and the daily buy and short entry prices are always providing a reward-risk ratio of 3:1 if the market trades sideways in the very short term (1 or 2 days) between the extreme limits of the first support and resistance clusters. Before the robot, I took my best market direction guess for choosing to go long or short at the buy/short entry prices. The added value from the robot is that it forces you to stay in synch with the 20 DMF and the highest probabilities beyond the initial 3:1 reward-risk ratio entry edge.
Billy

[johnboy70]

Path Of Least Resistance
I am still busy structuring my multi-pivots tutorials. It is a very difficult task because the methodology is mostly practice-based. One could write full books about how to make a golf swing or how to play a Chopin sonata, only hours, days and years of practice could actually make you a better player. Another difficulty for teaching is that most of what could be quantified and optimized, thanks to the initial help of Dr. K and Pascal, will be kept proprietary. The unfortunate experience in the VIT group that led to abusive external commercial use of my work without my consent forces me to do so. The quantified elements of the methodology are now an essential foundation for the risk management system of the robots setups. I will therefore keep the exclusivity of most tutorials for the early birds who will subscribe to the robots in mid-June.
In the meantime, I want to give you some introduction on how the multi-pivots can help you anticipate the path of least resistance day after day.
The formulas for calculating pivots, supports and resistances 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)

We use six timeframes for the pivots and support/resistance levels:
Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Semester (S) and Yearly (Y).
Additionally, we use two moving averages: the 50-day and the 200-day moving averages.

Each level is given a weight (or strength), proportional to the timeframe it covers, as follows:
Daily: 1
Weekly: 2
Monthly: 3
50 dma: 4
Quarterly: 5
Semester: 6
200 dma: 7
Yearly: 8
The next step is to locate clusters of support and resistance for the next trading day, within a realistic volatility multiple of the last close based on the last ATR% readings. (This is proprietary; please don’t ask for the details!). Once the clusters have been identified, we simply add up the weights of all levels within each cluster.
Below are today’s clusters results for IWM.
Cluster Strength
First Resistance Cluster: 82.606:83.213 11
Second Resistance Cluster: 84.086:85.313 8
First Support Cluster: 81.803:81.076 9
Second Support Cluster: 80.173:78.946 14

Our interest goes primarily to the first resistance and support clusters which are drawn as a white rectangle in the attached chart with their respective cluster resistance strength of 11 and cluster support strength of 9. The path of least resistance for the nearest clusters is slightly to the downside with a resistance-to-support strength of 11-to-9. This is not a big edge in front of a strong intraday money flow, but a neutral to negative intraday money flow will alert us of a potential reversal within the first resistance cluster.
At today’s open, IWM can move freely between the two clusters limits of 82.61 and 81.80 without testing the first significant resistance or support cluster areas. It will be day-neutral as long as it stays there.
Another part of the methodology will use these clusters to determine the optimal 3:1 reward-risk ratio buy and sell entries for the day, independently of market direction or money flow. These are the same as used by the robots. Today’s optimal buy point is 82.14 and the optimal short point is 82.82.
Based on the robot conclusions, I have included the “most probable” 3-day targets for long and short trades. The evidence that should jump at you all at once is that today’s recommended short entry limit at 82.82 is just below the “most probable” 3-day long target at 82.94, near the 50-day moving average (83.16) -so important to institutional investors- and most importantly, still well below the trailing stop (83.44) of the current robot position. In the absence of a very strong intraday 20 DMF, if IWM reaches that area, it will provide an optimal short entry as longs get exhausted within the strong resistance cluster. Only a sustained incoming buy order flow from institutions could prevent market makers from taking advantage of the weak buyers.
Billy

Billy,

I've read this entire thread twice over the past several days (since you wrote it), to include all the comments, and I'm wondering, without disclosing how you calculate it (which you say is proprietary - and, I'm not asking for disclosure of any type of your techniques), is there any way you could possibly define the term "cluster", other than "bands" where one could expect the highest volume of trading activity to normally occur? Also, once you define them, can I presume that they must be redefined every day (which is what I presume you have to do)?

John

[Billy]

Billy,

I've read this entire thread twice over the past several days (since you wrote it), to include all the comments, and I'm wondering, without disclosing how you calculate it (which you say is proprietary - and, I'm not asking for disclosure of any type of your techniques), is there any way you could possibly define the term "cluster", other than "bands" where one could expect the highest volume of trading activity to normally occur? Also, once you define them, can I presume that they must be redefined every day (which is what I presume you have to do)?

John

John,
We define a cluster of pivot levels as those levels that are close together. "Close together" is defined by all pivots within the Average True Range (ATR). The original basic cluster of the methodology is therefore the ATR. For the robots, we have optimized both the ATR and some multiple of it for the best correlation with the underlying ETF’s normal behavior.
This allows for measuring precisely the support and resistance pressures for the next trading day only within a “normal” daily trading range. So, yes, they must be redefined daily. A breakout above a stronger cluster resistance than support is the proof that large players are showing conviction in their accumulation and that market makers/ HFT are forced to follow their steps. The higher the volume and money flow when it happens, the better.
Billy