Info!! Trading Notes, Calendar Week Of January 4Th, 2016

Friday, Jan 8th

*  We finished Th with real weak breadth, every bit over 2000 stocks across all exchanges registered fresh monthly lows.  Moreover, fewer than 10% of SPX shares shut below their 3, 5, in addition to 10-day moving averages.  In a correction, such oversold levels to a greater extent than oft than non atomic number 82 to relatively quick bounces.  During comport moves, weakness tin beget farther weakness earlier whatever bounce materializes.  Early August, 2011 was a notable instance inwards point.  We saw buying run across the marketplace with the mainland People's Republic of China create overnight in addition to and so ane time again with the rigid payrolls number.  Still, we're registering lower cost highs in addition to so I can't conclude we're out of the woods exactly because we're oversold.

*  My primary bike stair out is inwards oversold territory, but non nevertheless at levels that receive got lately corresponded to intermediate-term marketplace lows.

*  Note the ascent inwards VIX; my pure volatility stair out is likewise elevated, which agency that nosotros are non alone probable to watch heavy volume, but likewise to a greater extent than movement per unit of measurement of volume.  That has of import implications for sizing of positions, halt placement, etc.



Thursday, Jan 7th

*  Yesterday's ship service noted the macro headwinds from China/EM/commodities in addition to pointed out that intermediate cycles had non nevertheless bottomed for stocks.  Overnight we're seeing to a greater extent than of the headwind dynamics, with some other 24-hour interval of weak merchandise inwards mainland People's Republic of China in addition to oil trading sharply lower.  That has dragged stocks downward significantly.  Selling bounces remains the operative strategy; my bike measures are inwards oversold territory, but non nevertheless at levels associated with recent marketplace bottoms.

*  Because of the mainland People's Republic of China dynamic, of import marketplace moves are occurring exterior of United States trading hours.  That has of import implications for both day-traders in addition to for those belongings positions overnight.  Day-traders operating during United States hours are finding markets already extended past times the fourth dimension trading starts.  Traders belongings private stocks overnight are discipline to gap risk.  It's a classic instance of a modify inwards markets that requires traders to adapt.

*  In yesterday's trade, novel three-month lows expanded, ending divergences that appeared to hold upwardly showing upwardly alongside breadth figures.  With today's weakness, I expression farther negativity of breadth.  While my intermediate bike measures are non inwards bottom territory quite yet, short-term we're quite oversold (see nautical chart below) in addition to my stair out of pure volatility (volatility per unit of measurement of volume) has ane time once again spiked.  That combination raises the odds for short-term, sudden short-covering rallies.

*  The collapse of oil hurts commodity producing countries, hurts major growth areas of the United States economy, in addition to reflects a province of affairs inwards which need from weak economies overseas cannot overcome increased supply.  Below is a nautical chart of the past times twelvemonth inwards WTI crude.  The comport inwards oil has snuff it the comport inwards stocks.

Wednesday, Jan 6th

*  After an indecisive session yesterday inwards which bulls could non mountain much follow through to the rigid bounce belatedly Monday, we've continued the downtrend inwards overnight trade, with oil notably trading weaker.  I snuff it on to watch China/EM/commodity weakness every bit major headwinds for stocks.  My intermediate bike stair out is non nevertheless inwards bottom territory, per the nautical chart below:

*  Interestingly, hence far we're non seeing every bit many stocks making novel lows every bit nosotros did at similar levels inwards Dec next declines.  I'm especially impressed with how utilities stocks in addition to unloosen energy stocks receive got held upwardly reasonably good despite the Fed charge per unit of measurement hike concerns in addition to falling oil prices, respectively.  My base of operations instance expectation is for a interruption of the Dec lows in addition to an expansion of breadth weakness, but I am real aware of the alternate scenario inwards which weakness cannot expand novel lows.  That would hold upwardly to a greater extent than consistent with a merchandise inwards which we're closer to the bottom of a hit than poised for a truthful comport correction.

Tuesday, Jan 5th

*  Great ship service from Bella on the form of self-observation in addition to diligence it takes to hold upwardly a consistently successful trader.

