Tuesday bounce

Above, the 3 LRS study of the daily bars of my little ETF basket. All looking fairly similar from a technical perspective and all below the lower LR30 channel, despite today's surge. My guess, and that's what it is, for the short term, is continued trading range behavior with the lower LR30 channel band acting at a temporary mean reversion target. We came close to kissing the channel goodbye yesterday in the Qs and IWM, while XLE and XLF are showing more resilience at the channel band. The technicals have a lot of work to do before I could get upbeat about a sustained rally, although I have noted several fellow bloggers calling yesterday's action the bear market bottom, punctuated by a VIX 48.
As a card carrying technical trader I'm ready to roll when the signals trigger, but the fundamentals just don't look that cheery, and you have to wonder what OTHER surprises are likely coming down the pipe. While the "rescue plan" may end the hemorrhaging, it's not likely to stop the bleeding and I don't want my trading account to become collateral damage to some really shoddy triage by our current admins.
Until the LR30 channel maintains a a level plane for several weeks, and/or begins to show upslope momentum, I'll continue to play the markets cautiously, trade small and be ready to hit the exits when the next revelation hits. Capital preservation is Job #1.

Monday pre-close Update

With the NYAD at .05, the VIX at a mind numbing 48 and the DOW off over 700 points, things could get exciting tomorrow. The only thing missing is volume, which surprisingly, is not refelctive of the uber volatility playing out today. Adam had an insightful post today on playing current conditions and it's worth a close read IMHO. It also helps explain the current bid/ask spreads (previously .01-.02, now .10-.20), as the market makers aren't sure which way the ill wind is blowing either.

Weekly Pivot Metrics

With VIX in the high 39's, the Qs and XLE hitting the weekly S2 within the first hour today and the XLF and IWM at S1, the argument for substantial range expansion this week looks strong. I've added several metrics to enable an objective study of the ETFs most likely to mean revert.
For those of you who have stuck with me on this study, I'll explain the metrics line by line and retain in the archives for future reference when the coding of the larger mean reversion study is finally complete. That project is turning out to be considerably more effort than I had originally forecast and November now looks like a more reasonable target date for release of a working model. In the meantime, this simple excel spreadsheet has provided a nice tell for the coming week's likely volatility.
R1-S1 is simply the range value for the first levels of support and resistance.
% Range is the value of the R1-S1 divided by the value of the PP pivot.
% Delta is the value of this week's R1-S1 divided by last week's value X 100 to yield a % value.
The next 4 rows are averages of the 3 and 4 week lookback data.
The 4W R/PP is the value of the 4 week average range divided by the 4 week average PP.
Keep in mind that this is a non-directional study. Although it's easy to imply a trend from the progressive weekly data, that's not my primary focus of attention. In conjunction with the 3 Linear Regression study, the weekly pivots are intended to add confirmation to butterfly (and other spreads positions that strictly limit risk and at the same time provide good risk/reward potential.
This week's % delta is the lowest we've seen for several months in my little test basket and the % range in all 4 ETFs is below the 4W R/PP, also a clear change of character.

Weekly Pivots Update

Last week's study predicted that this week's pivot range would contract significantly, which is clearly the way it turned out. Had Thursday afternoon's bailout plan not been torpedoed, I suspect the pivot range might have looked a little different, but this is the way it turned out.
I've added an orange colored block on the pivot range scale to designate the close of the week, just to show how the week's momentum ended. You'll notice right away that the closing values do not correspond exactly with the pivot values, but that's because the pivot values are fixed, so the orange cells are just the closest value to the close that the pivots will allow. I hope that's not too confusing.
Current financial conditions are unprecedented and the impact on the markets still has a long way to go to be sorted out. No news there and, as I've mentioned previously, technical analysis is most effective in providing a trading edge when market parameters are identifiable. This is currently not the case, and it should come as no surprise that volume has almost been chopped in half this week for our little ETF basket as the smart money sits on the sidelines.
IMHO the best course of action at this point is to stand back and avoid becoming collateral damage as the "smartest guys in the room" decide how they'll spend the few remaining tax dollars that are left in the treasury and/or develop some creative new taxes to finance a bailout of the greediest guys in the room, now sanitized as a "financial rescue plan".
For my own account I'm trading small for the time being, focusing on the opening gaps and intraday pivot swings that are my bread and butter. The weekly pivot chart above is now in a position for explosive range expansion. Whether that expansion will come to past next week remains to be seen, but it will happen shortly as the pivot spring is now tightly coiled.

