Thursday, July 31, 2008

CCI cucca popper

I looked at the CCI indicator in a previous post exploring technical behavior of the VIX:

Based on yesterday's RSI system improvement using a conditional MA suggested by Clueless, I decided to test the same concept on the CCI. The results are very impressive and I actually favor the CCI model in lieu of the RSI model.
Here's why:
Both the CCI and RSI generate approx. the same number of trades.
The RSI produces about 18% more total gain than the CCI but, and this is big . . .
The max drawdown on the CCI system is 50% of the RSI system.
The largest losing trade and the average losing trade on the CCI are 25% of the RSI system.
Max drawdown on the CCI long trades is 25% of the RSI system.

Although the CCI system generates a lower overall return, it does so with considerably less drawdown risk using no stops. The CCI system as presented clearly favors the long side trades and a continuing area of research is improvement of the short side trades. This may be accomplished by varying the entries/exits triggers based on the open/close and a number of other variables.
The goal is to keep the system as simple as possible, while generating consistent returns.
Here's the TS2000i code to use for further testing. As noted in yesterday's post, there's some variation in verbiage when transposing to TS8 format.
Anyone caring to share those nuances, please submit as comment.
TS sets the range of the CCI at -100 to 100. Other platforms using the CCI indicator may use a default range of -150 to 150 or 0 to 100. Make sure to check the embedded CCI range before testing the settings noted here or your results may be substantially different.
Also as noted yesterday, further testing on a fractal time frame is required to confirm the robustness and reliability of the system.

Wednesday, July 30, 2008

RSI Cucca Popper

Clueless suggested adding a 50 MA confirmation condition to my RSI2 popper system.
Here are the results for IWM on daily bars, and the results are pretty impressive.
The first observation is that the 50MA is not optimum for IWM for long entries. . .that number turns out to be 25. The 50 MA, however, works great for the shorts.
Various ETFs, indices, stocks, etc. have different cycle periods, so performance can best be optimized by adjusting the MA confirmation for each equity of interest.
Adding a conditional MA entry knocks down the total number of trades over the 5 year test period by 50% to yield approximately 1 trade a month.
Addition of conditional entry clauses will typically reduce the total number of trades generated by any system, while addition of conditional exit clauses (like stops) will typically increase the total number of trades. . .sometimes called false starts.
Clueless mentioned the drawdown issue with these simple systems and his point is well taken. The intraday drawdown, especially on the long side of this system, can easily test a trader's nerves and, as a consequence a stop loss is always advised, even if it does produce a few false starts.
The average hold time for the longs is 8 days, which corresponds to our tests of the original RSI2 popper2. Clueless further suggested focusing solely on the long side trades, and based on the differential equity gain between the longs and the shorts, this argument has merit.

As suggested in previous posts, in lieu of trading the actual stock based on the signal, an option strategy can be deployed that reflects the momentum bias projected by the system . . . and this is the way I prefer to use most of these technical studies.

Here's the TS2000i code for you system testers. Easily transposed to TS8 although the verbiage for the exit signals is somewhat different.
Further testing now needs to conducted on various intraday time frames as well as my stable of the usual ETF suspects to confirm the system's potential.

Tuesday, July 29, 2008

Systems update

Is there an advantage is what you trade? Or the timeframe you use?
Here's a test comparing DIA, IWM, QQQQ, SPY and XLE using some of the systems I've explored over the past few weeks:
RSI and short component
Stochastics (STO) and short side
STORSI and short side
816 cross and short side
All tests cover 500 back bars and the precise settings are defined in the system name. No stops are applied.
I've used Elder's 1:6 fractal timing model and tested the data in 10 & 60 minute and daily bars.

One variable to consider is the price of the underlying, since this will affect the true risk/reward. With SPY at 127, DIA at 113, IWM at 71 and the Qs at 45, the results for the Qs look a bit more attractive. I could normalize all these values for a better comparison. . .and will do so in future tests. I also favor the win/loss ratio offered by the Qs, as I like the odds in my favor when I plunk my money down.
The XLE test below also offers an attractive risk reward, and as suggested in previous posts, a likely jumping off point from this initial research is trading the best ETF or ETFs with the greatest technical alignment to a multiple strategy test such as those listed here. This is a different approach to trading than applying a single strategy to a basket of stocks. Here we are trading a single ETF using a basket of strategies.
In future posts I'll look at potential screens for ETF trading candidates using volatility, daily ATR and volume, as well as a few non-traditional technical alignment criteria.

