S&P 500 Stays Bearish, NDX Traders at Exuberant Extreme

Some stocks have had a nice rally since late November - especially precious metals and real estate - but how sustainable is it? Today's holiday-delayed Commitments of Traders data pours a bit of cold water on any idea of a continuing bounce from here. My new, improved S&P 500 trading setup (see more on it here) is still on a bearish signal and will go to cash next Monday for a single week. It will then go back to bearish the week following. Other highlights from my latest signals table:

- My trading setup for the NASDAQ 100 remains in cash for the second week. Interestingly, the small traders in NASDAQ 100 futures and options have suddenly gone ballistic in their bullish positioning. They've never been so optimistic, in fact, since the beginning of the data in 1996. Their net position is now a record 3.02 standard deviations above the moving average I use for this setup, as a percentage of the total open interest. This, of course, is a bad sign. The small traders in this market tend to be wrongly positioned at market turns. Oh-oh.

- Gold, my other fully tested trading setup (see more here), has also gone to cash for this week after a five-week bullish run. This is based on the large speculator total open interest (long plus short positioning) growing to excessive extremes that in my past testing have tended to signal falls in the gold price.

- My trading setup for silver is also bearish. In fact, silver commercial traders are now 2.1 standard deviations below their moving average in their net positioning as a percentage of the total open interest.

Hope you had a good holiday week. Good luck this week and best wishes for a Happy New Year!

TAGS: S&P 500, SPX, NASDAQ 100, NDX, gold, silver, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Holiday Delays

Holiday delay for the latest Commitments of Traders report. The report for last week and this will be delayed until Monday at 3:30 p.m. See you back here tonight or before the open tomorrow morning with my latest update.

Portfolio update: Also, just updated my portfolio page with data from my current positioning based on my COTs Timer system.

New Gold Setup to End Bullish Run Dec. 29

My brand new COTs Timer trading setup for gold will end its five-week bullish signal on next week's open of trading. It's been bullish since Nov. 24. I've just posted the results and parameter values for the new setup on my latest signal table. On Dec. 29, the setup will either go to cash or bearish. This setup is the second one I've developed based on my new testing that includes detrended price data (in which the long-term bullish or bearish bias of the prices is stripped away) and Monte Carlo testing (which sees how the setup would have done in 6,000-plus randomized market runs). My first new setup using these tests was for the S&P 500. See more on that one here.

My gold setup uses two groups of traders to come up with long, short or cash calls. It's been in the market only 44 percent of the time since 1995, yet beat gold handily. If the two traders don't agree, the setup goes to cash. The first signal fades (trades opposite to) the large speculators when their net percentage-of-open-interest position hits extremes of positioning. It has no trade delay. This setup remains bullish this week. The second signal fades the large specs when their total open interest hits positioning extremes. This setup gave a bearish signal the week of Nov. 4 and stayed bearish three weeks before going back to bullish. So with the trade delay of seven weeks it will put the overall setup either in cash or bearish next week, depending on what the first setup does. See all the details in the notes to that table. I'll upload a sample spreadsheet for this setup at some point soon.

Portfolio Update: Also, just updated my portfolio page with current positioning based on my COTs Timer trading system and a recently closed trade for my Nikkei trading setup. Hope you have a great holiday and good luck in the New Year.

TAGS: gold, S&P 500, SPX, Nikkei, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, Monte Carlo, walk-around testing

Bah, Humbug! S&P 500 Bearish Through Holidays

Interesting week. You'd never know from the news that we're in the middle of a powerful rally. Gold stocks and real-estate ETFs have doubled in the last four weeks. I've been playing some of these rallies with discretionary trades while I take another look at my COTs Timer trading setups using detrended price data and Monte Carlo testing.

My first setup that's come out of that process - for the S&P 500 - gave a bearish signal for the start of this week. Seemed a little crazy when the Fed opened the floodgates Tuesday by slashing its target rate to zero, but the index ended up closing about even for the week. Not bad. So what about the much-anticipated Santa Clause rally? Sorry to be a Grinch! The setup is still bearish for two more weeks. It finally goes to cash on the open of Monday, Jan. 5. Bah, humbug! See my spreadsheet for this new setup on my DYI page.

