Monday, January 27, 2014

IPM Trade Matrix - Trade 2 (Part 3)

Market Overview
Recent market action has not only validated the accuracy of the Inflection Point Model (by the grace of God), it is also supporting the argument that the IPM Trade Matrix is a robust trading mechanism because it can adapt to different market conditions in advance (like it did recently). The goal of IPM Trade Matrix is to make trading a system with out emotions and generate consistent results. Consistency is the key to success in the world of investing.

By every passing day, market action gives the feeling that this correction could be a start of something big. Market has initiated the 8/4 Test. First step is almost complete with the test of 1770 level. Now the second step would be the Test. If the test fails and market break below critical levels, we will enter a downtrend. By the ways things are going right now, we might enter a downtrend in February. 

If market does enter the downtrend, we would have to switch to the Downtrend section in the IPM Trade Matrix. This would mean that we will enter one more trade by the next IPM Bottom window.  

For the time being, market's structure is nearing completion before rallying for few days. Near term structure looks very impulsive. Whereas, in SP500 it is missing only one more down move before the rally can start, wave structure looks complete for Nasdaq and Russell. 

It is possible that the rally might start on the Fed's news and might till the end of January. We will continuously evaluate the market structure to identify critical levels for counter-trend rally completion. But if January ends negative, there is a very high probability that it will be bad for the entire year. 

Trade 2 Complete 

TRADE - 1: Summary of Trade 1 (Long) = +2.6%

TRADE - 2: Summary of Trade 2 (Short) = +9.3%
Long TZA (short ETF) at 16.85 ==> Exit at 18.41 ==> +9.3%
Short positions were added on 1/23/14 and 1/24/14 based on IPM Top window expiration and subsequent break below critical level (Trade 1 - risk realized)

Condition: High within IPM turn window - Top. Next IPM window is a Bottom and is 3+ weeks away.  
Trigger: Decline below 1835 (SP500), below 16400 (DJIA) and below 2473 (Global Dow)
Supporting Indicators: Lack of proprietary momentum thrust in upwards direction, Influence of weekly IPM and High within IPM turn window
Profit Target 1: 1770
Profit Target 2: 1724

Note: Exited all positions at Profit Target 1 because of Rule # 3: Exit all shorts at Target 1 if decline continuation signal is not present from proprietary momentum indicator and buy signals generated by key indicators. Moreover, Elliott Wave count is close to near-term completion. Re-evaluate situation in next 2-3 days to be ready for another short entry. 

Stop: Rally above SP500 = 1849, DJIA = 16498, Comp = 4246, Rut = 1181 (3 of 4)
Trailing Stops: SP500 = 1836, DJIA = 16310, GDOW = 2470 (Trailing stops will be updated next week - 1/31/14) 
Typical IPM Trade Matrix Risk: 1.5%
Actual IPM Trade Matrix Risk: N/A 

Risk Reason: No significant risk because upcoming turn date is a bottom.

Applicable Rule: If short with last IPM ~2 weeks ago & next IPM a bottom, review proprietary momentum indicator (combination of 5 indicators). If momentum = 1, stay till Profit 2, else exit all at profit 1 and re-enter later. 

Note: IPM Trade Matrix Trades will be posted in the first half of 2014. This is an experiment to understand and enhance the capabilities of this Matrix.

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