Monday, July 28, 2008


So how's this for premium? 15% return for 19 days. With WM at 3.90, a simple ATM buy/write on WMHH will get you there. What's the downside? Well, WM could be the next IndyMac and the stock could go to zero. . .but in the next 19 days? You be the judge.
Meanwhile, put premium is up in smoke. The TH puts closed at .87 on Friday and opened today at .68 (hypothetically .86, but no retail trader got that print) with WM up .20 on the open. That's what we call weekend premium decay.

Making sense of the markets

This article was the 2003 DOW Award winner but it's just as relevant today as then.
Tip of the hat to Ron Surz of for sharing this nugget.

Sunday, July 27, 2008

Qs weekly update

Qs up .68 or 1.5% for the week. DIA down 1.5%, SPY down .4 % and IWM up 2.6%.
As predicted last week, the IWM outperformed the Qs (and the other majors) although IWM currently showing short term technical weakness.
Approaching the new month bullish mode although the first 2 days of the month surge system has not been a recent winner.
Qs are showing consolidation at the 45 level, both on the daily and weekly charts.
No surprise. . .divergence of the mildly overbought daily and the mildly oversold weekly technicals. A significant reduction in volume of the past week in the Qs may reflect skepticism about the markets in general, or it may reflect a rotation of focus to XLF and the financials (for example, WM traded a record 335M on Thursday). A50 mildly overbought although the 200 DSMA looks like the next resistance level now that the 20 DMSA has turned upslope.
A200 briefly kissed the 200 and 50 DMSAs this week before the Thursday drop. Currently the A200 looks technically neutral but, as with the A50, the 20 DMSA is hinting at an upslope, and if it goes the Qs could repeat the Qs cycle to 50.
Confounding the probability for such a rise is a deteriorating economy, a housing foreclosure rate that is unlikely to abate in 2008, increasing unemployment, guidance lower by many recent earnings reports and a financial system rife with profound fundamental problems that are not likely to be remedied any time soon. Its popular to say that the markets climb a wall of worry, and frankly, there's a lot to worry about these days. I've added the NDX McClellan oscillator update this week since quite a few market technicians regard it highly. Currently coming off extreme overbought levels, the implications are bearish.
Hey!. . .nobody ever said trading based on technical analysis was easy. I've got a few ideas on the NAMO and I'll look at those Monday.
Posting next week will be light as I'm running a series of studies that will require much of the time I otherwise devote to blogging.
Glad to be in cash. Good luck out there.

Friday, July 25, 2008

RSI update and the STORSI

For comparison purposes with the Clueless20 and the 816 cross, here's my little RSI cross system looking back 500 bars. Considerable fewer false starts, but as there are no stops the open P/L is a bit frightening.
The system works particularly well with the IWM 10 minute and daily bars and, as I favor the IWM in lieu of the DIA or SPY for daytrading, helps explain my high regard for the RSI.
Here's the same data set using a indicator Schwab calls the StochasticRSI, which is an algorithm that blends the the Sto and the RSI signals and smooths out a lot of the peaks and valleys.
The positive effect on the open P/L is fairly impressive and delivers strong overall results.
The RSI and STORSI have a similar trade frequency although the RSI system delivers a more robust performance over this ETF test basket.
I couldn't find the STORSI in TS 2000i. . . if anyone using 8.3 can locate it in the current TS repertoire, please let me know. AdvancedGet offers a detailed STORSI, so E-signal users should be able to test it. Other platforms may also offer the STORSI, but I don't have a list.

Thursday, July 24, 2008

The 816 cross

Boy, that Clueless!. . . now he wants to add entry conditions to the Clueless 20 system. Okie, dokie little buddy. . .on the way. In the meantime, I ran this little test yesterday before Clueless changed horses and suggested a 8/20 cross based on John Carter (with whom I'm not familiar).

I frequently employ systems using 8 or multiples thereof as those systems seem to have an uncanny ability to produce a trading edge. Based on a few thousand hours of testing here's a couple keepers that you can set up on your own. . .my gift to you:

An 8 period ADX on 1 minute bars to use as an EXIT signal: incredibly reliable for scalpers using 2 to 5 minute bars. Exit when the ADX goes from 45 degrees up to 45 degress down.

A channel composed of the 8MA of the high and an 8 MA of the low. Set it up. . .and use in 5, 10, 60 minute and daily bars. Can be used for reliable entry and exit signals, especially for 11:30 AM (PST) breakouts on 5 minute bars.

And then there's this little crossover system using the 8 and 16 period MA in various time frames. I find a straight 1:2 ratio produces the most robust results for index based ETFs as well as XLE and XLF.

As usual, no stops are applied to the 816 system as published, but if there's any interest in pursuing the system in more detail, I'll test some entry conditions and stop loss options in future posts.