Thursday's Hope

Like most traders, I'm basically hanging out for Friday's Senate action on the bailout. The market's managed to stay pretty much in a holding pattern for the past few days as patience is the safer course than valor. However, a lot of blog chatter has touched on Buffett's bet on GS as a positive endorsement for things likely to come. Now, ole Warren's a lot smarter (and richer) than I ever hope to be and his guiding mantra that "Risk comes from not knowing what you're doing", frequently bounces around this otherwise muddled brainpan. So, I figure maybe Buffett has an inside track on this thing and although I had expected Thursday's action to be muted, the hairy bottom that developed in the last half hour yesterday prompted me to go long some Qs OTMs before yesterday's close. That turned out to be a quick trade however, as the Qs blew through R2 and the fib100 level at 10:15 this morning and I decided to take the money and run. I'll probably re-enter at the close today as I re-up my bet, which is basically what it is, since technicals are a minor component in predicting the outcome of the ongoing and unprecedented financial crisis.

Supporting Buffett's stance is the current position of the VIX, shown in daily and weekly bars below.

NYSE order flow stats

Yes, this is data from last September. . . the NYSE use to provide these stats gratis for 2 weeks, but have since revised their policy and now charge between $1500 and $5000/month for a peek under the sheets. Anyone out there with an NYSE access account care to share updated stats, send 'em along.

The reason I posted this is that I got a few emails questioning my 80% program trading and 3 % retail trading comments yesterday. Since the frequency and volume of program trading have shown a pattern of increasing over the past 10 years I'd be surprised if this year's numbers aren't even higher.

This data is a rehash of a series of studies I ran last year (starting Sept, 1 2007) exploring the effects of order flow masking algorithms, iceberg orders, and backchannel order executions. Interestingly enough, retail orders typically print de facto, whereas pro traders' orders are shown in increments of 100, 200 and 400 shares. Watching level 2 time and sales stream by, those 1000 share prints are probably retail orders, not the big dogs, so it's important to keep track of the total volume per bar rather that the T&S when trying to assess momentum.

Pivots and Fibonacci

I've been playing with a new intraday trading template that uses Fibonacci numbers in a little different way. The goal is to help identify intraday intermediate support and resistance levels and to gauge whether those levels will likely hold or fail. Since 80% of NYSE trades are the product of algorithmic program trading and only 3% are retail trades (you and me, buddy) I'm going way out on a limb here and assume that a significant number of those program trades are based on classic technical indicators such as support/resistance, MA crossovers, RSI, etc., or you can just go to www.programtrading.com and see where the big guys are setting their triggers for the day.
My current study of the fibs kicks in after the first 30 minutes and involves setting the fib range between the high and low pivots of the current price. If the current pivot range gets violated for 15 minutes, then I reset the fib range to correspond to the expanded pivot range.
The fibs are easy to set up on most platforms and typically require only snap and click. The difference here is that I'm not using subjective high/low ranges, but the pivots. . which as stand alone support/resistance levels already provide a high level of confidence for my daytrading targets. It's those intrapivot wiggles that can drive me to distraction and frequently cause me to prematurely exit positions that (in hindsight) were better left intact. Using the fibs between the pivots provides an objective overlay of support/resistance to help better assess the impending moves, and when used in conjunction with the 8/16 MAs and the parabolics helps build my confidence when I pull the trigger.
Who would have guessed that a 13th century mathematician's study of rabbit population expansion would lead to applications in the 21st century algorithmic trading dynamics?