*  We continued the sudden turn down inwards early on merchandise Monday, but per yesterday's observation re: volatility, nosotros saw a ferocious late-day rally that wiped out the day's declines.  The intraday advance-decline trace had been showing forcefulness into the afternoon, leading to that belatedly 24-hour interval rally.  When we're oversold in addition to selling can't force the marketplace to novel highs, that's when we're most vulnerable to the sudden curt squeezes.

*  The weakness has continued inwards overnight merchandise and, per the intermediate overbought/oversold stair out below, we're non nevertheless at oversold levels that receive got historically led to sustained bounces.  This stair out is based on 5, 20, in addition to 100-day novel highs versus lows alongside SPX stocks alone (data from Index Indicators):

*  That beingness said, we're quite short-term oversold per the stair out of the percentages of SPX stocks trading inwards a higher house their short-term moving averages, per the nautical chart below.  When we're oversold similar this on a curt fourth dimension frame, my leaning is to play make-it, take-it with curt positions in addition to non necessarily count on moves to extend over longer fourth dimension horizons.

*  Right now, it's exactly a one-day observation, but I practise notice that despite yesterday's wide weakness, fewer stocks across all exchanges made fresh novel lows than at the Dec depression points.  It would hold upwardly real pregnant if those downside divergences were to concur upwardly on farther weakness inwards stocks.



Monday, Jan 4th

*  With the sudden turn down inwards mainland People's Republic of China to kickoff the novel year, stocks receive got sold off sharply overnight.  The turn down on the heels of an already short-term oversold marketplace confirms nevertheless farther that the intermediate-term bike has turned downward, per the nautical chart below:

*  My stair out of "pure volatility"--the volatility that nosotros watch per unit of measurement of marketplace book traded--has exploded higher with the overnight move.  Spikes inwards pure volatility ordinarily hap nigh marketplace bottoms, but the bike stair out inwards a higher house is nowhere nigh a bottom level.  My trace organisation hither is that we're starting 2016 at a higher volatility regime, where we'll non alone watch high book in addition to volatility, but higher volatility for each unit of measurement of book traded.  That agency nosotros could watch large moves fifty-fifty on relatively curt fourth dimension horizons.  Short-covering rallies tin hold upwardly painful when volatility regimes explode.

*  mainland People's Republic of China in addition to emerging markets broadly receive got underperformed United States stocks for a patch now.  This tendency may hold upwardly accelerating, every bit concerns nigh global weakness inwards the human face upwardly of a rigid United States dollar receive got hold.  Such a global tendency would snuff it far hard for the Fed to engage inwards farther tightening in addition to could weigh on the United States economy.  These are themes I'll hold upwardly tracking early on inwards 2016.

Info!! Trading Notes: Calendar Week Of November 23Rd

Friday, Nov 27th

*  Not much changed from yesterday alongside honour to U.S. stocks, equally nosotros boot the bucket on to concord of import back upwards inwards the lower 2080s inwards the front end calendar month ES contract.  I boot the bucket on to move inwards the style of buying weakness that holds higher upwards overnight lows, but await merchandise to move deadening today given the long vacation weekend that many U.S. traders volition move taking.

*  So far, the number of stocks displaying odd forcefulness inwards the recent motion higher has been modest.  Below is a nautical chart of the number of NYSE issues closing higher upwards their upper Bollinger Bands minus the number closing below their lower bands.  (Data from the splendid stockcharts.com site).  To this point, that stair out of forcefulness has been waning.

*  Another resources that I stimulate got constitute quite useful is the Stock Spotter site.  They furnish purchase in addition to sell signals for private stocks based upon their bicycle models.  They also stimulate got toll forecasts for each stock in addition to ETF.  I've constitute those forecasts for SPY to stimulate got value in addition to stimulate got backtested them for the improve operate of ii years.  At present, their forecast is bullish for stocks over a adjacent two-week horizon.


