MLR Updates

If the seams in the market are cracking they are doing so in their own sweet time as Mr. Pietsch so eloquently pointed out in yesterday's comments. Today was a strong day, with only a few reluctant lagers like SMH, which finally joined the party in the last 2 hours.
With oversees debt worries easing EEM rose almost 2%, rising an additional .03 after hours.
XOM was a curious party pooper today. Actually, XOM's been a party pooper pretty much all year. Considering that XOM is a major component of XLE and XLE has risen from $ 47 to 61 in the last year, XOM has risen from $67 to 68.50 during the same period . . otherwise known as flat, so essentially it's been holding the XLE back.
On the currency front BZF staged a nice channel breakout today and now leads the way in our little basket by a substantial margin. Whether it can maintain positive momentum should be demonstrated by Friday's action.
Despite it's drop in the ranks FXC still remains an attractive chart, whereas the yen and the Euro are bearishly downslope. We're finally seeing some weakness in the dollar, a few days after the PDQ Dashboard called for such a move.

Becoming a Trader

I've noticed with some interest a recent spate of scary blogdom articles focused on the current minefield of dangers faced by active retail traders. . . HFT, dark pools, order masking, program trading, prop shop bracket orders, C2C (commercial to commercial ) trading pipelines, and the usual plethora of algo trading games.
Before proceeding further I need to clarify that my own trading timeframe is very short. I prefer daytrading and swing trades of 10 days or less as a means to manage my risk exposure. I also employ longer term option premium decay strategies for a large portion of my account, but these are basically market neutral positions, heavily hedged and yielding a slow but steady rate of return. That's just my comfort level.
Just to put things in perspective I've been trading now for 25 years, with over 35,000 hours sitting in front of my monitors, putting on some 30,000 trades and sucking up about 4000 hours just programming TradeStation code. I've tried most trading platforms and brokers, quite a few of which are no longer in business. I've bought thousands of dollars of trading software, attended seminars, workshops and trade shows and read some 200+ books on trading. I'm old and I'm tired, but I still go at it almost every day for most of the day. And my trading style today is substantially different from the one that I used 2 years ago.
I use a quantitative approach to trading because my education is grounded in mathematics and economics and my brain is hard wired to favor pattern recognition. It's a curse, but I think in algorithms. I pay little attention to fundamentals because I believe price reflects fundamentals, news and sentiment better than any other indicator and there are lots of folks out there with a lot of expensive infrastructure that have access to that intel much quicker than I could ever hope to attain. I've never met a PE that I didn't like.
Recent articles in the popular press (Active Trader magazine, Futures, SFO, and Stocks & Commodities) have noted the failure of many popular trading setups such as naked put selling, trend following, consolidation breakdowns, inside day breakouts, moving average crossovers, MACD zero line crosses, etc.
My reaction . . . So what ???
If you expect market mechanics and market dynamics to remain constant you've got a rude and expensive awakening coming soon. David Varadi had a great timely post on this topic and I recommend every serious trader read it several times. David isn't a daytrader, but the points he makes are salient regardless of your trading timeframe.
Adaptability is the key . . and that implies a willingness to be open to adaptive opportunities. That can translate into finding your own niche away from the daily tsunami of momentum, finding a few stocks/ ETFs that you track and trade in various time frames (my preference), trading different markets, trading a basket, diversifying your tactical approach, trading multiple time frames, joining a prop shop and scalping pennies and nickels with other people's money, OR ???? Adapting is a process. . . an ongoing learning process.
Consider this . . would you want to fly an airplane after watching a few webinars, reading a couple books and attending a seminar or two. Maybe so, but I wouldn't want to be a passenger.
Would you consider performing an appendectomy after watching a few videos on the procedure and attending a workshop on emergency surgical procedures. Sorry, but I wouldn't want to be that patient. Trading for a living is a on-going learning process and here's the shocker . . not everyone makes the cut.
Forget the TV ads and blog banner ads promising risk free 80% returns in the first month of trading. Forget the slick magazine ads promoting expensive seminars and workshops with "guaranteed" trading success. It isn't gonna happen. The only people making money on these deals are the seminar promoters.
For several years I was on the board of directors of the largest trader support group in SoCal with a rotating membership of about 400 traders. The group was mixed and traded a variety of platforms and a variety of products - Forex, futures, options, stocks. Some traded million dollar accounts while others traded with $10,000 or less. It really didn't matter, the idea was to network, share war stories and learn from each other. We had well known speakers come in every month and deliver their perspective on trading. Most of them also sold books, educational CDs, training workshops, etc. We always endeavored to vet speakers before inviting them to assure that we weren't part of a snake oil promotion. That group has now disbanded and the reasons can mostly be traced to lack of commitment, disillusion with realities of trading for a living and an almost universe feeling of ennui. I'm still in contact with a core of about 20 traders from that group who are still plugging away, but that's a pretty high attrition rate.
While TV brokerage ad hype might lead you to believe there are millions of daytraders out there, my own culling of NYSE and NAZ databases shows that there are probably fewer than 150,000 active retail daytraders. And that number is going down. When Cybertrader was shut down the rumor is there were only 3000 accounts. That's not a lot.
Sad to report, but over the past two years I've seen more than a few skilled and experienced traders either blow up their accounts, become so scared of the markets that they could no longer pull the trigger and/or decide they really couldn't make a living trading. The collateral emotional damage including personal anxiety, frustration and feelings of inadequacy and failure that accompany such reversals should not be underestimated. Such fallout can seriously damage a psyche and threaten a marriage and family ties. I've seen it close up.
I've often heard it said that one year of daytrading is the equivalent of 3 years of intensive psychoanalysis. Believe it.
Trading ain't easy and anybody that tells you otherwise is a liar (probably trying to sell you something packaged as an edge). There are a few nuggets out there . . finding the ones that fit with your mindset, capital resources and risk tolerance is a very complicated and time consuming dance. Expect a few missteps and falls along the way.
Hopefully, you don't break your neck.
That's the process of becoming a winner.