Wednesday, July 23, 2008

Clueless 20

My buddy Clueless mentioned a simple system yesterday that bought the cross above the 20MA and exited on the 20MA cross down (I think that's what he meant).
Since I have a lot of time on my hands I tested the system on my little ETF short list both long and short using the 20 MA on the 10 and 60 minute and daily bars over the past 500 bars. The results are shown above.
As suggested, the system does have considerable whipsaws and although a simple stop loss will help control drawdown, the number of false starts will also increase. In every case except 2 the system made better money (sometimes much better money) than a buy and hold strategy. Worth a closer look.

Tuesday, July 22, 2008

The Costanza Problem

These are particularly difficult times to be trading. Within the last two months 2 of my long time trader buddies have managed to blow out their accounts and have decided to pursue other paths. The collateral damage to family relationships, general health and mental attitude is often substantial and underestimated in situations like this as "risk capital" devoted to trading may really have been earmarked for more important functions. I am deeply saddened by these recent events as the fallout is typically not resolved quickly or without considerable anguish.

In both cases the traders had more winning trades than losing trades. In both cases the problem derived from the fact that the losing trades were substantial and they failed to cut their losses or go market neutral when the opportunity arose. I find this weakness in my trading also and am constantly working to correct it. One way to deal with it is to auto trade, where stops and exits are applied automatically, thereby removing the component of subject emotion. This tactic has its pitfalls also as it involves a leap of faith that most traders are unwilling to make.

I was stunned to hear these reports as I respect both men immensely both as traders and really nice guys. One of the traders, "J", said that as he looked back over his trade journal he realized that his main problem was a failure to deal with "The Costanza Problem", an issue I described in an article that I wrote a few years back for a trading symposium.

As a cautionary note to other traders, portions of that article are repeated here:

The Jerry Seinfeld sitcom often featured George Costanza, a character who was a serial loser by his own admission. George was frequently unemployed for long periods of time and was forced by his poor financial situation to live with his parents whom he found every opportunity to denigrate and demean. Although George tried almost every job imaginable, he always found a way to get fired, often under embarrassing (and hilarious) circumstances. His personal relationships and his professional pursuits were a series of unending blunders. George’s inability to make either personal or professional commitments doomed him to a world of constant conflict between Relationship George and Independent George. As George was fond of saying, "A George divided against himself can not stand”.

George was a comic success because of his personality quirks, but a deeper analysis of his multiple character foibles provides an insightful look into the types of behavior and attitudes that can help traders succeed.

While George frequently acted like the poster boy for deviant behavior, he was merely displaying an over the top version of many of the negative traits that traders must avoid in order to become consistent winners. Failure to be honest with one’s self, lack of training, lack of a professional attitude, lack of self-discipline, lack of patience, lack of focus, poor capitalization, poor planning and/or the inability to formulate and follow a plan are all examples of self-destructive behavior that traders must overcome.

In a particularly watershed episode George experiences a glorious epiphany that everything he has ever done in his life has been wrong and that to rectify his failures and now become successful he must behave exactly opposite to the way he has behaved in the past. George undergoes this realization while in a cafe and immediately approaches to the back of a very attractive, apparently unattached blonde perched at the bar. Completely contrary to his usual attempts at gaming and self-deception he openly declares, “Hi, my name is George, I’m unemployed and I live with my parents”.

The anticipated result of this encounter is, of course, that the blonde will turn away from George in disgust and disdain. But with an inviting smile she turns to George and says, “Hi, I’m Victoria, it’s so nice to meet you.” It is in this moment of brilliant clarity that George ceases to be divided against himself and presumably later reaps the benefits of his new persona off camera with his new lady friend.

In like manner, a mantra for traders might be, “A trader divided against himself cannot survive”. How can a trader formulate and effectively utilize a unified mindset and attitude that will enable him to emulate George’s awakening and trade with calm, clarity and consistency? The ability to successfully answer this question is fundamental to a trader’s longevity and the shape of his equity curve.

The very nature of trading requires participation in a dynamic, probabilistic and opportunistic environment characterised by uncertainty and risk. At the same time trading is a zero sum game and utterly impersonal. Other traders have no regrets about taking your money and eating your liver for lunch, presumably with some fava beans and a nice Chianti.

There are always unknown forces and traders operating in the market with diverse goals and strategies that may not be logical or probabilistic according to your perspective. If you believe anything can happen in the markets then you will always be right.
In addition, Murphy’s Corollary usually prevails: “Anything” will most often happen when you least expect it or when it is most disadvantageous to your market position.