Thursday, Nov 26th

*  Happy Thanksgiving in addition to many cheers to readers!  I aspect frontward to a dandy 2016.  This latest article describes a structured procedure for dealing positively alongside setbacks in addition to failure.  So much of the departure betwixt the successful trader in addition to the unsuccessful 1 is how they bargain alongside the inevitable losses dealt past times markets (and past times our faulty processing of market-generated information).

*  We've continued modestly higher inwards overnight trade, equally the basic strategy of buying weakness that holds higher upwards key prior twenty-four hr catamenia in addition to overnight levels has been a practiced one.  The relative outperformance of little caps is something I'm watching.  Utility stocks, faced alongside the prospect of rise rates inwards the U.S., stimulate got been relatively weak.  Below, the graphic from the splendid FinViz site shows mixed surgical procedure amidst U.S. sectors.  It continues to move a rotational environment.

*  On a to a greater extent than global scale, I'm watching the relative surgical procedure of China, emerging markets, Japan, in addition to European stocks, given the prospect of farther easing from overseas cardinal banks in addition to a charge per unit of measurement hike from the Fed.  Note the relative forcefulness of the U.S. dollar of late; that is also a theme that is impacting U.S. shares.  I know besides many traders who are in addition to so busy looking for short-term setups that they completely immature lady larger themes that are driving stocks on the longer fourth dimension frame. 

Wednesday, Nov 25th

*  We tested the overnight lows inwards early on merchandise yesterday in addition to constitute rigid buying off the lows, bringing us dorsum toward the upper halt of the recent range.  The inability to sustain weakness is consistent alongside a marketplace seat inwards a rise cycle, though I do detect tepid breadth therefore far inwards the motion higher.  For example, the past times duo of days, we've seen to a greater extent than stocks register fresh 52-week lows than highs.  While I do recollect nosotros stimulate got a practiced chance to attempt out recent highs, I am far from convinced that we're launching to a fresh bull leg from here.  

*  Dec promises to move an eventful month, alongside ECB in addition to Fed meetings that could Pb to monetary easing in addition to an involvement charge per unit of measurement hike, respectively.  I recollect it's possible that, alongside a dovish Fed hike in addition to monetary ease inwards Nippon in addition to Europe, nosotros could reckon a renewed "QE" merchandise inwards stocks.

*  The nautical chart of cumulative upticks vs. downticks amidst all listed stocks (red delineate of piece of job below) has been heading to novel highs.  That reflects relative forcefulness late amidst smaller cap issues.  Interestingly, the cumulative upticks vs. downticks for Dow stocks exclusively is inwards a recent downtrend.  This rotational merchandise could good boot the bucket on through this vacation period.

Tuesday, Nov 24th

*  Yesterday's merchandise was interesting inwards that nosotros saw considerable buying involvement inwards early on trade, equally tracked past times NYSE TICK, but much of the forcefulness centered on smaller cap issues in addition to non the NASDAQ in addition to SPX large caps.  What turns a bull, rise stage of a marketplace seat bicycle into a topping stage is that buying involvement fails to accept prices meaningfully higher, equally around segments of the marketplace seat display weakness equally others concord up.  In yesterday's trade, it was the NASDAQ index--and AAPL specifically--displaying weakness.  As buying failed to force indexes higher, sellers came inwards during the afternoon in addition to took us lower.  Yesterday's merchandise was a squeamish illustration of how markets plough on a brusque fourth dimension frame.  It was also a squeamish illustration of how it's of import to rail multiple marketplace seat sectors, non simply the index you're trading.

*  Painful sense has taught me to non move long stocks alongside pure volatility (volatility per unit of measurement of trading volume) is low.  Forward returns simply aren't positive on average.  As you lot tin reckon below, pure vol had gotten quite depression recently, a xanthous caution light.  With the downing of the Russian jet overnight inwards Turkey, stocks stimulate got fallen dorsum in addition to taken out stops inwards the 2070s inwards the ES futures.  Pure vol has expanded meaningfully.  Adjusting volatility expectations in addition to risk/reward is key here.  On 1 hand, corrections that get upwards pure vol offering practiced entry points on the long side.  On the other hand, nosotros at nowadays stimulate got a province of affairs where idiosyncratic (geopolitical) factors are moving markets.  It is hard to successfully merchandise historical patterns when idiosyncratic conduct chances factors dominate.  I'm opened upwards to buying weakness that cannot accept out the overnight lows, but inwards no rush to larn involved.  

