This week's showcase page will take a look at a few interesting things about the last 2 days in the S&P. Friday was the day of the large down move, the biggest in many of the stock averages in history so far, which makes it a good day to evaluate tools and ideas. Good tools should never blow up on extreme days. The trading day immediately after is always interesting to look at as well, especially in light of our forecasting algorithm. Below is a chart for Friday:
This is a 1 minute bar chart of the S&P market for April 14. I usually like 5 minute charts, but on really wild days like this one I'm forced down to smaller time frames to keep the stops more reasonable. As you can see, the market followed the regular forecast very closely on this day, giving us excellent places to execute trades. Momentum divergence signals accompanied the second and third forecasted turning points of the day, confirming the forecast and keeping us on the right side of the market. You'll also notice the Exhaustion Bars from our second exhaustion study. These were built for 1 minute charts, and always do a good job on them. Once the regular forecast was confirmed, the Exhaustion Bars gave some great entry points.
Now let's take a look at Monday, and one of the interesting things I wanted
to talk about. Once the forecast for Monday was computed, I noticed something
very interesting about it - it was almost identical to Friday's forecast. This
doesn't happen too often, and what it means is that the underlying cycles in the
market haven't really changed. Since Friday was down so strongly, the first
thing I thought was "Wow. Is this going to be October 1987 all over
again?!" That thought faded pretty quickly - the cycles were the same but
the markets don't like to do the same thing two days in a row. If we were going
to have a crash, we would need new cycles to run on, not the same ones.
Therefore, the only solution was to expect Monday to follow the inverted
forecast, as this would still let the cycles act out their influences while
preserving the perverse character of the markets. This piece of information -
that the cycles would invert on Monday - made everything fairly straight forward
during Monday's trading:
The red line is the upside down or inverted version of Monday's forecast. Although not perfect, it was very good nonetheless, especially considering that the odds were definitely in favor of this forecast working itself out rather than the regular, right-side-up version. Of course, that doesn't help us place trades. There was only one really clear trade on this day, and it came around 1200 on the chart above when we broke out of a down sloping trend line right after an oversold SlowK reading. This happened right at the forecasted bottom, so it was an obvious buy worth over 30 points if held to the close.
So that illustrates a common way the markets can work out identical conditions on two consecutive days while still keeping the public on their toes. Since this is a zero sum game, the market can never do the obvious thing. You can prove this to yourself by writing a simple trading system that buys after down days and sells after up days. Set commissions to $0 since you're looking at tendencies and check out the winning percentages. They should be greater than 50% in most cases. Remember that money can never flow from the few to the many because the few will stop playing and go home. It always has to go from the many to the few. This is basic contrarian strategy, but it is interesting to see it show up so nicely in the forecasts. Stay tuned!
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