Friday, September 23, 2011

Trading Algorithm Update - September 23, 2011

Update 7:00 PM
SP500 (Closing as of September 22, 2011) = 1129

Market: Bear
Defining Level: 1209
Trend: Down
Defining Level: 1248
4/8 Trend Change Confirmation (Up to Down): Yes on July 27, 2011
Current Trade:  Short from 1197
Profit Objective 1: 1160 (achieved, sold at 1140 (market open))     Trailing Stop (closing): 1129
Profit Objective 2: 1124 (achieved - trailing stop hit at 1131)          EW Stop: 1131
Status: Stop was hit at 1131. Short trade closed for a total profit of 4.3%.
Next Trade / Model Based Approach: Short on a partial retracement
Stop:                                                                                       Risk: Low
Risk Associated with trade: Low because Shorting in a downtrend is a low risk trade. 
Turn Window: September 20 (+/- 4 days)
Market has entered the turn window. Market's behavior over the last few days suggest that we will see a top
1-   Market bottoms in turn window
2-   Market tops in turn window
3-   Market double bottoms and breaks out
4-   Market double tops and breaks down
Observations: As mentioned yesterday (in the note section), there was a possibility of a short-term market bottom either on Thursday or Friday. As a result, we decided to tighten our stops to lock in gains. Stop was hit in the morning and we are now out of our Short trade for a 4.3% profit. 
     This same approach (tightening of stops) helped us in our last Short trade (early-mid September). In fact, after we got out of our short positions, the market (SP500) rose from 1145 to 1220 within a week. If we had held the short positions, a profitable trade would have turned into a losing trade. 
     Note: It is very important to note that stops should be placed at places which demarcate a key wave structure level - a level which if broken would mean that there is a high probability of stronger move in the opposite direction.
     Over the next few days, we might experience a market bounce. This bounce can reach anywhere from 1160 to 1210, depending on the market internals. However, we are approaching an IPM turn window. We will discuss this turn window and its implications in greater detail in the Market Overview. 
     Overall, recent decline has exhibited clear downtrend characteristics. This behavior in conjunction with time symmetry analysis leads us to conclude that we will soon see further downside. On the other hand, we are seeing pretty pessimistic readings from some sentiment surveys. This kind of pessimism can result in a sustainable rally. Therefore, at this point in time one should patiently analyze the market and make the trade with highest expected profitability (typically highest probability trades in a bear market are on the short side), with an open mind for a trend reversal. 

No comments:

Post a Comment

I would love to hear from you! Please leave your comment below!!