Wednesday, September 7, 2011

Trading Algorithm Update - September 7, 2011

Update 9:00 AM September 8, 2011:
Markets might have already reversed. Be on the look out for shorting opportunity with tight stops.

Original Post 10:30 PM September 7, 2011:
SP500 (Closing as of September 7, 2011) = 1198

Market: Bear
Defining Level: 1207
Trend: Down
Defining Level: 1278
4/8 Trend Change Confirmation (Up to Down): Yes
Current Trade: None
Profit Objective 1:                                                Trailing Stop (closing):
Profit Objective 2:                                                 EW Stop:
Status: N/A
Next Trade / Model Based Approach: Short near 1209 (SP500), or after a clear downward reversal
Stop: 1231                                                                                 Risk: 
Risk Associated with trade: Low because shoring in downtrend
Turn Window: September 20 (+/- 4 days)
Wait for the market structure to develop to identify top or bottom.
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:  US Markets staged an impressive rally today. But in the context of the overall market structure, we would consider it to be a partial retracement of the previous decline. As mentioned in the research sent via e-mail, recent market decline (8/31-9/6) took a clear 5-wave form. This form symbolizes start of a downtrend. It was also mentioned in the report that markets could rise into President Obama's speech on Thursday. Thus, markets followed the overall path.

Moreover, today's rally was based on lighter volume suggesting lack of buying conviction. Today's VIX and Put/Call ratios showed absence of fear and acceptance of rally, which shows optimism and optimism is bad for markets from a contrarion point of view. Today's rally also sported a very low TRIN reading - low TRIN readings are either an exhaustion sign or indicate start of a new rally phase. Alongside these indicators, certain time symmetry models are suggesting that markets would continue to decline over the next 2 weeks. In short, internals of the market are not very strong. 

In terms of time, next turn date is scheduled for September 20, 2011. It is difficult to assume that from current levels markets will rise into the next turn window, primarily because bear market rallies are hard to sustain over a longer period of time. However, if the markets decline to a new low during the next turn window, it could result in a sustainable rally based on positive divergences in technical indicators (October 2011 to December 2011).

As mentioned earlier, UST Trading Algorithm does not participate in counter trend trades until unless there is ample conviction through Inflection Point Model and Market Matrix. Since the trend is down and the turn window is 2 weeks away, the Trading Algorithm will not undertake any long positions before the next turn date. However, it might Short Sell. In order for the short trade to materialize, markets need to stop their assent below 1231 (SP500) and need to reverse in a sharp manner. We will keep you informed if a trade materializes and will update this sheet with Risk Management levels.

Interesting Observation: It would be very interesting to see if the markets rise into President Obama's speech to address the Congress on September 8, 2011, where he will talk about job growth, and then sell-off after the speech...

Future Publications:
1- Market Structural Analysis
2- Time symmetry models

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