Archive for February, 2011

Capitulating Bears Send Short Sales to Three-Year Low in Aging Bull Market

Posted in socionomics on 2011-02-28 by Strategesis

From Bloomberg:

The biggest Standard & Poor’s 500 Index rally in more than five decades is forcing stock market bears to abandon short sales, cutting them to the lowest level since 2007 last month.


“The time to buy is when the blood is running in the streets.” — Baron von Rothschild.

“The time to sell is when the champagne is running freely.” — Strategesis


Investor Sentiment: An Alternative Interpretation

Posted in education, socionomics, technical analysis, technical indicator on 2011-02-27 by Strategesis


I have often contended that there are two ways to interpret sentiment data. The first is as a contrarian. Figure out when too many investors are on one side of a trade and bet the other way. This is the “traditional” way most interpret this kind of data. The second method of interpretation is based upon the fact that investor sentiment will track the movements of price. So as prices move higher, we would expect bulls to increase; as prices move lower, we would see investors express their bearishness. It is the rare situation (believe it or not) where investor sentiment and price actually deviate. To read more on variant uses of sentiment click here and here.


Turning Points (Andre Gratian)

Posted in advisory service, education, price chart, technical analysis, technical indicator on 2011-02-27 by Strategesis


In my Week-end Report, last week, I concluded that:

“For the time being, the long trend appears to be safe, and higher prices will probably occur before the SPX starts an intermediate retreat. However, we currently have the best technical evidence yet since the rise from 1275 that, this time, the SPX is not crying wolf about forming a minor top at this level, and that near-term caution is warranted.”

I had a good projection to 1343 and the SPX had already reached 1344.07, and my indicators suggested an imminent reversal. Monday was a holiday, but on Tuesday, the index dropped almost 31 points, one of its worst declines in weeks.

Last Thursday, based on structure and P&F projections, I alerted my subscribers that I saw a good possibility that the decline would end at 1295. The low turned out to be 1294.26.

This earned me the following: “Andre–that was a brilliant call. thanks for all the extra updates and your hard work. You are really “there” for your subscribers when markets are roiled and we need you.-M.

OK, enough bragging! What happens next? Since Thursday’s low, the SPX has rallied 26.35 points and closed near its high on Friday with excellent A/D figures to support the move. This was enough for my hourly indicator to give a strong buy signal, and for the daily charts to suggest a potential reversal, falling just short of giving an actual buy signal.


The Importance of traders and the evils of bankers

Posted in economic utility (of trading), education, morality (of trading), social function (of trading) on 2011-02-26 by Strategesis

From The Cobden Center:

The key is uncertainty. The future is not known; if it was, then the central planners might stand a better chance. But the future peculiarities of individual desires and wants can never be known, so there are always highly uncertain outcomes inherent in planning for the future. The world is too complicated to simplify into maths or bureaucratic diktats. The risks are too great and the mistakes too expensive. What we need is a mechanism to attempt to put a price on future outcomes. We need to “crowd-source” the answer to the problem of resource allocation. And, that’s what speculation is…


US Stocks: Trends and Momentum are all strongly up on the quarterly charts (bar-size = 3 months)

Posted in education, price chart, technical analysis on 2011-02-26 by Strategesis

Chart of the S&P 500 US Stock Index [Quarterly bars (each bar is 3 months of price action)]

(Click on image for larger view)

Trends and momentup both go up and down in cycles. However, at any point in time, the current trend and momentum are more likely to continue than to reverse.

Also, the trend and momentum can be different than each other (trend can be up but the momentum can be down.) And they both can be different at different time scales. Strong uptrends as seen on a monthly or quarterly chart can and do experience days, even weeks, with net downward price movement.

Future direction of market prices cannot be predicted deterministically or mechanically, only probabilistically. It’s biology and psychology, not differential equations and mechanical engineering.

Deep Practice

Posted in education, trader psychology on 2011-02-21 by Strategesis

Deep Practice is a proces of acquiring “guru,” “grandmaster” or “best of breed” skill or talent. A synopsis of the process is as follows:

  1. Select a goal
  2. Attempt to achieve the goal
  3. Analyze your performance, focusing especially on whatever you did wrong or imperfectly, and identifying the necessary changes to eliminate the problems or improve the performance
  4. Repeat as long as you can identify problems of deficiencies in your performance


Chart of E-Mini Dow Futures for Friday, 4 March 2011 — With an explanation of the indicators I use!