The real trick is to approach the markets with no agenda other than to let them unfold as they may. If you utilize a quantified trading edge then the laws of probability will prevail over a series of winning and losing trades. If you don’t expect the market to make you a winner every time you place a trade then you will have little fear of losing. Maintaining a clear and focused state of mind is your best tool to help recognise and take advantage of opportunities the market makes available to you.

Once the inherent uncertainty of the market is accepted as fact your success as a trader will increase dramatically. Consistently successful traders develop an almost detached state of mind that treats trading as a probability game because they know with a high degree of certainty what a trading edge looks like and how to determine if it is working, and they have a trading plan to mitigate risk and to define how to take profits and cut losses.

Consistently profitable trading results from acquiring and embracing the tools to master these technical, tactical and mental skills rather than focusing on making money.

Monday, July 21, 2008

Links for bank ratings

Here's a few links to help you evaluate the relative safety of you current bank and
a) get really nervous about your money's solvency, or
b) find the current (disclosed) status of a banking alternative.
and within that site, a great tool that's a little hard to find: safe and sound ratings:
and finally,

The problem with FDIC is that they don't disclose ratings so you have no way of knowing who's on death watch until the funeral.
Bauer and Ambest charge for detailed reports, but basic rating analysis is free.
Bankrate also has a menu of other great financial planning and analysis tools on the site, all free.

Saturday, July 19, 2008

Weekend pulse

Here's Friday's closing ETF heatmap for a quick thumbnail sketch of what's hot and what's not
going into the weekend. This is a useful tool provided free, courtesy of NASDAQ and they also have premarket heatmaps that can help traders gauge the opening tone. Updated every minute.
My beloved Qs are showing their true color by finishing bottom row, 3rd to last.
A post by Big Picture suggests banks have bottomed, but the warm, fuzzy feeling I have about the XLF ended when I closed my long calls Friday. With a slew of banks reporting this week, including a few on near term death watch, like WM, there might be some ugly surprises in store. Although C surged Friday on earnings that weren't as bad as anticipated, that backhanded logic might wear thin this week if repeated enough times. Keep an eye on RKH.

Friday, July 18, 2008

Qs Weekly Update

Closing print on the Qs was actually 44.81 so I don't know what's up with Telechart's quote of 44.59.
Nevertheless, for the week, Qs up .25 or .5%, IWM up 2.4%, DIA up 3.7%, SPY up 1.8%.
Qs were the laggard this week, while the IWM played out its upward surge perfectly, closing on the LR30 daily mean bar for the week (and showing the most potential for an extended run).
Interestingly, both the A50 and A200 are now reading 28 and both succeeded in crossing and holding above the 20 DSMA.
The A50 is looking a bit more overbought than the A200, but checking out the MACD, both are upslope on the zero line, which historically has provided at least a couple carry through days before any reversal.
The big driver for the markets next week will, of course, continue to be earnings as we swing into the heart of reporting season and this backdrop can produce a volatile mix of fundamental and technical signals.
Of note today, XLF volume was exactly one half of yesterday's record, which is probably an indicator of something important. . .or maybe just trader exhaustion.
I'm currently flat again, having exited my August XLF and IWM long calls ahead of the weekend. I was caught off guard by the accelerated premium decay in the August XLF calls today as volume and volatility subsided, but managed to book a few pennies in the green.

Thursday, July 17, 2008

XLF volume record

Big day for the XLF with a record 527M shares. Of technical note is the fact that the Fs failed to get above the opening follow through highs, although it made 2 pretty good charges in the afternoon session on dwindling activity after the early morning volume surge.
As noted in previous posts, the XLF also has pivot envy and today's action was a fine example.
The NYAD was almost a perfect mirror of XLF price action except for the closing hour, but with so much XLF volume that should come as no surprise.
Both the Qs and the IWM are looking a bit toppy after a couple of good days and the lack of convincing follow through in the XLF may also be a harbinger of a Friday fade down. MSFT, MER and C earnings will be momentum drivers for the near term, and as evidenced by INTC's delayed takeoff after earnings, initial market response may not be the most profitable path to follow.

Wednesday, July 16, 2008

Relief rally and RSI2 update

Markets went up today. . . the only bad news was the lack of convincing volume. Yeah, the VIX spiked to 38 at the open, but that's not exactly the exhaustion pattern I was looking for. How much of today's action, especially the closing hour, was short covering?. . . we'll find out quick enough and with a slug of earnings coming out tonight and Thursday, we could see a substantial retracement if the reports are grim to pitiful.
On the systems front, the RSI2 models for the Qs and the IWM are now on a BUY as of 11am today, and recalling our test model, best results derive at 6 days holding for both systems, so mark it on your calendar. I'll be posting a revised RSI2 model soon with performance results for a number of stop types, but that probably won't be until next week as I'm focused on a few other things for the remainder of this week.
Wednesdays tend to be pivot high days, so that's a bit of a caution to keep in mind.