3 LRs Update

Here's the 3 linear regression (30,11,3) (LR) channel update for my little pivot basket of Qs, IWM, XLE and XLF. Above are the weekly bars, in conjunction with the on-going pivot study, and below are the daily bars just to probe the shorter term current mean reversion targets.
On the weekly bars only XLE remains in an upslope LR30 primary channel, and although the July channel kiss off has dropped it some 20 points, it looks like the best candidate for mean reversion into the high 70s, a case which is strongly supported by the midpanel technicals. Next best is the Qs, currently sitting on the lower channel band and showing an affinity for a return to 45, although this case is harder with make with the underlying technicals.

Last week's late action created a distinct change of the direction for the daily LR30 channel momentums, and under "normal" circumstances the current configurations would suggest overbought conditions in all 4 ETFs. The government's proposed intervention in the spiraling financial crisis, however, was of such magnitude that I suspect the safest course for short term traders is to place more weight on the underlying technicals than the LR channels themselves. Following that argument, the daily chart's case for XLE as the best mean reversion candidates is in sync with the weekly chart, with the Qs running a distant second.

The XLF is probably a short here, so it will be interesting to see how volume plays out with the SEC short ban and how the options open interest reacts.

Weekly Pivots Update

OK. . .the range expansion that was anticipated as a result of last week's pivot study turned out to be quite BIG! and once again the range % delta is showing doubles (and triples with the IWM).
If you're following my thinking here, the coming week should show a volatility retracement in the pivots as we work off last week's action and a VIX that spiked to over 36. This doesn't imply that prices will necessarily stay within the weekly support resistance LR30 channel . . ., it does imply we'll see range contraction.
Tomorrow I'll take a look at next week's PP pivot levels in conjunction with the 3 LRs study of our little ETF basket for further clues about likely short term mean reversion targets.

Sidenote: With the banning of short selling in 799 financials this morning I thought I was going to have to revise all my systems to delete the short side, but upon a little reflection, the world has not ended for short sellers. ETFs can still be shorted and of course, those wonderful inverse 2x ETFs are still active.

I'm inclined to just buy puts or, more likely, sell calls, when trying to establish a short position, so the game is still afoot and I expect many stocks that previously had low to moderate open interest will see a significant rise in activity.

KOP Qs

Well that was an interesting day which I suspect many will label a classic one day reversal. We shall see. In the meantime, the XLFs traded a mind boggling 852 million shares today as yesterday's hated financials became today's must haves.
Although the vast majority of the systems I have profiled over the past few months have featured IWM, I have not forgotten my beloved Qs and am therefore posting a Qs version of the KOP format.
I actually like this system quite a bit and it's unusual to find this type of risk control with the Qs when not employing stops.
I've merged Grand Slam 2 and the %R RSI2 system and added a couple wild cards to create this simple KOP. The max consecutive losers is very attractive . . 2 for both the long and short side and the max intraday drawdown on the longs is half of the IWM model (short side, a little different story). With 304 trades over 283 weeks, this is an active system with short exposure. . . average 2 days for the longs and 3 days for the shorts.
The downside is that average trade gain is only $43/100 shares so you need to deploy some capital with this system in order to make it worthwhile. A fixed bar exit (BarsSinceEntry) of 8 increases yield a bit and is can easily be tacked on the code.
Something for you to play with but (IMHO) definitely useful as a stand alone short term timing model for the Qs.
TS 2000i code shown below:
For those who don't have TS 8.3 and are considering it, TS is waiving platform fees until 12/31 for new accounts ($5000 minimum). This is not a solicitation or endorsement of TS, just an FYI.
Go to http://www.tradestation.com/ for details, if interested.