This afternoon's Commitments of Traders data has given my other setups a few new signals this week: cash for the NASDAQ 100, BKX U.S. Bank Index and platinum; and bullish for natural gas and the Nikkei. See my latest signals table for more details on these and my existing signals.

Please keep in mind: I haven't yet subjected these other setups to testing with detrended data and a Monte Carlo test. I have no idea how many I'll keep and which I'll need to replace. These tests are a key way to gauge the risk that the setups came from chance or if they represent an actual market effect. For this reason, I'm temporarily combining those signals with technical indicators for trading as explained in this post.

Have a good weekend and wonderful holidays. See you back here next Friday with the next COT update, or maybe sooner if I finish testing setups in gold, the next market I'm updating.

TAGS: SPX, S&P 500, NASDAQ 100, gold, natural gas, platinum, Nikkei, BKX, Bank Index, crude oil, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

New SPX Setup Bearish

Lots of interesting new signals from this afternoon's Commitments of Traders report. I've updated my latest signals table here. My brand spanking new S&P 500 trading setup (see more on that below) has gone to bearish for next week's open. (It was in cash last week.) The Nikkei has gone to cash, as has natural gas. And platinum is now bullish. All for next week's open of trading.

That table also has the backtesting results of my new S&P 500 setup. The specs are also all posted in the notes to the table. It's the product of a bunch of new testing I've been doing using detrended market data (data that has the long-term bullish or bearish bias of the market stripped out) and comparing it to randomly generated price data using something called a Monte Carlo test (invented during development of the atomic bomb). I plan to stick with this new setup until my next round of updating all the setups in mid-2009. I will also now resume trading this particular setup with no added technical indicators for backup. Sorry for switching this one around so much in the past few weeks, but I think the effort and your patience have paid off. You'll also see on that table I've added some new metrics that I'm using to evaluate the best setups. I've just published a spreadsheet for the setup on my DYI page. Have a good weekend!

TAGS: S&P 500, SPX, Nikkei, natural gas, platinum, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Long Dow Industrials

Just updated my portfolio page to reflect my current positions based on my COTs Timer strategy. I was long the Nikkei from a few weeks ago and just put on a long Dow Jones industrials position this morning shortly after the open. My stop is just below the highs of Dec. 3 and 4 at $29.49 for the DDM ProShares Dow ETF. I've made a couple of changes in how I'll report my positioning. I'll just be reporting the gain or less and dropping my position sizes. I don't think that's as meaningful now that I'm doing some discretionary trading on the side again. The position sizes also reflect technical considerations - i.e., where my stop is - rather than the maximum portfolio allocations for my system. I'll include trades on this page if I executed them any time during the week following a new signal. (To read more about why I'm temporarily changing the way I trade my system, see this post.) Good luck this week!

Dow Gets Bullish, Commodities Iffy

Hope you survived the week! Interesting new signals from my trading setups based on this afternoon's Commitments of Traders data on the latest derivatives positioning. See my latest signals table for the details:

- After being on a bearish signal since late July, my setup for the Dow Jones industrials has turned bullish. This, after the wrong-way large speculators - that's the bright lights at the big investment firms and hedge funds who have wrecked Freedom 55 for the boomers - finally caved in and hit an extreme net short position as a percentage of the total open interest. They were massively bullish in late July, just as the market topped. Now, they have finally thrown in the towel and sit about 1.1 standard deviation below the average of their net position. The trade execution is for Monday's open. My Highly Correlated Markets Rule (see more on it here) says I can take this position because at least one of the two correlated markets - the BKX Bank Index - is also bullish. But I won't execute it without some kind of confirmation on the charts next week because of my temporary decision to trade in combination with technical price action while I finish up some extra testing (see more in this post).