Running around our 4 square daily Linear Regression study charts. . .
The Qs continue to hug the lower Lr30 channel
The XLF avoided kissing the channel goodbye and has now risen to LR30 mean resistance mean, which is kind of a make or break level.
The IWM is enthusiastically headed back to lower LR30 channel support, having kissed it goodbye in early July. The IWM performed almost 40% better than the Qs today and continues to be a focus of my daytrading attention as I believe it offers a better risk/reward than the Qs (at least until the lower LR30 channel becomes support again rather than resistance.)
And finally the DIA, managed to climb back to close at the LR30 mean, which has provide overhead resistance for the past 3 weeks.
In the mid technical panel all the indicators are bullish in all 4 charts, so the path of least resistance at this point is a continued rally for a few days unless, as mentioned, torpedoed by a flood of bad earnings.

Tuesday, July 15, 2008

Pivot envy

I was gone for most of the day, hitting the ball around the links and managed to card a respectable 83 at Woods Valley. Not bad for an old guy. The temp was 81 when we started at 10:30 and 99 when we finished at 2 pm. Whooee! That was pushing the heatometer.
Oh yeah, the markets. Almost forgot. I said I'd be playing it light this week and my preference for golf over trading is showing through.
I keep yakking about the power of pivots for guiding intraday support and resistance targets, and today's action was a walking testimonial for that argument.
It just doesn't get much better than this as the pivots started the day by collapsing to S1. . .
Followed by a failed rally (see yesterday's post and squat bar comment)
Then a plunge through S1 at 9:50
Which increased the probability of a decline to S2
Then a quick kick off S2 10:05-10:10
Which increased the probability of a pop up to S1
But the solid, big volume break through S1 at 11:00-11:05 argued for a continued pop to PP.
The low volume pullback S1 probably shook out the S1 stops,
But the big volume wide range bar at 11:50 was a sure signal to get long or get long again.
The Qs dithered around the PP for most of the afternoon session before the breakout at (no surprise) 14:30, when it ran up to R1 on unimpressive volume before retracing down to PP, and then, on a big volume bar dropping through PP to end 38% below PP for the day.
I won't delve into the correlation between the pivots and the parabolics, but a cursory study of this chart will show how these powerful indicators work in sync and why daytraders should monitor them throughout the day. . .

Monday, July 14, 2008

Monday open gap fade

A picture perfect gap fade this morning at 9:38 as the Qs made a lower low off the previous little 2 bar squat. The action in the NYAD was the clear confirmation we were coming down.
The PP provided a clear first downside target, and the Qs got there in a record time of 20 minutes.
Since I've got several things to do today away from homebase, I closed the position at 10:04 as the Qs reversed back up through the PP. We'll probably go up 100 points today, but I'm flat and done for the day.
Net time in trade: 9:38 -10:04 = 26 minutes
Net gain 44.93 - 44.56 = .37
I would have preferred to play the options in lieu of cash, but I knew I couldn't stick around to finesse the trade exit and with only 4 days till expiration, premium decay intraday on long options can offset any directional gains, and then some.
Why not play the August options? Should have, could have, but in my humble experience the best use of options for daytrading is in the 2 mid cycle weeks of the current contract when premium decay volatility tends to be more muted.

Sunday, July 13, 2008

XLF Update

Here's the 3 linear regression study(30,11,3) of the XLF daily, weekly and monthly bars to help you appreciate the critical nature of the financial sector.
While the XLF continues to ride the lower LR30 daily channel down, the weekly bars have now retraced to the lower LR30 (support) channel per the Jan and mid March lows. From a purely technical standpoint we should expect the XLF to bounce back to at least the channel mean at 20.67, hence my comment on Friday that XLF was a BUY at 18.35, which was the lower channel line.
That being said, my own money on the XLFs is strictly in daytrades as the danger here is the the XLFs will "kiss the channel goodbye" and plummet to new uncharted depths. Although I don't consider this scenario very probable (I think the worst case is a continued slide along the descending lower LR30 channel), I don't want to be holding XLF overnight and get caught in a nasty gap down day of a couple hundred points with the XLF leading the way if we get a few more IndyMacs.
Next week should really add some volatility to the mix as earnings ramp up including Schwab, USB, INTC on Tuesday, WFC and EBAY on Wed, BK, F, JPM, PNC, COF, MER and MSFT on Thursday and C and SLB on Friday.
In case you're still not sweating bullets about the financials, run over to Traderfeed and check out Dr. Brett's sobering post today.

