Monday, October 17, 2011

UST Update and Market Overview

Its been a while since the last market update was posted at Understand, Survive and Thrive. For the last two week, we were having severe computing issues including modem issues, router problems, modelling software license update and computer replacement. After several days of troubleshooting, we are back and running. The only caveat is that over the next few weeks, I will be having mid-term exams and presentations. As a result of these scheduled obligations, market updates will be less frequent.

Due to modelling software's update, the license had to be re-installed. This prevented us from re-running the model for the past 2-3 weeks. When the IPM was re-run yesterday, I was shocked to see that October 4th bottom occurred within the turn window specified at UST: September 28 (+/- 4 days). In the near future, I will address this observation in detail with lessons learned and future action plan.

As mentioned previously, the primary task of Understand, Survive and Thrive is to manage risk and trade in the direction of the trend. After shorting at 1185 (SP500), UST Trading Algorithm exited the market at 1114 for a 4.5% profit. Culminating the choppy month of September with a handsome 10%+ profit (details of trades will be provided in the Q3 Newletter).

In spite of such amazing performance in September, the UST analytic team believes that our most important achievement is that we did not get caught up short in the recent sharp rally. Some of our peers have lost over 15% as they stayed short on a break above 1100. This allowed us to keep our powder dry while continuously analyzing the market for directional clues.

In terms of the market action, there hasn't been a lot going on. Although the market has rallied more than 10% in less than 2 weeks, it is still in a downtrend. To be clear, we would have loved to catch this rally if the model had been re-run in time but this is not the goal of trading. The goal of trading is to be disciplined and opportunities will come our way.

At this point, I would like to mention that around one week ago the UST Tading Algo suggested that if the market declined below 1150, it might provide a good shorting opportunity. However, market never broke below 1150; again validating the importance of the UST Trading Algo (By the grace of God).

In the event, one could ask: Why didn't we go long on Oct 4, 2011? Following reasons prevented us from going long:
1- We were not able to re-run the model for the past 2-3 weeks, as mentioned above.
2- We did not feel comfortable undertaking a counter trend trade.
3- We wanted the market to prove that it had turned from down to up.
4- When we last ran the IPM model, the October 2011 turn date (will be provided to subscribers) appeared to be one of the largest/most significant turn dates in a long time. With the well-defined market structure carved out by major indices since May 2011, it was highly likely that market would bottom at this significant turn date and then rally for a few months. Instead market bottomed at the last turn date.

As a result of these developments, we did not buy stocks on Oct 4, 2011.

Note: The best aspect of being a human is that we continuously evolve with time and learn from our experiences. In similar fashion, the UST team has updated its set of trading rules based on IPM turn window trading. These updates will hopefully (God willing) help us through our future trading endeavors.

Right now, it looks like the market bottomed (at least in the intermediate term), on October 4, 2011. Since this bottom and the subsequent sharp rally does not guarantee a long-term up-trend, it is possible that we might have already completed a partial retracement of the previous 5-wave decline and have started another down leg. On the other hand, its possible that we might just undergo a partial decline before the major break-out. In order to mitigate such uncertainty, UST uses the 8/4 test to justify a market bottom.

The 8/4 test is divided into 3 parts:
1- Setup
2- Test/Hold
3- Breakout

If the market has bottomed, it is currently at the first step - "The Setup". This step will be followed by a retest of critical levels / partial retracement of the recent rally. UST Trading Algorithm will generate a buy signal during the correction, if this correction coincides with the Inflection Point Model turn date and Market Matrix buy signal.

In the coming days, we will discuss market's structural potential to decipher whether next turn window will mark the market bottom or whether it will mark a top before beginning the next sharp decline phase.

1 comment:

  1. Can't wait to see what the next turn window will indicate a top or bottom!


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