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Sunday, January 5, 2014

Sunday, 1/5/14 update


Preferred count for the ES/SPX at the moment has the market working out a 4th wave correction of the rally off the Dec 15 lows.  The 2nd wave of the structure was a zig-zag so the EW rule of alternation requires a flat, triangle or some type of complex structure for wave 4.  A flat is shown but any of the others are possible.   Wave 5 will follow the completion of wave 4 and that should lead into an intermediate term top of some significance.

It should be noted that there is a way to count the structure off the Dec 15 low as a completed 5 wave impulse at the Dec 31 high:


This alternate has a problem with the lack of proportionality between wave 2 & 4 of the structure, so it has to be viewed as less probable than the preferred count in the 1st chart above.  But it is only slightly less probable, say 45/55.

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The tick is like the heartbeat of the equities market and can be an excellent tool for trade timing.   When time permits in the last couple of years I've been experimenting with and refining a trading tool which uses the tick as it's basis.  The latest iteration shows some real promise and is presented below.


The bottom chart is an MACD type treatment of the NYSE Composite Tick based on 30 minute bars.  The blue line is a 26 period SMA of the average (H+L/2) Tick per period, the red line is a 26 period SMA of the difference between the instantaneous (1 period) Tick and the 26 period SMA, and the histogram is the difference between the two lines.  The top chart is the SPX but in Heikin-Ashi format.

Trade signals need two things to happen: a cross by the blue SMA above (buy signal) or below (sell signal) the red SMA, and a Heikin-Ashi bar in the direction of the indicated trend.  The idea to use Heikin-Ashi bars is the latest refinement and is intended to help suppress whipsaws, although there was a whipsaw event in the last couple of days.  Also, there is the possibility of another whipsaw in the next trading day unless equities immediately move lower.  Another reason to use Heikin-Ashi is to orient the trading system to one which buys strength and sells weakness.  This is counter-intuitive to some traders, but it does avail itself of the old market adage that says "the trend is your friend".

Stop losses are the final component.  They are set at a distance of 1 ATR from the closing price of the bar where the trade was initiated.

I use TOS as my charting/trading platform and unfortunately they only retain 20 days of data for time periods of less than an hour.  So this system only has 20 days of data so far.  I feel that the minimum requirement for a high level of confidence in a trading tool is 12 months of data at the very least, and obviously more is better.  So this approach needs to be tracked for another year or so before it can be said that it has a definitive edge.  But the initial feedback is quite promising: 6 completed trades with 4 winners and 2 losers, net gain of 69.97 points with a max drawdown of 15.44 points.

One other note.  On the chart above it can be seen that the market activity of the last few days has not generated strong directionality in the Tick by the measures used.  In a way this is further confirmation of the value of the analyses employed because it's pretty accurately reflecting what is known to be the case: a holiday market with a significant number of major players not participating.  Monday should see a change in this situation as everyone comes back off of holiday.  But, as noted above, it may mean another whipsaw in the trades indicated.

I plan on reporting the results of this approach in the months to come.

Happy New Year!

3 comments:

  1. Thanks for the excellent analysis Al. Good luck with the Tick trading system. Stay real warm in the next couple of days...Jordan

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  2. Thanks. Plenty cold here - I live in Wisconsin. Forecast is 26 below tonight, high of 13 below tomorrow. Just got done watching the Packers lose, but it was an excellent game so still proud of them.

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  3. Wind chill will be even worse...but you'll be making nice ice to sail...

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