Condition1 = PercentR(3) Crosses Below 81 and RSI(Close,2) Crosses Below 77;
Condition2 = PercentR(3) Crosses Above 13 and RSI(Close,2) Crosses Above 27;
Condition3 = RSI(Close,2) > 80 and CCI(7) > 82;
Condition4 = RSI(Close,2) < 31 and CCI(7) < 30;
Condition5 = RSI(Close,2) < 29 and CCI(7) < 39;
Condition6 = RSI(Close,2) > 81 and CCI(7) > 89;
Condition7 = Close > High[1] and High[1] > High[2];
Condition8 = Close Crosses Above Average(close,12) Or LinearRegValue(Close,27, 0) > 50;

If Condition1 OR Condition3 OR Condition7 Then Sell This Bar on Close;
If Condition4 Then ExitShort This Bar on Close;
If Condition2 Then Buy at Market;
If Condition6 Then ExitLong at Market;
If Condition5 Then Buy This Bar on Close;If Condition8 Then ExitLong This Bar on Close;

KOP 10 and risk/reward

KOP10 is a streamlined version of KOP16. I've peeled off 6 of the original conditions since, after more testing, I've found their equity value to be minimal. In fact, by eliminating some of the conditions we find that they were acting as constraints to the equity curve rather than contributors. . . so in this case less is better.
However, the point of today's post is not to look at the performance of the KOP10 per se, but to look at what happens when we take a fairly robust system (IMHO) and apply pyramiding to the entries.
The KOP16 post included the middle pyramid option. . multiple different entry signals.
In today's KOP10 study we'll look at the risk reward of all 3 options. . . top to bottom.
While the % profitable is almost identical across the models, what does vary significantly is the max intraday drawdown. It should also be noted that pyramiding also requires an increased capital commitment since multiple positions are held before exiting on a common condition.
The difference in max consecutive losers, both long and short, is only 1 between the first two models, while the equity gain is 50% over the original model using 25% more frequent trades.
Max intraday drawdown, however, also increases 50% and this is the added risk.
Where things really get exciting is with the third pyramiding option turned on.
This model squeezes 5 times the gain out of the system where compared to the no pyramiding model and yields a whooping $62K net gain over the same test period on 719 trades (a bit active).
But. . .and this is a big BUT, there are few traders who would put their own money into such a system and for good reason.
First is the max drawdown. . .close to 10K, which is a lot to watch slip away and trust that things will turn out for the better in the end.
Second in the max consecutive losers versus winners which run 1:3 for the longs and 1:5 for the shorts. These aren't great odds in my book and ,although the allure of a $62K gain is enticing, this is a risky way to trade as the model tends to add to losing positions with different entries until the first exit signal appears.
If we just focus on the short side of the lower model, the results look more attractive as they almost mirror the total return of the middle model using the same number of trades.
However, the max intraday drawdown (2.5K) and the consecutive winners/losers ratio (1:5) still favor the middle model for my money.
That being said, the tactic to increase overall equity gain would be to increase position sizing in the middle model rather than buying the risk inherent in the last model.

TS2000i code for KOP10 shown below:

Condition1 = PercentR(7) Crosses Below 95 and RSI(Close,2)Crosses Below 87;
Condition2 = PercentR(7) Crosses Above 20 and RSI(Close,2) Crosses Above 18;
Condition3 = RSI(Close,2) Crosses Above 20;
Condition4 = RSI(Close,2) Crosses Below 95;
Condition5 = RSI(Close,2) > 90 and CCI(8) > 98;
Condition6 = RSI(Close,2) < 32 and CCI(8) < 32;
Condition7 = RSI(Close,2) > 78 and CCI(8) > 86;
Condition8 = RSI(Close,2) Crosses Below 86 and CCI(8)Crosses Below 86;
Condition9 = RSI(Close,2) < 28 and CCI(8) < 20;
Condition10 = RSI(Close,2) Crosses Above 21 and CCI(8)Crosses Above 23;

If Condition2 OR Condition10 Then Buy at Market;
If Condition1 OR Condition5 OR Condition8 Then Sell This Bar on Close;
If Condition6 Then Buy This Bar on Close;
If Condition3 OR Condition9 Then Exitshort This Bar at Close;
If Condition4 OR Condition7 Then Exitlong This Bar on Close;

Red Monday

A number of volume records today, with the Qs building downside volume and momentum early on. Is this the awaited selloff? The only problem with that theory is the lack of rebound into the close, althought the Qs have recovered a little bit after hours. Typically the markets exhibit at least a hint of a reversal at the bottoms and that was not the case going into this close. Did I mention in the previous post that I was expecting volatility to expand this week. That might be a bit of an understatement, with the VIX jumping over 6 points today.
Below the NYAD and the reason that long positions today were a risky bet. When it starts at .o4, that should be a solid clue that this gap down might not fill.

