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Here’s Your Probability
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Here’s Your Probability

by The MoleMarch 7, 2010

by gmak

I’ve spent this weekend crunching numbers. This is to address the fact that most traders say they put on a higher probability trade, but very very few can say what the probability of another 1% move in the same trend might be. Yet, they claim to have an edge. If they are regularly profitable, I would agree with that – but it is not because they are able to identify high probability trades necessarily.

I’ve taken as my base, the 55 DMA (55 is a FIB number), because EVERYONE looks at the even numbers for moving averages – and if everyone is doing it, it is hard to come up with insights that might give one an edge.

The data history is the daily open, close, high, and low back to 1960. I began my analysis Jan. 3, 1961 to give enough trailing data to put in moving averages as I expand my analyses. I have even come up with a coding technique to identify the shape of a bar – hopefully to find relationships between trends, relationships to moving averages, and the shape of the bar in order to know how the next day might behave (the bar shape) within a certain probability. However, that is more involved and for another time.

What I have done is looked at how far away from the previous day’s DMA, the current day’s SPX close can get. It is like an elastic and at some point the forces to move back are stronger than the forces to move away. I have broken this information down by groups based on whether or not the SPX and DMA are widening (based on the slope from the least squares fit of 10 days of closes for each); and whether or not the slopes are positive or negative.  I have looked at the behaviour when SPX crosses the DMA in either direction, and I have also grouped this by the same characteristics.

I have already published my results for part of this research and was met with a virtual wall of silence which suggests that either no one understands the significance, or no one cares. Since I have changed my base date, here is that same data again.

Bin Frequency
-10% 1.9%
-7% 1.9%
-5% 3.5%
-4% 3.6%
-3% 4.3%
-2% 6.3%
-1% 7.3%
0% 9.1%
1% 11.0%
2% 11.9%
3% 11.0%
4% 8.9%
5% 7.0%
7% 7.9%
10% 3.7%
More 0.8%
   
TOTAL 12376

Why is this important? It shows the odds of the SPX reaching certain levels. Note that the -10% in the table means all the values that are <= -10%. The value beside -7% is the proportion of days that SPX was > -10% but <=-7% below the DMA.  The more means > 10% for SPX above the DMA.

On Monday, March 1st, the SPX crossed over the 55 DMA. As of Friday’s close, it is 2.6% above the 55 DMA. The total history of the data suggests that there is a 32% chance of SPX going higher and moving further away from the DMA.

If I refine this and choose some somwhat arbitrary indicators such as widening or narrowing gap, positive or negative slope (10 data points) for SPX and DMA, I get a “111” = [widening gap, SPX +tive slope, DMA +tive slope]. Running the same analysis on just this condition suggests that there is really a 58% chance of SPX going higher. This is quite different and suggests that a short trade is marginally a better probability. Note that this does not refer to the next day, but until the “111” conditions changes – meaning SPX starts to move towards DMA, or its 10 day slope goes negative, or even DMA goes negative.

The SPX crossed above the 55 DMA on Monday, and has been there for 5 trading days. The data for how long before it crosses back below the 55 DMA is interesting. Of the 12,376 trading days in the sample, SPX has crossed over the 55 DMA from below  only 50 times [there are a total of 725 crossovers, not counting this latest, from either direction] – when both the DMA and the SPX are rising.

When the SPX crosses the DMA from below, and both are rising at the time, the SPX remains above the DMA for a max of 10 days for 60%  of the time. IF I do a back of the envelope calculation, and say that it takes twice as long to go up as fall down (I haven’t crunched the numbers so this is just a guesstimate), then SPX should turn down for a trend between Monday and Wednesday of this coming week – 66% of the time. I chose the 5 day threshold, because anything less is a headfake. So, IMO, this is not a headfake over the 55 DMA (even if this is stating the obvious in hindsight – it sure helps to have some numbers to back up the gut feeling). As well, what is the probability of a 2.6% down day? (SPX is 2.6% above the 55 DMA).