Friday, July 11, 2008

Qs Weekly Update

Friday's action was. . hairy (tops, bottoms and otherwise), to say the least. See my alter ego Homer's expression on the right of the blog for a more precise reflection of today's whipsaw.
Despite the wild gyrations every day this week the Qs closed down only 7 cents for the week. This, opposed to the DIA (down 1.87 or 1.7%), SPY (down 2.44 or 1.9%) and the amazing IWM (up .95 or 1.4%). Can a bottom be far behind with this type of divergence?
An increasing number of technical bloggers have made the case for an impending bounce and today's action sure felt like a one day reversal pattern in the making, but cooler heads prevailed in the closing hour and the risk avoidance selloff took the Qs right down to S1 at the close, only .20 below the open. Better safe than sorry. (see Market Wisdom on right blog panel).
While the XLF 3LRs study flashed a BUY at $ 18.35 mid morning, the Qs still look technically vulnerable and poised for another leg down. With earnings in mid run and "disappointment" the current buzzword, I'm inclined to play next week lightly.
At one point the VIX was up 15% on the day, and typically those big surges get played off for a day or two before a blow off.
Monday might be an important turning point if we do get a redux of today's dynamics.
We're seeing interesting support in both the A50 and A200, with both indicators reflecting the neutral outcome for the Qs this week. Little insight to gain from these charts other than oversold levels have now been absorbed and the contrarian uber oversold argument for a bounce has lost its edge.

Thursday, July 10, 2008

Tracking the pivots

If you've followed me for a while you know I use the pivots as a basic building block for my daytrading. Hairy tops and bottoms at the pivots are surefire tells that a break is coming and wide range bars that blow through pivot lines (especially on unusual volume) are also great tells of coming strength or weakness.
I've also mentioned the value of watching the NYAD (NYSE advance-decline line) and the IWM for pivot signal confirmation and yesterday's action was a fine example of why.
I often gauge the probability of moves by price proximity to the pivots, so when I see a trend suggested by the 10&20 MAs or the parabolics, I put on my risk management goggles and look for the nearest pivot.
Without getting into the details of yesterday's technical action, the moves around the pivots were clearly sloppy and not the typical clean turns on the pivots that occur about 70% of the time. The IWM displayed a similar ambiguous pivot pattern for the first few hours, perhaps reflecting the wariness of traders who listened to all the talking heads the Monday night, saying the worst was over (at least temporarily) and a good rally was beginning. Don Worden of Telechart (whom I greatly repsect) offered such a bullish opinion, and although I was tempted to cough up a hair ball when I read his market prognosis, I held off. (I held off any long positions also).
What yesterday's chart said to me by failing to get to R1, was that the odds of the rally following through were extremely limited.Where the notion of a failing rally really became apparent was by looking at the NYAD, which did make it to PP at the open and then again 2 hours later before beginning a slow, gradual descent for the remainder of the day, closing relatively close to S1, with a swoon in the last 25 minutes. With the 10&20 MAs crossing down at 12:30, prospects for the bulls became very dim.

Even when the Qs don't hit the pivots precisely, the IWM and NYAD pivots provide a great visual tool to help you define probable turning points as well as impending failures of support and resistance levels. If nothing else, tracking the NYAD & IWM pivots should keep you on the right side of the trend and help avoid premature entries and exits in the Qs, which tends to be more "jumpy" than either the IWM or NYAD.

Wednesday, July 09, 2008

Happy Trails

Here's a little different approach to the markets using moving averages. In this case IWM. What I've done here is construct an oscillator by subtracting a moving average (MA) from the closing price. When the close is higher than the moving average, momentum is positive. When the close is lower than the moving average, momentum is bearish. The system therefore uses 2 oscillators - the high minus the MA, and the low minus the MA. If the trend is up the oscillator lows set up BUYS. If the trend is down the oscillator highs set up SELLs.
This system also uses a stop loss ($310) and a thing TS calls the Breakeven Floor amount ($25).
An interesting area for further research would be deploying the system on intraday bars (10 and 60 minute, for example) to test shorter term efficacy.

Although the results are very impressive this system has certain unique characteristics that not everyone will be comfortable with. As seen in the equity curve below, there are distinct flat periods of equity growth. This is because of the break even floor. If the position starts to go against you, it's out. So there are a lot of trades with zero gain. It's only when price breaks out (either up or down) that the system rolls.
When the performance results cite the # of consecutive winners and losers, the numbers are really reflecting zero gain or loss trades as non-losers. A bit of semantics here, but necessary to understand how the system works.

