IPM Trade Matrix - Trade 1 (Part 7)

Market Overview:
Market is still going sideways. This kind of market action suggests that the market is getting ready for a blast higher. Although yesterday's Chinese PMI data will be brought forward as a reason of concern and the sell-off, there is nothing wrong with the market structure suggesting that this news will also be bought. 

An interesting development is in the Dow's Elliott Wave structure. Its recent sideways action has kind-of traced out a triangle. Triangles usually break in the direction of the trend. This triangle could also result in a sharp rally, as long as Dow can hold above: 16237  

On a closer analysis, triangle's sub-waves are also divided into 3s and are overlapping. This is a classic example of a corrective wave. And suggests that the bigger trend has not turned down yet.

Overall, it seems like market wants to give Chairman Bernanke a standing ovation before his departure from the Fed towards the end of this month.

First Trade of 2014 is in process:

Trade Observations

1. IPM Top date did its job, as market went sideways after topping on that date. IPM Top date was scheduled for Jan 15 and the latest market top did occur on Jan 15. We will see if market can break above this top to mitigate all the risks!
2. Although DJIA did close below its trailing stop, other indices did not close below their respective levels. As a result, we are still long and have not been stopped out. 
3. As we come closer to the next IPM turn date, we will take profits even if the market did not reach our target. But that time is few weeks away. So market has ample time to show its real character.

Markets
SP500 (1/22/14) = 1845
DJIA (1/22/14) = 16375

TRADE
Long TNA at 76.25 (original) ==> 76.6 (new)
Long FAS at 92.30 (original) ==> 91.6 (new)
Long TSLA at 171.2
Long positions were added on 1/14/14 & 1/16/14 based on IPM Bottom window expiration and low risk scenario

Condition: Next IPM Window is Top or Bottom
No. of Trades between turn windows: 1
Triggered (Updated at End of Day on 1/9/14): Rally above 1837 (SP500) and above 16450 (DJIA)
Profit Target: 1885-1890 (Will be evaluated as Elliott Wave structure matures)

RISK
Stop: Below SP500 = 1816, DJIA = 16217, Comp = 4090, Rut = 1141 (3 of 4)
Trailing Stops (updated on 1/23): Close Below SP500 = 1835, DJIA = 16442, Comp = 4170, Rut = 1160 (3 of 4) 
Typical IPM Trade Matrix Risk: 1.5%
Actual IPM Trade Matrix Risk (1/15/14): 0% (Entry = 1837, Exit = 1835, Risk = 0%)
Risk Reason: IPM Top is approaching. Market needs to hold during this top window, otherwise we can see a serious correction. Rise above 1850 will neutralize this risk

Applicable Rule: If next minor IPM turn window is within 2 weeks then wait for a confirmation break before exiting longs. 

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.

Why Trading Algo Sold Before the Debt Deal?

On July 27, Trading Algo generated a sell signal at 1322 (SP500). Since then markets have continuously declined (SP500 low of 1273 seen today). Although we have seen the debt deal materialize, UST's proprietary model is still far away from a buy signal. Such market behavior gives rise to the question, "Why did the Trading Algorithm got into cash at 1322, when everyone knew that a debt deal was certain?" 

Debt Deal and Market Response

Let us start with a question that was asked yesterday at the blog, "Market futures up due to budget deal. What is the S&P buy signal number?? Thanks." My response was, "Buy Signal will be generated above 1320. It will be interesting to see how the next few days unfold. Since debt deal was a known, are we going to see sell the Rally approach? Moreover, the bill has not passed the Congress yet. You never know if the Congress pulls-off a last minute Tuesday night drama, which could send the market down again. In any case, it is time stand on the sidelines for next few days."

This question was very thought provoking as the futures were up more than 150 points over night. However, as suggested in the reply the market gave up all the gains and some, during the initial trading hour. This kind of behavior is not only strange, it shows us that "News" does not govern the market. 

The News based trading dilemma is widespread in the financial markets. This is primarily why, UST developed the Market Matrix - a comprehensive analysis of market's strength. This analysis not only tells us where the market is headed, but also whether to trade in that direction or not. At Understand, Survive, and Thrive, we believe that market is like a river, and trading along the flow of the river is the best strategy. This is why when the market declined below 1322 and triggered the proprietary 8/4 indicator, we sold. 

Primary Reasons of Selling

First of all, last week investment advisers were not worried at all. In fact at one point they were 49% bullish according to both HSNSI and Investor Intelligence survey. This was quite worrisome. After all, if the threat of Uncle Sam defaulting or a downgrade of his debt is not enough to build a robust wall of worry, what will it take?

Secondly, the market turn (top) coincided with the Inflection Point Model (shown on right) signal. This signal, though weak, was sufficient to trigger a warning signal. Technical indicators were continuously deteriorating, and market structure was evolving into a form which resembled correction rather than start of a new up trend.

All of these developments when coupled with the 8/4 sell trigger were sufficient to get us out of the market. Even though it was certain that the market might rally based on the news of Debt deal. So I hope that all of you have seen the benefits of using UST's Trading Algorithm.

Pick the Turn Point Challenge

Now, the trend is neutral to down. There are three possible market structure scenarios. New Inflection Point date has been generated. Trading Algorithm is continuously updating its buy points. This is the most opportune time to launch the Pick the Turn Point Challenge. Here, we will try to identify the next market turn point. So stay tuned.

Q2 Newsletter Released

2nd Quarter Newsletter has been released.