Wednesday, 6 May 2009

Derivatives Data May Point to Rally Targets

Ah, lovely days to be long. The last thing I'd want to be doing right now is standing in front of this powerhouse rally. So I'm heavily long in my discretionary trading (albeit with tight stops!) But I've also been thinking about the bearish signal from my new S&P 500 trading setup based on the Commitments of Traders data. (Update Friday morning: I closed most of my long positions during yesterday's selloff, but went long natural gas.)

The S&P 500 signal took effect on the open of April 20, with a price of 868.27, and it's now 5.03 percent under water as of this morning. (I'm not in this trade because I started using this new S&P 500 setup only after the current signal took effect.) The trade is down, but it has yet to hit my stop level - a 7.77-percent loss. That stop is based on the average trade profit in backtesting minus two standard deviations. That stop would be triggered if the S&P 500 were to rise to 935.74. If that were to happen, it would effectively mean the market has gone against the typical trend that's happened in the historic data. So that could actually be an upside target for this rally. On the chart, this is around the next resistance level from the January highs. 

There's also a second, higher level I'm keeping an eye on, too - 980.01. A rally to here would mean this bearish signal has lost more than the maximum past drawdown seen in my backtesting - 12.87 percent. That would trigger my Black Swan risk-control rule - which means not trading the S&P 500 setup for four weeks. (Read more about that and my other risk-management rules here.) That 980.01 level is, incidentally, close to the next resistance level on the chart, going back to the highs in November.


Anonymous said...

Alex: THANKS for the mid-week comment.
I keep asking myself, When is this going to COOL OFF A BIT ? Maybe you are right with your S+P target.

Take care, ED N.

Tim said...


Take a look at this:
Breadth Measures Hitting Historical Highs

By Phil's Favorites

Posted: May 6, 2009 - 11:07am

Courtesy of Rob Hanna at Quantifiable Edges
Breadth Measures Hitting Historical Highs
I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday - and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.

This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.


Anonymous said...

Hi Alex,

Since Nat.Gas has been beaten up for the past year, are you still looking at this data? This past week, it seems that it may finally hit a bottom? The volume has been increasing on the buy side as it started on the up move.


Alex Roslin said...

Hi Phil,

I agree natural gas is a great market to trade, with its massive volatility. I went long yesterday based on a breakout on the charts (not a recommendation to anyone else!), but I don't have a COT setup yet using my current testing techniques. Hope to develop one soon though. Thanks for your interest.

Best regards,