My New Dollar Basket

This is an update of my previous dollar basket post. The UUP is, of course, the Powershares double US dollar (bullish) and this time around the focus is on other currencies and short term bonds (SHY) as the wild card.

The PDQ Dashboard has gone through quite a few refinements since the initial post and this basket should be considered an alternate to those earlier PDQ components.

The relative beta of the CYB (yuan) is obviously out of sync with the rest of the basket so this signal bears a closer look.

Also out of sync is the relative SHY (short term bonds) beta.

Both CYB and SHY display consistently high linearity and an identical 19% P&L over the past 6 months, and both have a similar trade frequency. And, as in the case of the FXY basket weaving post, in both cases an examination of the actual returns for each side of the pair trade reveals that UUP is the side to trade (the CYB and SHY trades only generate 1% and 2% of the 19% return respectively. For the above reasons I regard these beta skewed pair partners as valuable forecasters of UUP momentum.

The UUP fired a number of long signals on Monday's close and I'll be keep a close watch for exit signals. Since virtually all the PDQ components have 5-7 N day values (Z-score band cycle side to side) I would expect reversals sometime in the next 3-4 days.

Here's a peek at the current UUP call option string. Virtually all open interest is at the ATM 23 calls and despite $.15 net gain in UUP the 23s fell a nickel. A lot of interest here and the early action today was focused on buying the Ask.

A Dollar Basket

This is a continuation of the UUP/Qs study with the goal of developing a basket of pairs to trade the UUP. The UUP, of course, is a not a high beta ETF, but when we compare the relative z-scores created by opposing UUP to a few other ETFs, we can actually produce a nice stream of gains with very controlled drawdown (and hence, risk management).

I've set the Linearity filter to (90%) and the quick scan reported here shows some of the UUP pairs candidates and their performance stats.

The Qs, SPY, NEM, DBV and EEM paired against the UPP all present respectable trading opportunities.
A couple caveats:

Daily volume in the DBV (double G10) can run less than 100K per day, although it picks up to +300K for occasional spurts, but the spreads are still only .02-.03, so I've included it for this study.

The FXF (Swiss Franc) almost makes the grade but it's volume is typically in the 50K range so liquidity can be a problem. Surprisingly, bid/ask spreads are only .03.

