Thursday, September 22, 2011

The Most Valuable Tool - Inflection Point Model!!!

In the name of God, the most gracious, most merciful

Wow!!! Market declined 7.7% in 3 days (top to bottom). Did we really see the top on September 20, 2011, the exact date which was predicted by the Inflection Point Model several weeks ago. This kind of market timing accuracy is scary and is a blessing from the Almighty God.

Tuesday's market action was a grand head-fake, and I expressed this concern when I stated my displeasure with the market action at 11:00AM. There was something missing from the market and it seemed like we were going to see something significant. As anticipated, by the close of Tuesday the market finally resolved to the downside again respecting the 1210 Bull/Bear demarcation line. Thus, the closing stop loss was never hit.

Furthermore, Tuesday's clear downside reversal was the kind of market action we were looking for to strengthen the conviction in short positions. At the same time, since over the past 9 months the Inflection Point Model has an accuracy rating of 95%, there was a .95 probability of seeing a reversal. Such a high probability demands respect from any statistically minded individual. Finally, as stated in earlier market updates the market structure over the past few weeks had been overlapping and triangular - overlapping structures symbolize market correction. Market Matrix also allowed us to objectively analyze the market and showed us that except for the sentiment, all other indicators were suggesting a continued slide. Overall, we might be on the verge of completing the H&S pattern discussed previously. Thus confirming the H&S hypothesis.

Cumulatively, these reasons prompted us to believe that a significant move was coming in the primary direction i.e. downside.

On Tuesday a reader asked me about the market rally and my reaction. I am attaching my reply for your understanding:

By being a part of the recent market action and staying steadfast, our belief in the Inflection Point Model's accuracy and the importance of one's decision making ability has been amplified. It seems like decision making ability is a God gifted attributed and it is tough to assume that we do everything on our own (we do not deserve 100% credit).

Anyways, at today's opening market hit both 1st and 2nd profit objectives as mentioned in the Trading Algorithm update. Hitting both of these objectives in such a small trading window i.e. just 3 days, speaks volumes about the intensity of the decline. By looking at the market structure, it is evident that we have started the final wave down to new lows. As discussed previously in the comments section, it might be interesting to see if the market declines into the earnings reports next.

In the event, it should be mentioned that yesterday we saw a sharp increase in Pessimism among individual investors. This kind of increase will at some point lead to a sharp rally. However, as mentioned several times before that one should trade with the trend. When we are in a bear market, market conditions can become even more oversold before a significant bounce can materialize.

Note: Trading Algorithm's profit objectives were hit. However, we are staying partially short with a tight stop. TA will posted tomorrow. It seems like we might bottom today/tomorrow and then rally for next few days. There is a turn window coming up soon. We will discuss it in the next post.


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