Posted in education, price chart, technical indicator on 2011-02-20 by Strategesis

(Click on image for larger view)

This is the chart I use for entry signals. Each vertical price bar shows all the prices at which the market traded during a 3-minute period. Most of the technical indicators on the chart were designed and implemented by myself, although all but one of them are based on traditional technical indicators. The “studies” (drawn on the price chart itself, instead in a separate panel below the price panel) are mostly standard ones, with one exception.

The Studies

Keltner Channels: The dotted maroon and blue lines on the price chart are Keltner channels. The dotted yellow line is a 20-period SMA (simple moving average.) The Keltner channels are derived from this moving average.

Bollinger Bands: The thin, dotted gold and cyan lines are Bollinger Bands, which are computed very differently than are Keltner channels. The ones are on the chart are derived from a 13-period moving average.

Strategesis Channels (Strat-tay-GEE-sis): The dotted red and green lines are my own Strategesis Channels. They are derived from a) A triple-exponential moving average of the highs of each bar, b) A triple-exponential moving average of the lows of each bar, c) A triple exponential moving average of the difference between each bar’s actual high and the moving average of the highs, divided by the average true range, and d) A triple exponential moving average of the difference between each bar’s actual low and the moving average of the lows, divided by the average true range. The red and green channel lines are computed by multiplying the average true range by the average difference between the bar highs and bar lows, and then adding that value to the moving averages of the highs and lows. I use Strategesis Channels as dynamic trend channels.

Yesterday’s Key Prices: The dotted, horizontal sky-blue line at 12240 is yesterday’s (Thursday’s) closing price. Not shown on the 3-minute chart (because they’re too far away) are yesterday’s high and low. Those are shown on the 30-minute chart, as a dashed red line at 12040 (yesterday’s low) and a dashed green line at 12272 (yesterday’s high.)

30-Minute Opening Range: The darker gray region, bounded by reddish and greenish dotted lines at 12228 and 12260 (see the 30-minute chart, below) are the low and high of the 30-minute opening range (the lowest and highest price of the first 30 minutes of the regular trading session, from 9:30 am to 10:00 am EST.) This is also commonly known as the “Crabel Range” in honor of Toby Crabel, who first published and popularized a trading strategy based on it.

Floor Trader Pivots: The solid red horizontal line labelled S1 is one of the 7 “floor trader pivots.” There are seven such pivot prices: The “daily pivot,” and three higher pivots called R1, R2 and R3, and three lower pivots called S1, S2 and S3. Because so many professional traders use these prices to enter and/or exit trades, trends often reverse at these pivot points, at least temporarily. However, there’s no magic in how these pivot prices are computed (use internet search to find the formulae, if you’re interested; they’re available as chart studies on most of the major trading/charting platforms.) They work simply because so many traders use them.

Volume At Price: The horizontal pale green and pale red shaded rectangular regions on the left side of the chart show the relative up and down trading volume over every 10 price bars. The relative size of the green region to the red region shows the relative size of “buying” (based on bars whose closing price was higher than that of previous bar) and “selling” (tbased on bars whose closing price was lower than that of previous bar.) There’s no way to know whether “selling” represents the opening of short positions or the closing of long positions, nor is there any way to know whether “buying” represents the opening of long positions or the closing of short positions.

Better Sinewave: The horizontal, dotted green and maroon line segments are points of predicted support (green) and resistance (maroon.) The prediction is made at the close of the first price bar where the dotted horizontal line first appears, and is performed by Barry Taylor’s Better Sine Wave indicator, which is based on the work of John Ehlers, founder and CEO of Mesa Software.

Thunder: The yellow, red, orange and green arrows above and below the price bars signal changes in momentum, and usually also signal changes in trend and/or a significant swing point. They are computed by my Thunder meta-indicator, which interprets 5 of my other proprietary technical indicators as a group, and draws up or down arrows on the chart based on the consensus of opinion among the 5 indicators it considers. The arrows are placed at the close of the price bar below or above which they appear, and cannot be retracted or asserted once the next price bar has been started.