A more interesting point is that if SPX stays above for 15 days – then it will be up for more than 20 days – guaranteed based on the historical data. There are no 16 – 20 day occurrences of the SPX being above the DMA when it crossed with both slopes positive. So either it takes SPX more than 5 days to get back below the DMA, or it keeps moving higher. Here is the data:

Days Frequency
0 0%
5 36%
10 24%
15 4%
20 0%
30 10%
40 6%
50 6%
More 14%
   
total 50

Is this tradeable?  I have a 58% chance of SPX going higher from here. I have a 60% chance that SPX will stay above the DMA for up to 10 days, and it has already been there for 5 days. I have a low probability of a 2.6% decline in 3 days or less (guestimate), but a higher probability of this happening in 5 days.

SPX could still turn down on Monday and continue down to cross below the 55 DMA. If SPX stays above the DMA for 10 days, then there is a high probability that it will stay above for 20 – 30 days – and may run. It could also come down and parallel the DMA for a while before going below.

So you see, even knowing the probabilities does not give an edge by itself. If this is put together with TA, then perhaps it could be more insightful.

Here is the return data since the beginning of 2007 – since volatility has gone up. You can see Taleb’s fatter tails that he bets on.

Bin Frequency
-5.0% 2%
-4.5% 1%
-4.0% 1%
-3.5% 0%
-3.0% 2%
-2.5% 2%
-2.0% 4%
-1.5% 4%
-1.0% 7%
-0.5% 9%
0.0% 16%
0.5% 20%
1.0% 13%
1.5% 7%
2.0% 4%
2.5% 3%
3.0% 2%
3.5% 1%
4.0% 1%
4.5% 1%
5.0% 0%
More 1%
   
  100%
TOTAL 790

Here are the probabilities of a more than a 2.6% or 5% drop over various terms. I’m not a statistician, so I don’t know how to do the cumulative probability of these possibilities.  If SPX were to be 5% above the 55 DMA – assuming that the DMA move is small, it would be at about 1165. Once the SPX crossed the 55 DMA with both having positive slopes, the odds of reaching this level is 28.2%. I don’t know if that has increased by virtue of SPX reaching a level 2.6% above the DMA. Statistically-inclined persons please feel free to chime in. I took dta from the beginning of 2007 on.

DAYS Prob of <(2.6%)  RETURN Prob of <(5.0%)  RETURN
1 6.3% 1.5%
2 10.6% 3.0%
3 14.6% 4.1%
4 14.9% 4.7%
5 18.6% 5.4%
6 20.4% 7.3%
7 20.8% 8.7%
8 21.5% 9.0%
9 22.7% 10.3%
10 24.2% 10.9%
11 24.4% 11.9%
12 25.1% 12.3%
13 26.2% 12.8%
14 27.3% 14.8%
15 27.2% 14.8%

I can say, from the TA, that SPX has crossed above the “since Aug 17” trend line. IF THIS TREND LINE is still valid, then I would expect a re-test before moving up more, within a day or two. If it’s not valid, then the TD resistance happens to be at what I’ve labeled the “Point of NO Return for the Bears”, which is SPX = 1150ish. This also happens to be the high from January.

Let’s say that getting there moves the 55DMA up by about a point. SPX would be 1150 / 1111, approx., which is 3.5% above the DMA – hardly the stuff of legends and eminently do-able based on the odds.  The 5% level at 1165 (more or less) is where the odds of  a turn begin to improve to tradeable levels.

 

Cheers.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at the usual social media waterholes.
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  • http://oahutrading.blogspot.com/ steveo77

    GMAK, per your comment

    “On Monday, March 1st, the SPX crossed over the 55 DMA. As of Friday’s close, it is 2.6% above the 55 DMA. The total history of the data suggests that there is a 28% chance of SPX going higher and moving further away from the DMA.”

    I am trying to follow your method, how do you come up with 28%, are you adding a series from the histogram?

  • Schwerepunkt

    Impressive work. Are you going to make or alter any trading decisions based on this?

  • gmak

    Yes. NO sophisticated statistical analysis at all. The more important number is when I look at the slopes of the DMA and the SPX – it reveals a greater prob. of moving higher.