Being the perennial optimist that I am and with several of the Dirty Dozen systems firing BUY signals, I went long the Qs Oct OTMs 15 seconds before the close.

Weekly Pivots Update

Above is the rolling update of the weekly pivots study. As predicted in last week's post, a contraction in the Qs range developed, and in a dramatic way.
As mentioned in a previous post, I've added some metrics to the pivot charts in order to get a better view of whether each ETF is experiencing range expansion or contraction. Our goal is to develop some objective criteria that will determine if that contraction or expansion is in mean reversion mode or if a trending mode is building.
To those ends I've added a data row that defines the absolute vale of the R1-S1 range, a data row that calculates that range as a percent of the PP in order to equalize the magnitude of the range relative to the price of the underlying, and a % delta row that expresses the % change in range from the previous week. Keep in mind that these values are percentages, so 100% equals no change, and 50 equals a reduction by 50%.
Looking forward to the coming week, the lowest volatility (% delta) is now the Qs, which stands at only 47% of last week.
Last week saw the Qs R1-S1 range increase by 324% to 4.40, but this weeks range is only 2.05, thereby opening the possibility for renewed expansion.
At the same time, the IWM % delta has fallen from 135 to 83. . . a substantial decline.
While XLE and XLF also continue to display mean reversion behavior, the events of IKE and Lehman are likely to sponsor volatility expansion in those 2 ETFs this week.
The weekly pivot study is an ongoing work in progress and I plan to collect data for at least 2 more weeks before initiating the tracking module. This time lag will give me time to develop and test the background TS code and, hopefully, produce a preliminary working model by early to mid October.

KOP 16

Based on emails that I receive, the Kit of Parts (KOP) concept has a few readers confused, so this is an attempt to clarify some issues.
The KOP uses multiple entries and exits as conditional either/or orders.
Trades will execute if any of the entry signals trigger (entry pyramiding turned on).
Trades will exit when the first exit condition signal triggers.
Performance of the KOP can be "tuned" by adding or deleting entry and/or exit conditions.
Above is a exploratory KOP using signals from the Willams %R study, the Grand Slams and Cheaphooker.
The resultant KOP16 system trades over once a week and has any average holding time, long or short of 4 days.
The system focuses on support/resistance of the RSI, CCI and %R.
This is a trading range system.
KOP16 is designed for IWM only.
Results on any other index will be different. There are no inputs, and hence, no variables.
The equity curve is fairly impressive, although no stops have been applied. A breakeven floor stop will improve performance a bit and you're always encouraged to apply your own favorite stops.
For further testing ideas, I can easily imagine a KOP comprised solely of stop conditions. TS 200oi code is shown below:

Condition1 = PercentR(7) Crosses Below 95 and RSI(Close,2)Crosses Below 87;
Condition2 = PercentR(7) Crosses Above 20 and RSI(Close,2) Crosses Above 18;
Condition3 = RSI(Close,2) Crosses Above 20;
Condition4 = RSI(Close,2) Crosses Below 95;
Condition5 = RSI(Close,2) > 90 and CCI(8) > 98;
Condition6 = RSI(Close,2) < 32 and CCI(8) <32;
Condition7 = RSI(Close,2) < 32 and CCI(8) <32;
Condition8 = RSI(Close,2) > 78 and CCI(8) > 86;
Condition9 = RSI(Close,2) Crosses Below 86 and CCI(8)Crosses Below 86;
Condition10 = RSI(Close,2) < 28 and CCI(8) <20;
Condition11 = RSI(Close,2) Crosses Above 21 and CCI(8)Crosses Above 23;
Condition12 = RSI(Close,2) > 98 and CCI(8) > 98;
Condition13 = DayOfWeek(date)=2 and Close < Average(C,10);
Condition14 = BarsSinceEntry = 16;
Condition15 = DayOfWeek(date)=1 and Close > Average(C,12);
Condition16 = BarsSinceEntry = 14;