The Indicators

Thunder [Very dark gray background, green and red oscillator line]: The first indicator in the first panel below the price panel is also my proprietary Thunder indicator, as described above. The difference between this one and the one that draws in the price pane is simply that, instead of putting arrows above and below price bars, it draws an oscillator line in a separate panel. The oscillator line (thin, dotted gold/red line) shows the “signal strength,” which varies from negative 1.0 to positive 1.0. An arrow is placed below a price bar whenever the signal strength moves from negative to positive, and a down arrow is placed above a price bar whenever the signal strength moves from positive to negative.

The thick red/green line is the Inverse Fisher Transform of a triple exponential moving average of the Stochastics %K of a triple exponential moving average of the Thunder signal strength.

Strategos [(Struh-TEE-gose) Slate-gray background]: The Strategos indicator shows where price is trading relative to the upper and lower Strategesis Channel bands (see above.) It is smoothed using both a triple-exponential moving average and the Inverse Fisher Transform. Conceptually, it is similar to the commonly-used Stochastics indicator, but uses the Strategesis Channels to define the price extremes, instead of using the lowest and highest prices of the last N bars.

Cyclone [Dim-gray background, red/green signal line]: The Cyclone indicator is based on the commonly-used Stochastics indicator. It computes %K exactly the same, but computes %D using a triple-exponential moving average (instead of using a simple moving average.) As I normally use it, I don’t even have it show the plot of %K (it can, if desired.) I do have it show %D as a thin, dotted gold line. But for trading, I rely more on the Inverse Fisher Transform of %D, which is plotted as a relatively thick line whose color shifts between red and green (red when the line is moving down, green when it is moving up.) Also plotted as a thin gold/orange line is the inverse Fisher Transform of %D of Cyclone applied to %K recursively (my variation of “Double Stochastics.”)

Windsock [Steel Blue background]: The Windsock indicator is based on the commonly-used RSI (Relative Strength Index.) It uses a triple-exponential moving average instead of a simple moving average to smooth the oscillator. I don’t have it plot either the raw or smoothed RSI, but instead plot the Inverse Fisher Transform (as a cyan/blue line) and the Fisher Transform (as a black histogram) of the smoothed RSI. Also plotted as a thin yellow/orange line is the inverse Fisher Transform of %D of Cyclone applied to the raw RSI recursively (my variation of “Stochastic RSI.”)

Tempest [Dark teal background]: The Tempest indicator is based on the commonly-used DMI (Directional Movement Index.) I only plot the Inverse Fisher Transform (as a gold/orange line) and the Fisher Transform (as a black histogram) of the smoothed net difference between +DI and -DI. I also compute +DI and -DI somewhat differently.

Trendor [Rosy-brown background]: Trendor plots the Inverse Fisher Transform (as a gold/brown line) and the Fisher Transform (as a black histogram) of the net difference between a slow and a fast triple exponential moving average of price. It’s conceptually similar to the commonly-used MACD (Moving Average Convergence-Divergence) indicator.

Spike [Dark green background]: Spike computes the ATR (Average True Range) using two different triple-exponential moving averages, fast and slow. The slow ATR is plotted as a gold histogram, the fast ATR is plotted as a green line.

Better Sinewave: Same as the one described above, expect it plots the actual Hilbert sinewave oscillators in their own panel, instead of plotting the predicted support/resistance prices based on the interpretation of the Hilbert sinewaves.

Cyclone on Volume [Gray background, two-toned green line]: Applies Cyclone (see above) to volume instead of applying it to price.

To decide whether I will only take long trades, only take short trades, take both long and short trades, or take no trades, and also to decide on the amount to put at risk when I take a trade (by varying the position size), I also consider the 10-minute chart, the 30-minute chart, the 90-minute chart, the chart of the advancing minus the declining issues ($ADD,) whether price is currently above, at, or below the Daily Pivot, the distance between the day’s low and high price, the daily, weekly and monthly trends, and the Elliott Wave structure of the price charts.

10-minute chart:

(Click on chart for larger image)

30-minute chart:

(Click on chart for larger image)

90-minute chart:

(Click on chart for larger image)