  • gmak

    Right now, I am trading intra-day. If I keep a position longer than a day, I am (more and more) putting on a hedge. For example, if I am short DXY, I hedge by selling EUR futures when the TA suggests that it will fall (and the DXY rise) – so long as the TA still indicates a drop in DXY in my time frame. Otherwise, I use the EUR as a means to soak up losses and keep above break even until I can exit DXY.

    Right now, I am short ES – which was an “early” play on the TD pressure being in overbought on the SPX daily chart. I will likely use EUR as a hedge here as well if it looks like another “UP” Monday. (Although with everyone expecting it to be up and voting with their cash on Friday – I'm playing the 'wreck the most' theory and gambling on a down day).

    As well, I hope that I can get some insight from the shapes of bars, the slopes of the SPX, and other TA in order to see if there is any relationship to what happens over a series of days, post. (Although I highly doubt it, i'm still curious).

  • gmak

    I will be looking at set ups – and it will definitely affect the timing of trades I put on – especially when SPX is at limits vs its position above or below the DMA.

    I'm hoping to find time to look at returns based on various DMA crosses (so-called death or golden crosses) of various maturities.

  • http://www.hervey-bay-holiday.com kea11

    Excellent work gmak. This seems to be a first principles formulation of the work 3sweeties has done, or is sweeties work at a more macro level? Is that fair comment or have I missed the bus. Either way it does place some really nice navigation lights to highlight the deep water channel from the shallows. Thanks.

  • Onorio

    Awsome work gmak!

    I still believe se should make new highs soon, several indices already made it and SPX should follow.

    Im only daytrading now, and i will not take long term positions before i see some clear signals of where we`re going in the long term.

    Like mole says “take long term or very short term positions”…i prefer the very short term..

  • gmak

    I don't know what approach 2sweeties uses in their work. I'm just trying to make sense of the numbers with eyes open.

  • http://oahutrading.blogspot.com/ steveo77

    Roger that, I understand that you now value the slope data more, however I am trying to get a handle on the basic start, so which numbers do you add to get to 28% in the first example, thanks

  • gmak

    Thank you for being persistent. The number does not make sense from the data presented. It should be 32% and I had a small error in the formula. I do a countif(data range, “>2.6%”) to get the number. The 28% came about due to trying to sum off of the summary table I have presented. It would actually be the sum from “halfway” between the 2% and 3% bin, all the way to the bottom at “more”.

    I may not have phrased the result correctly, but out of all the times that there have been two positive slopes and SPX is above DMA, there is a 32% chance that it will be >2.6% above the DMA – while both slopes remain positive. To give you the raw numbers, there were 4,007 days out of a total of 12,376 where SPX was more than 2.6% above the previous day's 55 DMA.
    I hope this helps.

    Further:

    It's not that I value the slope data more, it's that I am trying to distinguish between states of data to be able to drill down beyond the overall total – i.e. try to get some additional insight so the odds make more sense. If you have any suggestions, I'm all ears.

    Thanks again for catching my mistake. I'm glad you're checking the numbers. That sort of innate curiosity, IMO, is one of the hallmarks of good traders and investors.

  • gmak

    2nd comment:

    To be fair, I should probably do some sort of analysis that says “Given that the SPX is already 2.6% above the DMA, what is the probability that it goes higher?” – but I've forgotten how to do that and right now, I need to stand back from the numbers and come at them fresh another time.

  • http://oahutrading.blogspot.com/ steveo77

    Yeah I was a probability and statistics whiz in college….unfortunately that was 25 years ago! Still am pretty darn good with Excel and nested if statements.

    Take a break from the numbers or you go batty looking at the trees and miss the forest.

  • http://oahutrading.blogspot.com/ steveo77

    VIX directly affects my “Fear Factor”. Vix did a gap down, and FF did a gap up.

    Went short into the weekend, Euro is up, meaning dollar is down, and maybe that “one way street correlation” means equities up. Futures will tell us something shortly.

    However, I do anticipate at least a temporary 1 to 3 days down. But ready to exit positions quickly also.