If Condition2 OR Condition11 Then Buy at Market;
If Condition1 OR Condition5 OR Condition9 OR Condition15 Then Sell This Bar on Close;
If Condition7 OR Condition13 Then Buy This Bar on Close;
If Condition3 OR Condition6 OR Condition10 Then Exitshort at Close;
If Condition4 OR Condition8 OR Condition12 OR Condition14 Then Exitlong at Market;
If Condition16 Then ExitShort at Market;

Following the NYAD

Yesterday's S2 - R2 swing in the Qs was picture perfect and exceptional for the range. I've previously mentioned benefits of monitoring the NYAD (NYSE advance/decline) in conjunction with the major indices, and the value of the NYAD can be demonstrated above. The 3 Finger study displayed the relative alignment of index behavior and I typically rely on the NYAD not only to confirm trade signals, but, perhaps more importantly, to keep me out of premature exits . . . which I am prone to execute as I scoot away from risk. The trick, of course, is to determine what's a pullback and what's a reversal. Although many scalpers prefer to just exit on 1 minute bar ADX reversals and then re-enter when (and if) the 3 or 5 minute bar trend rekindles, I'm more inclined to just follow the 5 minute bars, avoid the whipsaws, and exit of the alignment of the parabolics trigger, an RSI crossover and a NYAD reversal.
I've also found it's helpful to watch the action of the 8 and 16 MAs on the NYAD and frequently use the crosses for mid-day entries or exits. While the NYAD will seldom have the width of range of the indices and the slope of the NYAD is typically only a fraction of the indices, this is an important tell for what's really going on with market dynamics. Best monitored with a good vertical aspect in order to detect the signals.

A Pause on 911

Cucca sent me a few dozen golf balls blessed by his local Mormon bachelor farmer neighbors, which I have appreciatively called "Beaver Balls" in respect of Cucca's locale. I took the opportunity to try out a few today at the Camp Pendelton Marine Memorial Golf Course, where I sponsored and joined 2 Marines in a little Marine/Navy R&R tournament.
Lest we forget, these are the guys on the firing line. . .men who have seen and heard things that most of us would find hard to imagine . . . and find even harder to experience and then come away sane. If you think trading is scary, you should try walking a few miles in those boots.
With 4,155 service personnel killed to date in this war and 30,244 wounded, these men risk their lives every day in a truly frightening and threatening environment, where the possibility of painful and bloody death, or crippling or disabling injury is very, very real. That they can retain a sense of humor, wit and playfullness is testament to their courage and commitment.
In a war costing $350 million a day in direct costs and probably another $300 million a day in indirect costs, the financial consequences of this ill-conceived debacle will be borne by generations. The psychological, emotional and mental health costs to the participants in this conflict and their families will likely be beyond measure.
I was honored to be able to share a few hours of golf and conversation with these Marines.
My hat's off to them.

What I'm Workng On

I'm back. . .kinda. I still have some loose ends to resolve and at the same time I'm trying to get my trading goggles back in focus and my frame of mind back in the groove..

I've resumed work on the Kit of Parts (KOP) project by expanding the scope of the pivot study to include XLE and XLF. I've also added some metrics to the weekly pivot range delta, which will become data inputs in the final version of the code package. The plan is to upgrade the forward looking pivots following each Friday close and then review the resultant %range and %delta in conjunction with the slope and channel mean of the linear regression (30)study. The goal is the identification of high probability mean reversion candidates over a 3-5 week time frame, which is the reason the study uses weekly bars in lieu the typical of daily bars.