- Meanwhile, my setup for the S&P 500 is still bearish. In fact, the "dumb money" small traders last week were more bullish in comparison to past data than any time in a year for one setup I use and at a two-year extreme for the other one (hitting 2.5 standard deviations above the average on the latter). This week, they are still 1.6 and 2.1 standard deviations above their averages on those two setups. If that's not odd enough, the S&P 500 is highly correlated with the Dow industrials. So if I was getting this bearish signal this week, I wouldn't take it due to my correlated markets rule.

- Oddly enough, on the Nikkei, where the small traders are actually the "smart money" believe it or not - accurately calling tops and bottoms for years - these folks are super-bullish, too. More so than at any time in two and a half years. actually small traders haven't been this bullish in two and a half years. Silver commercial traders are 1.4 standard deviations below the average. So quite the mixed picture overall. I should note, however, the Nikkei isn't strongly correlated with any other of my markets.

- In the commodities, quite a huge turnaround since last week. Keen-eyed readers will recall that last week all five commodities were in the rare position of being bullish. This week, silver has gone bearish because of a sudden rampup in the commercial trader net short position (now -1.4 standard deviations below the average), while platinum and crude have gone to cash. Can't take the silver signal if I wanted to; it's the only bearish one of the bunch at this point. Copper and gold are still bullish.

Hope you have a relaxing weekend, and good luck next week.

TAGS: gold, silver, platinum, crude, copper, Nikkei, BKX, Bank Index, crude oil, S&P 500, SPX, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

S&P 500, Nikkei Setups Pass Monte Carlo Test

Figured out a way to do Monte Carlo testing on my trading setups in Excel. Phew, that was a learning experience. I've mostly tested it so far on the S&P 500. Happy days. A good number of my top trading setups based on the Commitments of Traders reports scored well above the 95-percent mark that signifies I can be confident their results weren't some kind of freak anomaly of luck, but rather a genuine market effect. A number actually scored better than the 99-percent mark. (That basically means that the average return was better than 99 percent of the returns when I scrambled the S&P 500 price data 6,000 times.) Same for my best trading setup for the Nikkei. It scored better than 99.3 percent of the 6,000 randomized returns. Unfortunately, my brand new S&P 500 setup I just announced Monday isn't one of them. It scored only at the 93.6-percent mark - not bad but not good enough for me to risk money on it. [UPDATE DEC. 5: Oops, made a mistake there. Just took another look at something I did wrong, and my current SPX setup does indeed score better than 95 percent on the Monte Carlo test. (In fact, its average weekly profit was better than that of 98.8 percent of randomly generated market runs.) Sorry about the screw-up. Still need to evaluate all the setups against each other as described below.]

I've got just one more step I want to do before I choose my best setup: a new test I just thought of combining the Monte Carlo test with my walk-around test. The idea of the walk-around test is to vary all the parameter values and see how this impacts the results. The worse those results, the greater the risk of data-mining bias (i.e., a setup that won't work well in actual trading). I check 16 variations of each setup's parameter values and come up with a "walk-around efficiency" score to see how much the results are impacted. You can see this in Column Y on my latest signals table. Curtis Faith talks about a somewhat similar technique in his book Way of the Turtle. He calls it "parameter scrambling." What I still want to do is take all these "walked-around" setups and do Monte Carlo tests on them, too. That would produce a "walk-around Monte Carlo efficiency" score. I'd add this to the measures I use to discard useless setups and choose the best ones. Should have something to announce in a few days. Incidentally, I've been thinking of creating a new webpage that talks about all these testing steps - kind of an amateur's primer on trading system development. Hope it can help someone else out there.

New S&P 500 Setup Bearish, All Five Commodities Bullish

Interesting new data from today's holiday-delayed Commitments of Traders report. My trading setups based on the reports are giving me these new signals that would have been effective on today's open: bearish for my new S&P 500 trading setup (more on it below) and bullish for crude oil. Earlier signals from past weeks had also given me bullish signals for gold and the BKX Bank Index today. The two new commodity signals mean all five of my five highly correlated commodities are now bullish. See my latest signals page for all the details.