    BTW, usually SPY moves same direction as the FF
    http://oahutrading.blogspot.com/2010/03/fear-fa
    http://oahutrading.blogspot.com/2010/03/fear-fa

  • gmak

    SO how does one do a “given A what is the prob of B” type analysis?

  • gmak

    The screen I'm on is a little small to read all the details on your charts. Could you let me know why you believe we might see a 1 – 3 days' down? Thanks.

  • gmak

    I;'m seeing bid /ask on ES as being falt at open in spite of the pop in EUR (if one can call 20 pips a pop.

  • http://oahutrading.blogspot.com/ steveo77

    The flyaway gap on my patented 🙂 mother of all indicators, Fear Factor, often retraces downward–sometimes very fast, and SPY follows

  • http://oahutrading.blogspot.com/ steveo77

    It would hurt my brain a bit. I think I could handle that, but would just have to trudge through it, if you want to send my a bit of your spreadsheet I could devote maybe 45 minutes to it today. stock (at) hawaii.rr.com

    But yeah, i think that given A what is prob of B would be a great way to go. Its kind of like a bollinger approach, but using the distance from the moving average….

    Also agree, that using 55 (numbers that others don't use) is more likely to sleuth out something unique and useable. I like 40 because 40 trading days is like a double moon cycle, and because no one else uses 40

  • http://oahutrading.blogspot.com/ steveo77

    The 161 Fib Stopped this market before, maybe this will be a double top. However, market breadth (percent of issues advancing was like 11 to 13 Adv/Dec) That is scary strong if you are a bear.

    http://oahutrading.blogspot.com/2010/03/total-m

  • gmak

    It's 256 MB. I think too big to send

  • amokta

    March 8 (Bloomberg) — China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges

  • trabuco

    Guys…
    The big boys are gaming the markets…historical stats and TA have little or no validity at this time. IMO.

  • gmak

    Japan seems to be quite intent to put a floor under USD/JPY. If the retail (japan) trade buys into this, USD could make a move up against EUR – unless the carry trade is very aggressive on the JPYEUR trade.

  • gmak

    SO, it is headed down now? And that is the reason for expecting SPX to go down over the next 1 – 3 days?

    Thanks for that info.

  • amokta

    game, set, but maybe not match?

  • http://oahutrading.blogspot.com/ steveo77

    If you can zip it down to 100MB, this free service can send it. Someday (like 50 other projects), I am going to add FTP upload and downloads to my blog

    http://www.yousendit.com/

  • http://oahutrading.blogspot.com/ steveo77

    Friday was flyaway gap, expected direction is down. It doesn't gap and run that often.

    I can't form my indicator from futures….need market hours.

  • amokta

    Can anyone explain why market 'gaps' up/down on open – does this reflect premarket/afterhours trading, which means big players, and/or 'ppt' can game the markets?

  • Gold_Gerb
  • http://oahutrading.blogspot.com/ steveo77

    It is expected to go down, and from visually observation, it tends to drop for several days (at least), but does also go down several days, then resume upward travel.

  • http://oahutrading.blogspot.com/ steveo77

    Hell ya, welcome to the broken clock.

  • Niktus

    Excellent Post!

  • yudhisthira

    Damn euro above 61.8% retrace of thurs-friday decline.

  • Gold_Gerb

    ..and that means?

  • yudhisthira

    well, impatiently looking for euro weakness to turn around stocks, while I work on other things tonight.
    Some thinking that Wednesday euro high was the end of fourth wave flat correction to the upside.
    Hourly chart using FXE, euro etf:
    http://www.screencast.com/t/YzczOTI5M

  • http://oahutrading.blogspot.com/ steveo77

    History of the US Financial system in 10 minutes—

    I updated the list below from a December post I did and got a bunch of good comments….so chime in, if there are important things I missed, please comment and I will add.

    For me the little summary below was a great “view from 20,000 feet”. Imagine that….less than 200 years ago, the British were rampaging through Washington with troops and burning the White House

    http://oahutrading.blogspot.com/2009/12/10-minu

  • http://oahutrading.blogspot.com/ steveo77

    GMAK, you still on?