An integral goal of the KOP is the creation of an Excel-based toolbox that can used to objectively assess the relative probability of mean reversion targets.

Although a working theory of the project is that it will have fractal properties, that is, applicable to daily or 60 minute bars, I'm deferring any research in that area until the KOP is shown to be reliable on the weekly bars.

I'm using XLE and XLF in conjunction with the Qs and IWM as their options share common traits of high open interest, multi-exchange participation, good daily liquidity and .01-.02 bid/ask spreads on most of the strikes. Since the immediate focus of the KOP study is the use of butterfly positions to create a revenue stream, these traits are critical. Most brokers will put on 3 legged butterfly trades for one commission. My experience is that, when placed as limit orders in high liquidity option markets, market makers will typically work the orders to give you a fill within a penny or two of the order limit. A little oversight may be required as part of the order execution, but in many cases the orders will float through without adjusting the limit size. I'm using butterfly positions because the risk is fixed and the trades can be setup with a defined risk/reward ratio. . .with a target minimum of 1:3. Although it's possible to set up zero or near zero butterfly debits, these are typically not high probability situations. The KOP goal is to identify the higher probability scenarios.

The ETFs I'm using are for demonstration purposes only based on the traits I've mentioned above. As we move forward with development of the KOP, I suspect that a few of you will have suggestions for screening criteria that may enhance performance even further.

Speaking of enhancing performance, Dr. Brett has started an ambitious series in which he will explain all about systems trading, culminating with his presentation of a real trading system, all of which will be captured in a free ebook format. Since the Doc is a self-confessed discretionary trader, this is something of a swing in his approach and I look forward to following the series. His system will trade a basket of ETFs, no doubt as a means to dilute risk. My only concern with this approach (NOT A CRITRICSM!) is that it will require a substantal capital outlay in order to mimimize the effect of multiple commissions. As Cucca says . . . we shall see.

Tip of the hat to the Doc for mentioning my Grand Slam system.

OFF

I'll be off line for a couple days, but should be back Wednesday.

Qs & IWM Weekly Update

Above is the rolling update of the Qs & IWM weekly pivots. I've highlighted the weekly range in yellow on the pivot scale to get a quick visual on how each fared this week. Clearly, the IWM held ground much better than the Qs. Whether that weakness was all DELL driven is doubtful, but it certainly was a catalyst. Looking forward into next week's action the PPs have dropped a couple notches and a test of the March lows seems like a strong possibility.
Here's an interesting situation:
Last week Qs pivot range R4-S4 = 8.16; IWM R4-S4 = 23.76
Next week Qs pivot range R4-S4 = 25.86; IWM R4 -S4 = 32.16
This is true volatility expansion, with the Qs delta from PP to S1 now just about 3X that of last week.
Above is the 3 linear regression study (30,11,3) of the Qs daily and weekly bars.
For the week, the Qs were off $3.66 or 7.8%. That's the widest range weekly down bar all year and now that the Qs have broken through mid July support, things could get dicey. All the mid-panel daily indicators are solidly oversold, but the weekly chart is showing the probability of more of the same to come and is in a basically neutral mode. The lower LR30 channel support band is pegged at 41.77, which is S1 for the week.

Compared to the Qs, IWM looks almost bullish, with both the daily and weekly mid panel technicals chattering along on a neutral track. The caution here is most obvious on the weekly chart as IWM retraces through LR30 upper channel resistance. If things do get ugly next week and IWM starts to slide, the first target to the downside will be the LR30 mean at 68.83, a half buck below S1.

I expect the Qs pivot range to be significantly narrower next week, as the expansion demonstrated last week was extraordinary. As such, my focus will be on selling premium at every opportunity. With 14 days until expiration, I would normally expect premium decay to start accelerating in the OTMs and the dramatic jump in Qs put premium last week has only added support to my focus on the Qs next week. We shall see.