Monday, Nov 23rd

*  How much fourth dimension do nosotros waste product in addition to how much mental clutter do nosotros do past times staring at screens, opening superfluous email, in addition to reading cloth irrelevant to our conclusion making?  How does that clutter clog creative processes in addition to interfere alongside generating novel in addition to improve ideas in addition to trades?  This post on media consumption tackles a really of import topic: nosotros can't get together practiced ideas if we're non collecting the right puzzle pieces.

*  We're trading inwards a relatively sideways gain inwards the ES futures, correcting to a greater extent than inwards fourth dimension than inwards price.  That is mostly what markets do when they're trading inwards a practiced uptrend, in addition to that's how I'm treating this marketplace seat until proven otherwise.  The exclusively flies inwards the ointment are depression levels of implied correlation in addition to pure volatility, both of which are associated alongside subnormal near-term returns.  My basic strategy, equally has been the instance recently, is to purchase weakness that holds higher upwards overnight in addition to prior day's lows.

*  I mostly similar to purchase oversold levels inwards rise markets in addition to sell overbought levels inwards falling ones.  Influenza A virus subtype H5N1 large portion of profitability comes from practiced entry execution.  The same applies to move out execution.  When positions become our agency but are stretched to the upside or downside, it mostly pays to accept at to the lowest degree around of our seat off inwards markets that display short-term hateful reversion.  I aspect at a medium term charge per unit of measurement of alter stair out on bars created every 500 toll changes to furnish perspective on overbought in addition to oversold.  It's non something I merchandise off of directly, but utilisation to mostly guide practiced in addition to bad merchandise location.

Info!! When Trading Platitudes Substitute For Trading Wisdom

You know, sometimes I listen things together with milk shiver my head.  Then I listen them 1 time again together with gyre my eyes.  Finally, I maintain hearing them together with brand a valiant seek to non throw upwards inwards my mouth.  I mean, really, yous don't desire to live on rude to people, exactly there's exclusively thence much 1 tin suffer when platitudes pose equally wisdom.

Take the virtuous advice that trading success hinges on "following your process."  Please.  WTF does that mean?  Here's a procedure for you:  I potable Turkish java every forenoon together with and then examine the java grounds at the bottom of the cup.  If the grounds by together with large settle at the overstep of the cup, it volition live on a bullish twenty-four hours inwards stocks together with I purchase at the opened upwards together with sell the close.  If the grounds settle at the bottom of the cup, it volition live on a bearish twenty-four hours inwards the marketplace position together with I sell the opened upwards together with comprehend at the close.  If the grounds settle at the left side of the cup, it volition live on a placidity twenty-four hours together with I'll sell volatility.  If the grounds settle on the correct side of the cup, volatility volition expand together with I volition live on a vol buyer.  And if the grounds are evenly settled at the bottom of the cup, there's no border for the twenty-four hours together with I'll potable a 2nd cup.

Now that *is* a process.  But does my trading success hinge on fidelity to my process?  Of class not!  That's because, inwards the linguistic communication of psychometrics, the procedure is reliable exactly non valid.  It is repeatable exactly random.  Being procedure driven is necessary, exactly non sufficient.  Before 1 waxes poetic nigh next a process, it helps to define a procedure worth following.

Or let's accept the cliché that 1 shouldn't seek to predict markets exactly instead should nous to markets together with follow their lead.  I don't know what that means.  Does it hateful that yous are supposed to naively extrapolate the terminal X bars on a nautical chart together with blindly assume that they volition expire on their pattern?  Does it hateful that yous impose expectations of momentum together with tendency on every marketplace position regime?  Does it hateful that yous utterly lack backtesting skills together with are bravely turning that into a horse-whispering virtue?  Whatever.