    Hey I been looking all through TOS to find Demark studies….are they still there, can you point me to them?

  • Gold_Gerb

    History Lessons eh?

    Liquidity: I guess some things never change..

    “Finally there came the awful
    day of reckoning for the bulls and the optimists and the wishful
    thinkers and those vast hordes that, dreading the pain of a
    small loss at the beginning, were now about to suffer total
    amputation — without anaesthetics. A day I shall never forget,
    October 24, 1907.
    Reports from the money crowd early indicated that borrowers
    would have to pay whatever the lenders saw fit to ask. There
    wouldn't be enough to go around. That day the money crowd was
    much larger than usual. When delivery time came that afternoon
    there must have been a hundred brokers around the Money Post,
    each hoping to borrow the money that his firm urgently needed.
    Without money they must sell what stocks they were carrying on
    margin-sell at any price they could get in a market where buyers
    were as scarce as moneyand just then there was not a dollar in
    sight.”

  • http://oahutrading.blogspot.com/ steveo77

    I added to my list, where is your quote from?

    http://oahutrading.blogspot.com/2010/03/10-minu

  • Gold_Gerb

    Reminiscences_of_a_Stock_Operator

  • roncofooddehydrator

    Looking at some long term charts, I thought you guys might find these levels interesting:

    Yearly $SPX, the 5 EMA is at 1153
    http://content.screencast.com/users/jbreedlove/

    Quarterly $SPX, the 30 EMA is at 1151
    http://content.screencast.com/users/jbreedlove/

    Monthly $SPX, the 60 EMA is at 1153
    http://content.screencast.com/users/jbreedlove/

    Weekly $SPX, the 200 EMA is at 1141
    http://content.screencast.com/users/jbreedlove/

  • gregn

    Nice post, sir gmak – probabilities are everything in the market. I'm waiting out till Tuesday to decide what to do.

  • http://crisismaven.wordpress.com/ CrisisMaven

    For statisticians, educators, students and researchers: I have put one of the most comprehensive link lists for hundreds of thousands of statistical sources and indicators (economics, demographics, health etc.) on my blog: Statistics Reference List. And what I find most fascinating is how data can be visualised nowadays with the graphical computing power of modern PCs, as in many of the dozens of examples in these Data Visualisation References. If you miss anything that I might be able to find for you or if you yourself want to share a resource, please leave a comment.

  • St. Deluise

    wow, excellent research gmak

    blew my mind using fibs for MAs, so obvious but i had never really thought of it!

  • http://oahutrading.blogspot.com/ steveo77

    Looks like a good compilation, I especially liked the html code for inserting custom charts into webpages/blogs. I am putting your link on a blog article on my site.

  • spicestory

    Gmak, thank you for such a hard crunching number exercise, feel like reading 2sweeties analysis. Love it

  • Gold_Gerb
  • standard_and_poor

    http://www.youtube.com/watch?v=otgAAdxDGkc
    We remain 100% long from Feb.05,2010 basis $Compx from 2101, currently at 2326.

    from 3 weeks ago:”100% long basis 2101 $COMPX from 02-05-2010 , currently at 2183.53.
    Keeping stop at 2100.10. Haven't seen so much bearishness in quite some time – odds for new 52 week highs are improving.”

    http://www.youtube.com/watch?v=J1EF9Q2m7pA
    John Prine sings “There was roosters laying chickens
    and chickens laying eggs”.

  • bananaben

    Thanks for your post Gmak – it's great that you share your insights with everyone here. I've been doing some serious soul searching over the weekend because this market is really getting to me. I'm an engineer and a business owner and I know for sure now that this market is dangerously rigged against us. Anyway, it's a long post but here is what I think is going on for what its worth:

    Unfortunately, I'm afraid all of us have underestimated the ability of the big banks, the Fed, and the PPT to maintain control over the market. We must understand that a major market failure would not only result in the breakup of the banks but also would jeopardize the very existance of the Fed. This is the most serious threat to the power structure of the US and they will print whatever it takes to maintain the status quo. Over the past year, we have seen how the Fed has provided enormous liquidity through POMO operations and MBS purchases and succeeded in driving the market over the psychologically important 10000 level on the Dow. At this stage, it appears that they intend to put a floor under the market around the 1000-1050 level and will coerce it ever more forcefully as it approaches the lower bound lest it get out of control. It should also be noted that the three most recent declines (July, Oct, Jan) have all been less than 10%, a very common trailing stop that might trigger a much broader sell-off.