The various 90% basket components do have different lookback periods, which is also helpful in gauging relative momentum of the UUP.

For the sake of space I've only shown 2 of the basket full pairs analysis, but the matrix stats give a good indication of the likely odds of using this approach.

Keith had a comment on Greenfaucet yesterday lamenting the poor performance of the UUP/Qs pair going back to 2 years. I'll reiterate my answer to him: previously I've mentioned the need to look at the position of the equity curve (chart D) relative to the slope of the R2. Strictly as a risk management tool, our tactical approach to trading each pair involves NOT trading when the equity curve falls below the R2 slope. This is one of the reasons for using a pair basket as our goal is to identify differently phased pair cycles, some of whose equity curves may be above the R2, while some may be below. We only want to execute trades in those above the R2 and hold back on the others until such time as their performance improves or, failing that, remove them from the basket and identify other pair candidates whose equity curves are above R2.

This trading selectivty is, in fact, the foundation of the adaptive pair trading strategy we're trying to capture.

Qs / UUP Pair

This is a continuation of my study of the REWIND Pairs Trading module.
Today I'm looking at some trading opportunities offered by various currency ETFs and the major indices.
There are other currency ETFs available, but I've tried to narrow the pack to those that actually have tradeable volume, considering that muted volume leads to significant bid/ask spreads that can effectively destroy much of the potential trade gains..
Although there are some interesting inter currency pair possibilities (to be explored at a later time) the object of our current attention is the QQQQ/UUP pair as shown by the red circles and connecting bars. I've set the linearity filter to 90% (as discussed last week) in an attempt to further cull the high probability pairs.
The UUP/SPY and UUP/DBV look like alternate candidates (blue circles and connecting bars) and as I move towards building a UUP based pair basket, their trade cycles and the relative synchronization of of their trigger signals will be explored further.
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Below is the actual Qs/UUP pair analysis:
While there have only been 7 trades during he last 6 months the Trade Report shows that all have been winners. Now the first thing you're going to say after looking at the Trade Report is, "Gee, Bob, 6 of the 7 trades were long the Qs and short the dollar. . .why not just trade the Qs?"
That's a very good question (I often have these conversations with myself) and my answer is that it's easy to see things in hindsight, but a bit more problematic in real time. Those that have been predicting a significant mean reversion pullback for the past 2 months haven't fared very well but this little pairs model would have kept you on the right side of the Qs (and the Spy as it turns out). Sometimes the best use of a trading system is not as a strategy per se, but as a timing model, and in the case of the Qs/UUP I think the evidence speaks for itself.

Weekly ETF Pivots Update

All 4 of the ETF basket reached the upper LR30 daily channel this week and all 4 closed the week with the technicals in a bullish mode. We are now at a challenging point: will the market exhibit some of that (truly) irrational exuberance and kiss the channel good-bye to the upside . . or will the LR30 continue to hold as upper resistance and usher in the next cycle down to the lower LR30 channel? That, of course, is the 64 dollar question and whether the election results catalyze a market explosion or an implosion remains to be seen.
One scenario that has been posted widely foresees a surge into election eve and perhaps for a day or 2 thereafter, followed by a virulent decline to previous or lower lows. Given the position of the current technicals, this is a distinct possibility, so extreme caution is advised for those favoring swing positions.

For the week all 4 of the ETF basket closed at the R1 level, reflecting the lockstep bullish behavior of the markets. This should also be an indication to you that these ETFs do indeed move in somewhat predictable ways.

The pivot ranges for the coming week are almost mirror images of last week, so what's interesting here is that the % delta of the ranges has almost reached 100, indicating a leveling off of volatility. Unfortunately, this is happening when the asset value of these ETFs is down about 40% from this time last year. What this suggests, of course, is an impending range expansion . . but as with the LR30s study in the top charts, the question is whether the break will be to the upside or downside.Finally, a quick look at the NDX (Qs) stocks above the 50 day MA. Coming off a zero reading for most of October, this certainty looks encouraging, and based on past behavior of this indicator, we should at least expect a cross of the MA50 line before a retracement. We'll check back next week to see how the A50 played out.