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.	Scenarios 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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Inflection Point Model - New Lows Coming???

As I write this post, the US Stock futures are down more than 250 points. With Europe declining sharply, tomorrow might be a bad day for the US financial markets. Understand, Survive and Thrive's Trading Algorithm generated a Sell Signal on Friday at 1177. After the Friday's sell-off, today the UST team e-mailed a special market report to its subscribers (In order to get the report, please subscribe to the e-mails)

This market analysis brought forward a uniquely different market outlook. In short, markets have changed their trend from up to down and might decline a lot. In order to better understand these recent developments, we re-ran the Inflection Point Model. Note that IPM has been 95% accurate in predicting market turns. Therefore, we hoped that it would provide a better perspective for the recent market decline. 

INFLECTION POINT MODEL

Our trades are governed by the Trading Algorithm, not by opinion. In this regard, we re-ran the proprietary Inflection Point Model to discern the next possible Stock Market Turn date. The program output is given below:

ANALYSIS

According to the two models, the next turn date is scheduled for September 20, 2011 (+/- 4 days). At the next turn date, both models are showing a potential turn, thus amplifying turn possibility. To our amazement, there are two turn dates very close to one another. This suggests that either we will see a double bottom or we will see a sharp but short rally into the second turn date.

Interestingly, this time frame also coincides with "Options Expiration Week," Federal Reserves' special 2-day meeting where they might announce QE3 and the Fall Solstice (a significant time for market turns). Collectively, these observations suggest that we might witness a significant announcement from the Fed. This announce would mark the bottom of the current decline (If the downtrend remains intact).

Keeping in mind the double bottom scenario, it is possible that Fed might announce an easing program giving way to a 2-3 day rally followed by test of the lows. This test will eliminate any remaining optimism about Fed's intervention and will give way to a more powerful/sustainable rally.

Bottom picking in a downtrend is hard, and can result in significant losses. Hence, we will intently and safely wait on the sidelines for the turn window and trading algorithm signal. In the next few days, Trading Algorithm might generate a Sell Short Signal and therefore, we will trade the signal when it is generated and not our hypothesis for the markets. 

CONCLUSION

Now that we have a turn window - September 20, 2011 (+/- 4 days), we will concentrate on how to evaluate the market going into the turn window. Risk management is the key to success. In the next post, we will evaluate different market structure scenarios which can take place and how to play them for profitable trade in these tumultuous times.

Note: If markets do make a new low then the chart pattern will suggest that we are heading into a prolonged down-turn - possibly a depression. 

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