Wednesday, May 6, 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.