See Homer's expression for reality check

A just plain dismal day, with the NYAD giving absolutely no sign of imminent relief in the selling.
Although the daily charts of the Qs and IWM look strikingly similar. I did notice one odd situation in relation to the weekly pivots.
(For those who haven't noticed, I've added the weekly pivots for the Qs and IWM in a panel on the right side of the blog and will update on a weekly basis for the foreseeable future.)
The Qs closed today at 43.67. . . a few pennies below S3.
IWM closed at 71.82. . . about 25% above the S1/PP pivot interval.
Despite the swoon today, for the week IWM is showing considerable relative strength.
That strength was demonstrated in the last hour of the day with IWM upslope for all but the last 5 minutes, while the Qs flashed a hairy top for the first 3 5 minute bars of the last hour and then turned downslope for the last 35 minutes into the close.
Long IWM, short the Qs is the current trend.
Let's see if that holds tomorrow, or if we get a reversal and a return to parity on the pivots.
I'm currently long the Qs (options) at the close in anticipation of at least a modest relief rally.

The Butterfly Catcher

The Butterfly Catcher template was inspired by an article by Mike Parnos in the Dec 2007 SFO magazine called The Butterfly Net. You may have to log in to access the article. There's a number of clever ideas here and well worth your reading time. Subscriptions are free, and as I've noted before, the magazine's usually chock full of practical trading ideas. Since it's copyrighted material, I can't reprint any portion of the article here. There is also an error in Mike's posted worksheet that has been corrected in this template.
The concept is to use spreads (here debit spreads) to capture potentially big gains with a minimal fixed risk loss. The setup can be deployed both directionally and non-directionally, depending on your view of market momentum.
This is another component of the larger Kit of Parts system I mentioned yesterday, and does require the trader to manually enter option strike, price and quantity. There is probably option trading software available that optimizes these parameters and kicks out ready-to-execute orders on the trading platform. Being a troglodyte however, I'm not aware of them but, if you gentle readers, are aware of any, please post as a comment for others to consider.
If you'd like a copy of this EXCEL file, or yesterday's pivot EXCEL post, email bzbtrader@aol.com with "butterfly" and/or "pivot" in the subject line. I'll be happy to send them out. My workload is fairly heavy these days, so if you don't get a response until this weekend, I'm just a little behind.

Weekly Pivots

Here's a little pivot calculator that's part of a current study I've been playing with, although full code for the system probably won't be completed until October. The calculator is another component (like the 3 Fingers system) of my systems trading toolbox that may get deployed depending on whether markets are trending or in a trading range . . . a theme Cucca has been investigating recently using some of my earlier studies as baselines.

The goal of my current study is to produce a modest month to month risk-controlled revenue stream using straddle, strangle and/or butterfly positions. The system focuses on non-directional tactics and is as much concerned about risk management as profit potential. For comparison purposes I'll look at both the Qs and the IWM using weekly bars . . . with the pivots defined for the coming week based on the stated date. This two prong pivot approach will also be used for a future pairs trade study.

Basically, the study uses the weekly bars' fringe pivots to manage the risk of selling OTM puts and calls, and riding the positions to expiration. This is a risky trading strategy, as losses are theoretically unlimited, and you need specific broker approval to trade this way.

I'm not encouraging anyone to trade this way. I'm counting on you to develop your own trading variations to capitalize on market probabilities the system may present.

Over the next few weeks, I'll post portions of the system, as a "Kit of Parts". . . a concept I mentioned in the 3 Finger study. All components are exploratory, so they may or may not end up in the "final" version of the system.

You, gentle readers, are always encouraged to tweak the code, assumptions, parameters, time frames, etc. to accommodate your own trading focus and bias. Suggestions and comments are always welcome, and those that have come in over the past 2 weeks have been particularly insightful, reflecting a spirit of teamwork learning. And that's really what this blog is all about.

You can access a full version of the pivot calculator on line here, a site I have no affiliation with. I've changed the format a bit and saved as an EXCEL worksheet for use in other applications. There are several different ways to calculate the pivots, and you can view the calculations on the above site. The above values reflect the "Classic" model.