Thursday, February 7, 2008

Retest approaching

Just time for a quick note tonight…

The study I posted last night showed a good possibility of a one-day rally in the S&P. The one day rally lasted only half a day. After that the market fell apart again.

I’ve gone over a few things tonight, but I’m seeing pretty much what I expected. Price is becoming stretched, but the price drop alone isn’t providing any huge edge. An example would be the current Nasdaq price action. The Nasdaq has dropped over 1.25% three days in a row. Looking back to 1985 this has happened 48 other times. Over the next 1-2 days the Nasdaq has rebounded about 2/3 of the time. Not a bad ratio, but the average losing trade dropped about 4%. That’s more downside risk than I’d like to take on.

Many of the oscillators and other market gauges I follow are simply not stretched the way they were two weeks ago. My Capitulative Breadth Indicator (CBI) -click CBI label for details- for instance still remains at 0. Once we get closer to retest area a case could be made for an entry on some kind of reversal since a reasonable stop should be nearby. We aren’t there yet and I’m not comfortable looking for even a swing trade at this point.

One thing that may interest me is a gap down tomorrow morning. Cisco (CSCO) is trying to help create that. I showed recently that large gaps down in downtrending markets offer significantly more reward than large gaps down in uptrending markets. A gap lower therefore could be playable. I would only consider keeping part of the position beyond a day if it was strongly in my favor.

11 comments:

Anonymous said...

Do you fell shorts are to risky here ? Thnaks

Rob Hanna said...

I'm not planning on initiating new short positions here. The market has come too far too fast the last three days. The time to short was a few days ago when the market was extended up. My studies at that time suggested caution, so while I did a good job capturing the bounce, I've missed that retracement back down. That's ok in my book. I don't try and capture a move unless I feel it offers solid risk/reward. Coming off the oversold conditions we had with good volume, price action and breadth there was a chance an intermediate-term bottom was in place. That's now looking less likely. Daytraders may still find some opportunity to short. I'm hoping for a long setup...

Dave M. said...

Great blog entries as usual. It's refreshing to see someone like yourself use actual facts and data to analyze a trade instead of usage of questionable indicators such as MACD and stochastics.

Dave M. said...

Oh, BTW, I recently had a on-line debate with a self-described technical analyst. I challenged him to provide ANY historical statistical proof that indicators such as MACD or stochastics were predictive. He could not name one study. I, however, did find one expert who said he analyzed these indicators and found that they were no better than a coin flip.

Dave M. said...

Sorry, my previous post ended w/o my additional info..Here's a quote.

"Yet Charles LeBeau author of The Technical Traders Guide to Computer Analysis of Futures Markets claims to have tested every possible combination of moving average conceivable and found their performance to be little better than random probability. In any serious testing trend following indicators struggle to have a reliability of above 50%. The MACD histogram, which is thought to be among the best of all indicators, often has a reliability of below 50%. I have personally run a test trading the SPI on an intraday basis by tossing a coin in the morning and found it to be profitable. It is extremely difficult for traders to accept that the tools they use may not be as effective as they thought, or that their methodology may have a reliability below that of simply tossing a coin.

http://www.tradinggame.com.au/articles/article.asp?i=6

Rob Hanna said...

Thanks Dave. Very interesting. Obviously I'm of the belief that more technicians should make the effort to quantify their tools. Having a handle on odds and risk/reward ahead of time can be very valuable.

With a favorable payoff structure (and good trade management), even coin flips can be quite lucrative. But thinking you have an 80% chance of success when it's really 50% may cause some people to trade too aggressively.

Ken said...

dave m.

It's ridiculous how you are approaching those "indicators". Of course they do not predict any up or down direction in the market trends. That will be way too obvious.

You dont just become a trader just becaue you've been enticed into trading by watching FastMoney and pick up a couple books on Amazon.com and find out about trendlines, head&shoulder, resitance and support lines. That is way too obvious. Trading is all about taking other people's money. Yes, people like you. What does that mean, you ask? If it is too obvious, it will not work.

It's funny how the market has changed. Even 2 years ago, on CNBC the brokers would advertise themselves in terms of giving friendly advice, retirement advice, etc, etc. Now you see commercials on how to read charts, and trading short term. You hear all these analysts come on TV and talk about options, trading commodities, etc.

