Jul

15

Reader Mailbag: Is This A Bottom?

Teresa Lo @ 3:04 PM | | Start a Discussion 

We have a quite a few questions in today’s mailbag. Let’s start with one that’s on everybody’s mind:

Everyone
Is this the bottom?

Teresa
I’ve already given my opinion on the psychology of today’s market in Too Soon Old and The Twilight Zone. My experience to date in the financial markets is that it’s never different this time, and anytime the mantra becomes “It’s different this time”, it is generally a big turning point.

One thing we can never, ever underestimate is the motivational power of collective self-interest as the incentive for people — even grandstanding, windbag senators — to put aside partisan differences, pull together and do things they could have never done in “peace time”. Survival instinct somehow prevails at the eleventh hour, sort of like how the astronauts on Apollo 11 got themselves back to earth in one piece using a slide rule.

Worse comes to worse, we can read the market’s entrails:

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One question to ask ourselves is this: if every bearish technical pattern has already been “triggered” and everyone who knows for sure that the market is going lower has sold, who is left to sell? Whether or not we’ve reached that point is a matter of opinion. Technicians cannot even entertain the idea of a spike bottom [WATCH VIDEO]. In fact, no one is calling for a bottom anymore. They don’t even dare ask if this might be one in the making [WATCH VIDEO].

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We zoom in on an intraday basis to find a potential wedge trap for short sellers…

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… while the crude oil daily chart has formed a potential wedge trap for longs on the fabled Trader Vic 2B test of top. It doesn’t get any better than this folks!

Last, but not least, permabear David Tice has cashed in big time, selling Prudent Bear Funds for a potential $143 million. Not bad for the manager of BEARX, a fund that has returned exactly -0.03% since inception in 1995. Tice is growling all the way to the bank. He got his; what about the clients?

Jason
I am a new “via email” reader of your blog. I was wondering if you could do a daily summary about the overall market in the post?

Teresa
You have a good suggestion, but I just don’t have the time to do it. Check out KirkReport.com; Charles Kirk writes one of the best ones around.

Jason
Thanks for the quick response. Actually I have been a subscriber to the Kirk Report for last 3 years. That is how I know you. I really like your post.

Teresa
You’re welcome. If you have time, could you tell me what kind of “daily summary about the overall market” you would like to read? What sort of information are you looking for?

Jason
I was originally looking for some words like those provided by the Kirk report and the Worden Report. However, what I really want to know is your view of the market trend for next 6-18 months. I guess a “daily” or “weekly” update is not appropriate due to the high volatility. But something monthly like Fred Hickey’s “The High-Tech Strategist” may be very useful to me. It gives me a chance to identify a true expert who is from “Main Street” instead of “Wall Street”.

Teresa
One of the most difficult things to do is making forecasts. That’s why global macro hedge funds have such a difficult time. Not only do you have to make good predictions, you must also correctly predict the reaction of the market to your correct macro prediction.

Let’s give David Swensen the last word. I agree with his ideas; not making predictions is the core philosophy of our trading and portfolio strategy:

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult. Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.” — Keep It Simple, Says Yale’s Top Investor

Greg
I purchased InVivo.Stops yesterday and installed it. Everything went smoothly. I have experimented a little bit with the indicator and like what I see so far. Thanks for a nice product.

My question is, you have provided some general guidelines for its use (Universal StopFactor = true, settings between 1.0 and 1.5), but have you provided any specific recommendations for settings in various market environments. I am thinking of situations such a trending versus range bound markets, or perhaps adjustments related to market capitalization of the individual stock, or accounting for its beta, etc. Also does the time frame (daily, intraday) necessitate different settings.

Teresa
I suggest that the stops should be used as trailing stops, and therefore, if you wish to manually set the StopFactor, the “tightness’ is highly dependent on your trade setup. If you are scalping, you probably wish to use a stop closer to 1.0. If your entry is with the trend, you should set the stop closer to 1.5.

Ian
I am a member of Charles Kirk’s site and really enjoyed your interview. I will have to buy the Justin Mamis book. I am also enjoying your podcasts.

If at all possible it would be great to have the Invivo indicators in Ninja Trader. Until recently I had not realized how useful this free charting platform was (taking feeds from esignal; IB; opentick without the usual fiddling of instrument set up). It also has an equivalent of the radar called market analyzer and you can also restrict the code. I would be a customer but would be surprised if there are not more traders using that platform.

You did not mention it, but I assume the indicator is not related to Welles Wilder’s volatility stop. In trying to answer that question and Google searching Teresa Lo Le Beau, I came across your essay on engineering better Bollinger Bands. Very interesting observation on the strong trend not necessarily being volatile. Could you give an example of how the Better Bands XC could be used for determining the swing trade versus day trading and as you rightly observe we are trying to do this “ex ante”.

I also liked your threshhold line for coloring the bars on the RMI. I had first seen a threshold used in Tom Joseph’s MACD, but yours looks very useful.

Teresa
Thanks for the kind compliments.

With regard to similarities between InVivo Universal Stops and Welles Wilder’s Parabolic SAR, the confusion probably arises from the fact that there are only so many ways to visually plot the dots. Yes, they might look the same, they are quite different. In simple terms, Parabolic SAR experiences much more whipsaws. In technical terms, the calculations that go into Parabolic SAR are not based on statistics. InVivo.Stops uses statistics to detect outliers, that is, movements that are outside the range of “normal noise”. When that happens, we are alerted to a possible change in direction of the price swing.

I don’t really have anything to add to the XC version of Better Bands because the article was intended for illustration purposes. The threshold line we use in the RMI studies are not related to MACD. Again, there are only so many ways to plot an indicator and that makes it confusing for readers.

Our trading tools are available ONLY for TradeStation 8.x and eSignal, software that we actually use.  We won’t be making them for any other platform in the foreseeable future.  Our focus is on R&D and helping clients make money, one at a time.

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