Tuesday, July 08, 2008

IWM Grand Slam

Over the past few weeks I've explored some system trading possibilities using the RSI2. I also looked at the CCI as a viable system parameter and for today's study I've merged the RSI2 and CCI8 into a single system I call Grand Slam2. Both the RSI and CCI signals must be in sync for trades to trigger.
One consequence of this double entry filter is that the total number of trades is reduced. Still, the system manages to enter a trade about every 2 weeks over the 5 year test period, which is the type of trade frequency I'm looking for, if, for no other reason, to gauge the ETF's current position within the support/resistance cycle.
Here's the TS2000i code. As usual, run without any stops. Add a 2-3% fixed stop and/or a trailing stop to further enhance total performance and reduce drawdown. Be prepared to deal with whipsaws created by stops as even the cleverest algorithm has to resolve the inevitable sway of the markets, especially in the ETFs. Not necessarily a bad thing, just something to be aware of and prepared for.
Below, the equity curve. . .looking a bit more consistent than Cheaphooker over the past 10 trades, but really just another way of looking at support and resistance for the same data set.
Of interest to me. . .the length of winning and losing trades is very similar using either Cheaphooker of Grand Slam2.

Monday, July 07, 2008

A lot with a little

Well, today was a gap fade setup pure and simple and the NYAD was the tell to follow to the bank. That, and the wimpy volume on the Qs were signs that the gap up was most likely to fail.I won't review the setup details again. . they are clearly spelled out in the How I Trade panel on the right of the blog.
Today I was feeling a bit frisky and noted the extreme volume in the Qs 42 near puts early on. Being a lazy sort, I figured the big guys knew something special so I picked up a block at .16. Now, just an an aside, I love these kind of plays and have probably made most of my money piling on these setups.
With the NYAD in steady decline after the first 5 minutes and the IWM leading the way down (not shown), I was looking to S1 as a reasonable target for today.
AT 13:00 the Qs made a dive for S1 on the highest volume bar of the day and I decided to bail as the 42 puts (QQQSP) hit .28/.29. I managed to get out a few seconds before the bid dropped to .27 and was thus able to book a .12 gain (75%) over 150 minutes. Only wish I had another 100 contracts, but things are always clearer in hindsight.
The market is still in a strong technical decline and I probably should have left a few of the contracts open to pick up further weakness but I'm done for the day and off to the links. A pick up item on Cheaphooker: (clever, huh?)
Cheaphooker was originally inspired by a weekend carry system for the British pound developed by Joe Krutsinger, the holder of Tradestation license #1 (back when TS was $2000-2500). Joe's been around a long time, is a master system developer and a great teacher and very entertaining speaker if you get a chance to see him (he's been at recent TradersExpos lately hawking, what else?, TS . Here's a little item from him and you can check out more of his products and record here.