I think that had alot to do with the major bulltrend and Jim Cramer. Every end of major bull markets bring all these retards into the market thinking they can game it. Couple that with the TV personality Jim Cramer and you got the recipe for an influx of wannabe traders.

You can find those people on forums, message boards, blog comments sections just like this. They talk about support lines, shorting, indicators, you know the deal. Exactly how it is in this blog.

Trading is all about emotions. This is what traders exploit and they can do it for several reasons. This is their job, my job. We have LOTS of time devoted just to trading. Secondly, they love trading and they are good at it.

Regular folks who are brought into trading by watching Mad Money or Fast Money are people who have jobs. They simply dont have the TIME to be slaves to their screen in front of them.

Maybe you should give up that coin flipping and just get back to your job. It sounds like you are just the type of people who were intrigued by these indicators, found that you couldnt' successfully utilize them into your trading attempts, and now discredit their uses just because you couldnt.

Dave M. said...

ken said.."Maybe you should give up that coin flipping and just get back to your job. It sounds like you are just the type of people who were intrigued by these indicators, found that you couldnt' successfully utilize them into your trading attempts, and now discredit their uses just because you couldnt.""

Please don't lecture me in a condescending way because you look foolish not knowing who you are talking to. I've been trading full-time for 16 years.

Since you seem to be a proponent of these indicators, I now challenge you! Please provide ANY staistical study that proves these indicators are better than a coin flip. And no, your assumption (ass-u-me) is wrong. I have never used these indicators to trade with because I couldn't find ANY evidence that they were predictive when I first started trading. Still havn't.

Ken, you just like other technicians I have challenged. All ad hominem attacks, but no facts. Sigh.

Dave M. said...

rob said.."With a favorable payoff structure (and good trade management), even coin flips can be quite lucrative.""

True, as long as you have historical data to back you up on that payoff structure. Trouble is, MACD and stochastics proponents don't have any valid data.

Ken said...

Dave M.

I'm glad you didnt' respond with hostility. I expected you would lash back at me full force because I assumed you were one of those newbies I talked about. Just watched Mad Money and this guy was asking about a re-test. Well if you need investment advice why trade alone? Accept that you can't do it, and hand over your money to a professional. Anyways, that's just my little own annoyance.

You are obviously a veteran in the markets. But I'm surprised that you didnt' find those Basic indicators useful. I trade index futures, usually emininis but sometimes straight futures. I just get the oversold and overbought levels, both 15 day and intraday, and use that against typical pivot points. It works EXTREMELY well. At least for me. You should know that the goal of the market is to make this "boat ride" as nauseating as possible and shake out and confuse the newbies. That's where market instinct and experience comes in. You can just gauge the newbies' entries, stop points, and see their panic. And that's where you get in. This is more of an instinctual skill that comes from experience.

So yes maybe I am just blindly defending these indicators. But as far as my trading goes, especially in these volatile environments, I am doing great with just the MA, EMA, Stoch, and trendlines. On top of that I have my up and down bias for one certain day and I trade around that bias.

For example, it's quite obvious that the S&P will break its 12000 level. And that is when I set up a long term futures position, long term as in like a week or so, and I trade intraday swings.

That's how I roll.

Dave M. said...

After many years of trading, I have seen numerous hucksters trying to sell trading systems. Most will say that indicators such as MACD, stochastics, etc. are predictive. They say this because they are trying to sell you a system based on these indicators. Some who sell trading systems will occasionally be honest and realistic. Like this guy who said..

"MACD is a lagging indicator which uses moving averages to derive some trend-following characteristics"

Notice the word "lagging". That's different from alternate terms such as "co-incident" and "predictive". Then he gets real honest and says....

""The MACD indicator alone does not provide sufficient accuracy to qualify an investment decision.""

he continues.."MACD is best used as a valuable compliment to other technical indicators such as Bollinger Bands (BB) and Relative Strength Index (RSI).""

Although he provides no data to back this up, I must say that it is entirely possible that when you use multiple indicators and find market extremes, there might be valid data to trade off of.
http://www.deepinthemoney.com/tech-analysis-macd.html