So here's a corking experiment that anyone tin conduct.  Define a trading organisation that takes the terminal X bars together with extrapolates from them to the side past times side X bars, buying the X+1 bar opened upwards when the extrapolation is positively skewed; selling the X+1 bar opened upwards when the extrapolation is negatively skewed; together with standing aside when the extrapolation displays no directional bias.  That way you'll ever possess got a replicable procedure *and* you'll live on next what the marketplace position is telling you.

Just equally a lark, I tried the experiment amongst historical data, buying SPX when the percent of stocks inwards a higher identify their five-day moving average was inwards a higher identify 50% together with selling SPX when the percent of stocks inwards a higher identify their five-day moving average was below 50%.  The information were for SPX stocks specifically, going dorsum to 2006, together with the belongings menses was for the side past times side v trading days.  Buying describe gave an average five-day supply of -.07%--a pocket-size loss.  Selling weakness gave an average five-day supply of -.44%, a considerable loss.  The average five-day supply over this menses was a make of +.15%.  In other words, having a robust procedure together with next the market's Pb has ensured losses inwards both rising together with falling marketplace position environments. 

Interesting:  the runway tape of the received wisdom is thence pitiable that it's promising.

Further Reading:

Three Market Idiots

The Near-Perfect Market Indicator
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Info!! Toward A Dynamic Approach To Technical Analysis

In my recent post, I suggested that a dynamic technical analysis would non rely upon a fixed laid of indicators in addition to nautical chart patterns to survive interpreted inwards a uniform manner.  Rather, fresh predictors would arise from a report of drivers impacting the most recent marketplace seat regimes. Traders would follow the indicators that direct maintain demonstrated predictive accuracy; non untested ones presumed to receive universal validity.

Let's accept an illustration from the electrical flow market.  Using tests of stationarity, I direct maintain identified a stable menstruation of marketplace seat demeanour embracing the recent past.  That stability agency that marketplace seat toll changes during that menstruation tin terminate survive assumed to give-up the ghost along from a unmarried process.  If the fourth dimension menstruation nether consideration possessed wildly dissimilar statistical properties, such equally 2008 in addition to 2014 for stocks, thus at that topographic point would survive no assurance that toll changes were resulting from a stable process.  That would plow over us no argue to extrapolate patterns from 1 menstruation to the other.

A major work amongst traditional purpose of technical indicators is that they are employed uniformly across non-stationary periods--especially intraday.

It turns out that during the most recent stationary menstruation (i.e., "regime") a major driver of short-term toll has been correlation.  How SPX is correlated amongst other equity instruments has been significantly predictive of short-term frontward toll change.  

The select deal of is that unmarried measures of correlation were non especially informative inwards my research.  Rather, aggregated correlations across a large pose out of stocks in addition to sectors in addition to over intraday horizons ended upward beingness an first-class stair out for short-term trading signals.  In other words, the most valuable indicator of correlation was non a criterion technical indicator, simply rather a stair out that required research.  Moreover, I had to inquiry it inwards such a way equally to non overfit the information relationship.

But at that topographic point it is:  when the correlation stair out exceeds .40, the side past times side day's toll modify has averaged +.35%.  When the correlation has been below .40, the side past times side day's toll modify has averaged -.37%.  As long equally nosotros rest inwards the electrical flow regime--a primal assumption--I await marketplace seat pull when correlations are high in addition to rising in addition to weakness when they are depression in addition to falling.

That becomes a potential trading "setup" for the electrical flow regime.  In a hereafter regime, correlation may survive much to a greater extent than modestly associated amongst frontward toll change--or it may survive predictive over longer fourth dimension frames.  Setups give-up the ghost dynamic, because they adjust to changing markets.  

But correlation is simply 1 component that sets upward inwards the electrical flow regime.  There are others, from options ratios to intraday volatility.

This is how many hours of training give-up the ghost into a unmarried hr of trading.  It takes fourth dimension to practice in addition to exam large correlation matrices.  It equally good takes fourth dimension to exam the many other variables that are associated amongst the factors of see in addition to positioning that are primal drivers inwards the electrical flow regime.  Once the inquiry is done, however, the trader knows the indicator levels that are pregnant in addition to is able to automate alerts.  That way, the trader tin terminate seamlessly contain multiple tested technical signals amongst his or her discretionary judgment close the market.