Please note, however, my post of last Friday, where I talk about my decision to temporarily combine my COT signals with technical analysis for trading. (The reason is I want to test my setups on detrended price data and apply Monte Carlo testing or some other randomization test to reduce the risk of having found my setups by pure luck.) I didn't enter any trades today owing to the breakdowns on the charts. (There were very bearish pullbacks from resistance on the 60-minute charts as defined by an interesting system developed by Tom DeMark, about which you can read more in this interview with DeMark here and in this excellent primer from a trader who uses it to great profit, Stephen Vita.) One promising result of my testing so far is that I came up with the same trading setup for the S&P 500 using raw price data as I did using detrended price data. (Detrending the data is a way to remove a market's net bullish or bearish bias. This is vital in order to ensure a trading strategy isn't just benefitting from parameters that are slanted to take advantage of this bias. Such a setup might not work as well in other market conditions.)

Speaking of the S&P 500, I've chosen a new setup I'll be following for this market. I've put up those results on my latest signals page. I chose it based on a slight re-weighting of the measures I use to score my best setups, with a little more weight given to my walk-around tests and use of what I think are more robust out-of-sample measures. As I said, I thought it was a good sign that it scored the best out of the setups I looked at on both raw and detrended price data. Still need to do a Monte Carlo test, but I'm working on developing that. You can see all the specs for the setup in the "notes" on my latest signals table. Or if you want to really get your hands dirty, check out my DIY page and download it for yourself. I welcome your thoughts.

Note (added Dec. 4): I should clarify that this setup is temporary until I've finished my Monte Carlo testing.

TAGS: gold, BKX, Bank Index, crude oil, S&P 500, SPX, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Holiday Delay

This week's Commitments of Traders report was delayed until Monday because of the holiday week. I'll be back Monday afternoon or evening with my next updated signals. Hope American readers had a good holiday and hope you have a good weekend.

System Development Update

I just found some time to take a closer look at David Aronson's excellent book Evidence-Based Technical Analysis and found some important things to consider about my trading setups based on the weekly Commitments of Traders reports. One is testing the setups based on detrended price data. My results and choice of best setups are based on the raw price data, but it's clear from Aronson's book that detrending the data is an important step. I tried that last night on the best few dozen setups I've found for the S&P 500 and can report that most of them still produce excellent results - on balance, even better than on the raw data. The problem is the results are different from the ones I used to choose my best setup for trading. So I need to look back at all of them to find the one I like best. Same for all the markets I'm trading.

The second major step Aronson talks about is a bootstrap or Monte Carlo test in order to verify if the setup was obtained by luck. Aronson offers code for a variation of the Monte Carlo test on his website here. I think he makes an excellent argument for the importance of this kind of testing, and I plan to do that too.

The question is where does all this leave my existing setups. Until I've done all this testing, I don't think I have much choice but to include a bit of discretionary technical analysis in the picture when I'm trading these signals. I might, for example, consider trading some signals with a tight stop - for example, a two-percent drawdown stop. Trading the system until now the way I've done has been an important education on the value and challenges of mechanical trading - more so than any paper trading could have been. And I think the signals still have great value in guiding trading decisions. But until I go through the important processes above, I feel like I'm taking on too much risk. On the other hand, the tests above will hopefully lead me to a super-robust trading system. Until then, I will still post the signals weekly and give my take on what the data is saying, as well as give updates on my system development progress. See you later today or sometime this weekend with an update on this afternoon's COT data.

Banks Bounce?

Quite a day. Quite a week. Quite a decade! Nice bounce back above the 2002 lows for the S&P 500. Could this be the bottom? Don't know, but you can bet there are a bunch more surprises awaiting. The three-month T-Bill chart still looks like a horror show. Just updated my latest signals table based on this afternoon's Commitments of Traders data. A lot of new signals this week (bullish copper and banks - the latter with a one-week trade delay - cash for crude oil and bearish for the 5-Year Treasury). I'll be ignoring the copper signal because of my Highly Correlated Markets Rule. (See more on that here.) I'll post a lengthier update early next week. Have a relaxing weekend.

