Friday, June 10, 2011

Trading Algorithm Validity

Head Fakes are a part of the stock market game. Goal should be to remain stead fast with one's principles and techniques. A similar issue took place on June 2, 2011, when the market's rally was a great head fake. In any case, it seems like my Model Was Right after all.

I wrote this on May 22, 2011:
"However, over the past two days market has declined sharply. Invalidating the ending diagonal pattern and bringing the bearish pattern to the top of the list. This decline has also led to the fulfillment of the proprietary 8/4 rule, converting me into a seller of rallies from a buyer of dips." 

As a result, I did exit my 401K and got everything into cash. In future, I have realized that never trade against the model. 

In any case, current decline seems to be carving out a series of 3 waves i.e. 3 wave decline from Feb 2011 to March, then 3 wave rise from March to April, and then current decline in 3 waves from May to June 2011 (as seen below). Therefore, as long as market (SP500) stays above 1247, to me it would mean that the market is carving out a triangle. Triangles result in a sharp rally in the previous direction, which would be up in this case.

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