Friday, July 04, 2008

Meet the Cheaphooker

A few years ago I explored some of the implications of string theory concepts for trading the markets. Much of my academic background focused on mathematics and logic systems and this area of research, along with fractals and neural networks had always intrigued me. This was back when I had no life and could sit around burning up 6 or 8 hours each evening programming TradeStation code. Pretty pathetic, really.
One result of my humble coding endeavors was a 4 module trading network. While the modules worked interdependently with each other, each module was also a stand alone system in its own right.
Cheaphooker is one basic building block of that system toolbox.
Originally developed to trade SPY within a short term, risk controlled matrix, the first iteration of Cheaphooker bought SPY at 12:45 PST (15 minutes prior to market close) on Friday with a 2% stop loss and then sold the position at the following Wednesday open. (Buying 15 minutes before the close caught the typical fade in the last 20 minutes of the market on Friday's.) The Friday BUY orders were only executed if the SPY price at 12:35 was greater than the 3 day MA. The system only traded long (it was designed to jig the return of IRA accounts) and offered a nice risk reward payout. The system was never in the market for more than 2 days + the weekend and attempted to capitalize on the tendency of institutions to lay off risk over the weekend and the tendency of Monday's to be surge days, either way (hence, 2% stop) and for Tuesday to be a carry over day if Monday's surge up.
Subsequent refinements in program trading and order flow algorithms, as well as other masking and sway techniques, have significantly impacted the dynamics of that original system, but certain variations still perform very well.
The top chart reflects 5 year results for the current Cheaphooker using IWM, an ETF I find has excellent technical alignment with many of the trading indicators and algorithms that I prefer . . .parabolics, pivots, MAs and MACD signal line. . . and the alignment is fractal, meaning that a proximate technical alignment can be achieved on either 10 minute, 60 minute or daily bars.
The big change to Cheaphooker is that the original bought strength. . .that is, if the current price was above the 3 day MA, the system bought. The new version should really be called Son of Cheaphooker and sells if current price is above the x day moving average and vice versa on the buys. So now the system sells strength and buys weakness. The original system only held 2 days + the weekend while the new version can hold considerably longer.
This is the TS2000i code, (pretty rudimentary), and the settings for the 5 year IWM are (2,10,16,1,12,14). This code version runs with no stops, but you can easily add a 2-3% stop loss or a trailing stop to limit drawdown. With 134 trades over 260 weeks, the system enters a trade approximately every 2 weeks, with an average hold time of 10 days.
I provide the code to enable TS users and other system traders to play with and test on other time frames and trading platforms.
These are the results for the IWM for the past 18 months. The optimized settings for this backtest are (2,8,16,5,10,14). Within this shorter test timeframe Cheaphooker still trades twice a month and holds about 10 day average. The number I really like here is the consecutive losers, both long and short = 1. That fits my risk management comfort level very nicely.
Side Note: When I backtest I typically run the variables in increments of 2 to mute the variance. This obviously does not hold for absolute values defining the days of the week: Monday=1, Tuesday=2, etc..
Now the first thing you're going to say is. . . Hey!, the settings are different for 18 months and 5 years. . .you're just curve fitting the data.
This is a valid argument but, what I'm not showing you is one of the other 3 modules that looks at a completely different data set to develop an adaptive factor for the Cheaphooker variables. That module skews both entry/exit days and lookback period based on momentum driven calculations and is specifically designed to offset curve fitting bias.
There are 62 lines of code for that little tweaker and, frankly, there are easier ways to attain similar performance results.
Reflecting the importance of the day of week entry and exit and the hold duration, similar performance results can be achieved using entry filters other than a MA. MACD, parabolics and stochastics can be substituted with good effect.
Nevertheless, when you look at the settings for the 18 month and 5 year backtests, you notice a close correlation of the lookback MA and the hold duration and I've run umpteen standard deviation studies to confirm my comfort level with the system (Hey!, it my money).
Now here's a flash!. . .you don't have to trade the system. You can just use it as a momentum or pulse indicator to gauge where IWM (or other ETFs, indices, etc.) is within the support/resistance cycle. The system also helps you understand what the probable duration of a cycle looks like. This cycle analysis was not possible with the original version, as it was essentially a scalping system.
With this knowledge you can improve your odds of success using options, option spreads and shorter term daytrading or swing tactics. . .that is, fade the rallies or buy the dips.
This is a little different way of looking at market dynamics than I normally do since it's basically driven by time variables . . . and, as they say, timing is everything.
I hope my little discourse here can help you think of ways to refine the basic Cheaphooker concepts to fit your own unique trading style and comfort level.

Thursday, July 03, 2008

Qs Weekly Update

Qs down 1.02 or 2.23% for the week. IWM down 4.8%, DIA & SPY down 1.5%.
Looking pretty ugly out there as the Qs and IWM play catch up to the downside with DIA & SPY.
On the daily and weekly 3LRs study the Qs continue to slide down the LR11 mean and, although clearly oversold, the technicals offer little clue as to an impending turnaround.
The weekly bars 3LRs study is looking very bearish with the technicals all ominously negative and the upper LR30 channel cross (43.11) the next downside target. This is the same target we have been watching for the past 2 weeks and all current indications enforce the likelihood of the cross.
The A50 took another big hit this week and now stands at 10. The descent from overhead resistance has been particularly dramatic this cycle. . .much more so that the November slide.
The A50 RSI continues to chatter along the oversold line, theoretically increasing the odds for a (short term) relief rally that will probably be fueled by frantic short covering.
However,. . . . .
The A200 also displayed an almost vertical descent this week, although it has not yet reached the extreme oversold levels of the A50.
My expectations for the Qs remain the same as the previous 2 weeks and for the overall markets I still believe a washout is coming. I know several technicians have suggested that scenario probably won't happen, just because everybody and his brother is expecting it. All we can do is wait and see. My trading bias continues to be selling the rallies.
Carmer's (utterly misguided) manic enthusiasm for what he saw as a one-day reversal on Tuesday aside, the markets will do what they will do (think . .the sound of one hand clapping) and it's always risky to put too much credence (or money) in anything I say because my feeble brain sees the world through a set of risk management goggles that are uniquely my own.
By now you know my program. . . daytrades only as described on the side panel of the blog, and if you missed the gap fade today at 9:38 to 10:06 (EST), then you missed some quick, easy money.