Woah

Yikes. SPX today closed two percent below its 2002 intraday low of 768. Not good.

Going Long Nikkei

Just updated my portfolio page with my Nikkei long position that I took on this morning's open. See more on that signal in Friday's post. Good luck this week!

Japan Turning Up? And Maybe Gold Too

A few interesting new signals from this afternoon's Commitments of Traders data for my trading setups: long Nikkei and gold, short copper and cash for the BKX U.S. Bank Index. All those signals are for execution on Monday's open, except for gold, which setup works with a two-week trade delay, so execution is for Dec. 1. Check my latest signals page for all the details. The new copper signal I will ignore because of my Highly Correlated Markets Rule, which says I'll take a new signal in a group of correlated markets if the majority is giving the same signal. In the case of copper, that's not the case. My system is long crude and silver but short gold, while platinum is in cash. Also, as of Monday, my Black Swan Rule expires, which means I am back to trading new signals. Confused? See more about how all this works at my intro page and glossary page and more on my risk-control rules at my how it works page. Have a great weekend. Also tune in next week for an update to my S&P 500 trading setup. I've been tweaking my evaluation method for choosing best setups and am starting with a new, improved one for SPX.

TAGS: Nikkei, gold, BKX, Bank Index, copper, S&P 500, SPX, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Triple Your Losses!

Tom Bulkowski blogs about a bunch of new triple-leveraged ETFs now available. Read more here.

Natural Gas: Nice Patch of Resistance

Hope you had a good weekend. Just noticed this morning that natural gas jumped right up to resistance at the earlier highs of Oct. 20, Nov. 4 and Nov. 5 and at the Tom DeMark sell line on the 15-minute chart. Now it's selling off again. Wow - nice patch of resistance around $31.25. If it breaks out, I'll consider a short-term trade.

Natural Gas Bullish

I've been watching natural gas closely in the past few days for a possible technical trade while my Black Swan Alert remains in place for one more week for my COTs Timer trading system. Natural gas has tested resistance around the Oct. 20 and Nov. 4 and 5 highs and is forming a possible base after its huge selloff. There's also a nice seasonal sweet spot for Alberta natural gas from July to December, and that could finally kick in late this year. (See more on that here.) Turns out this afternoon's Commitments of Traders data has given my natural gas trading setup a bullish signal for execution on next Monday's open - the only new signal from today's data. (See my updated latest signals table here.) I won't trade the COT signal due to my Black Swan Rule. (See more on that rule here.) But I might consider a short-term trade based on price action if there's a nice breakout. The recent highs also happen to coincide with breakout levels based on the Tom DeMark system, about which you can read more here. Have a relaxing weekend.

TAGS: natural gas, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing

Bullish for 13-Week T-Bill

Just updated my latest signals page. Very, very quiet this week. Just one new signal: bullish for the 13-week T-Bill (meaning the setup is calling for the yield to fall). Hope you had a good week and that you have a nice weekend. Happy Hallowe'en!

Falling T-Bill Yield Points to Sickly Market Action

Many days, there's a good tell that helps give guidance to the tone of the market. Sometimes, it's been important to watch the VIX Volatility Index. In the past few days, I often find myself looking at the 3-month Treasury Bill yield (symbol $IRX on StockCharts.com). Yesterday, it plummeted most of the day - despite the Fed move. Today, it's continued its steady collapse all day. See a daily chart here. (The intraday chart, available to subscribers, shows what I'm saying better.) Not a good sign.

The Little Bounce That Couldn't

Looked like a nice bounce coming into the open, but it's fading pretty fast. Two good tells right now are the HGX Philadelphia Housing Index, which quickly broke below the lows of yesterday and last week, and the ratio between the 200-percent leveraged UYG ProShares Financials Fund and the BKX Bank Index (which you can view in StockCharts.com by using the symbol UYG:$BKX). The latter is a way to check sentiment by seeing how the leveraged fund is doing short-term against the index. UYG:$BKX also quickly broke down this morning. Good luck this week.