The challenge is non that technical analysis doesn't work.  The work is that technical analysis industrial plant the way that parenting works:  powerful when dynamically adapted to situations; diluted when applied uncritically.
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Info!! Agreement The Markets You're Trying To Predict

The recent postal service highlighted the notion of resultant fourth dimension and the potential value inward redefining the X-axis of charts.  Once nosotros convey a fresh X-axis that normalizes intrasession changes of book together with volatility, cyclical patterns inward markets larn clearer.  It's yet some other instance of how quant processes tin forcefulness out potentially practise goodness discretionary traders.

The nautical chart higher upwardly runs from May 6th, 2014 to yesterday morning:  it's ane of the things I was tracking closely at the initiatory of all of Thursday's trade.  Each indicate on the nautical chart represents 500 cost changes inward the ES futures.  So, inward other words, every fourth dimension nosotros larn 500 ticks higher or lower inward the ES forepart calendar month contract, nosotros depict a novel bar.  So fourth dimension is measured inward units of marketplace movement, non inward motion of the clock.  

What that does is create many bars during busy, volatile marketplace periods together with fewer ones during slow, non-volatile ones.

Suppose nosotros larn real lilliputian cost motion during the course of education of 500 ticks inward the index.  What that tells us is that cost modify is occurring inside a real narrow band:  in that location is a high grade of consensus inward the marketplace at that 2nd regarding the location of value.

If nosotros larn a bully bargain of cost motion during the course of education of 500 ticks, it agency that cost modify is occurring inside a much wider band.  That suggests a higher grade of doubt inward the marketplace regarding the location of value.

The higher upwardly nautical chart measures electrical flow value doubt versus its longer-term moving average.  When nosotros convey values higher upwardly 1.0, in that location is relative doubt regarding the location of value.  When nosotros convey values below 1.0, in that location is relative certainty.  

As alongside traditional measures of volatility, you lot tin forcefulness out come across the vogue for in that location to survive greater levels of doubt at relative marketplace bottoms together with greater levels of doubt at relative marketplace peaks.  The normalization of the X-axis together with the structure of the indicator approximately its recent moving average--creating a mensurate that is relative, rather than absolute--makes that human relationship easier to identify.

One for certain could show this mensurate in- together with out-of-sample together with exercise it every bit purpose of a trading system.  Indeed, I convey conducted such tests together with convey flora the value doubt tool to survive helpful.  My exercise of it, however, is to a greater extent than qualitative together with discretionary:  I'm using it only to seat whether the marketplace surround is becoming to a greater extent than or less uncertain.

So, for example, I unopen out a long seat belatedly Wed because, although nosotros had a bounce that day, the marketplace doubt was rising, non falling.  At the same time, I could come across that some sectors of the market--most notably small-scale caps--were non participating meaningfully inward the bounce.  Indeed, all told nosotros had entirely well-nigh 500 to a greater extent than advancing stocks on the 24-hour interval than declines.  Stock thought was bullish--the equity put/call ratio was a relatively depression .76--but that bullish tide was non lifting all boats.  Nor was marketplace activity suggesting greater certainty inward the location of value.

Notice inward this instance that I am using tested marketplace measures to anchor a reasoning process.  My destination is every bit much agreement every bit prediction.  (Indeed, I did non predict Thursday's abrupt overnight decline; I only identified Wednesday's absence of strength).  I desire to empathize what is happening inward the marketplace together with why; non precisely blindly predict time to come motion on the footing of an algorithm linking variables that hap to tally a given lookback period.  Influenza A virus subtype H5N1 major turning indicate inward my trading occurred when I stopped predicating trades on predictions together with instead used predictive inputs to inform a procedure of understanding.  Trading systems together with tested indicators are most useful when they reverberate an underlying agreement of markets; they cannot substitute for such understanding.

Further Reading:  Putting Historical Odds on Your Side
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