    The latest dip and bounce was a planned and coordinated event to suck in bears and send the Whitehouse a message at the same time. The market started selling off steadily on Jan 19th. The news of the day was that Scott Brown was elected and Obama was proposing his bank tax. The algos shifted into reverse and shares plunged for almost two weeks in a row. I think Obama got the message, talk of the bank tax disappeared, and before long he was calling Dimon and Blankfein “savvy businessmen” and inviting them for dinner at the Whitehouse. The PPT came in Feb 5th to stem the decline before it got out of control and sent short sellers reeling. From there the algos were turned back on and programmed to go higher again. Of particular interest to me was the action on Feb 25th when the market plunged 180 pts intraday. I think this was a rare case where natural market forces trumped the algos so they brought in the PPT to keep the squeeze on and provide absolutely no relief to short sellers on the way up. See the related ZH piece:

    http://www.zerohedge.com/article/what-perfectly

    Unlike in 2007-2008, we no longer have anything close to a free market. In fact, it should be clear by now that the stock market is the chosen mechanism to helicopter money into the economy – it is a secret form of monetary policy. The idea as we know is to control consumer sentiment/confidence in hopes of sparking a self-sustaining consumer led recovery. All this does of course is reward stupid bulls who get rich for the wrong reasons, hedge funds that have correctly anticipated their moves, and corporate insiders. Once again the Fed has done its job: the rich get richer, the poor get poorer, and the bears lose money. In the short term, we need to recognize that they have created a bit of a recovery – one that is not over yet and has proved to be a nice hedge to my disasterous bearish bets.

    In the long term, they will fail with their scheme because it does not address any of the underlying causes of the crisis and only makes the imbalances much, much worse. When will that failure be reflected in the market? I don't know but at this point I think it will be in the second half of the year now at the earliest. The only way I can see this ending is when they are forced to raise interest rates or some truly shocking news occurs – Greece and Dubai aren't going to do it. Until that time, I feel we are playing a fools game trying to short this market. Technical indicators like mutual fund cash levels, sentiment, VIX etc just won't work when the Fed is involved – in fact I think they have been using this against us making the market more irrational than I have ever seen.

    So I hate to say it but I think we are in the “new bull market” for now and this may be the start of a nasty third wave up that pushes onto new highs – 1200, 1250 etc regardless of the bad news. I can already see them lining up a new set of stepping stones to get there – home sales will start to rise again, first quarter earnings and GDP will probably meet or exceed expectations, etc. Everything is completely addicted to stimulus, zero percent interest, and constant PPT intervention. Remove any of these and the whole thing collapses.

    Finally, you have to ask yourself why hedge fund managers like Paulson have stayed away from shorting the second wave – he was smart enough to get into gold early and stay the hell out of this horror show. I hope to join him before it's too late!!

  • mattco

    Great post. I completely agree. I must add that Paulson now has Greenspan as an advisor to his fund. How that is legal is beyond me, but I guess it is. Good luck.

  • bananaben

    Isn't that ironic. Even the “maestro” must know where all this shit is headed in the end.

  • mattco

    Anytime someone puts Robert Rubin or Larry Summers in power the results are the same…. massive intervention. That fat fuck Summers couldn't trade his way out of a paper bag so now he gets a job on the inside and uses “our” credit card to pay for shit that we will never be able to afford. How can the market not like that in the short term? He is the ultimate shit bag!

  • https://evilspeculator.com molecool

    What a great comment – very thoughtful – wish I had time to properly respond. Thanks!

  • I_got_Prechterized

    good summary and I am another permabear who tends to agree. The fact that almost the last of us stalwart bears have accepted the likelihood of higher prices, might be what's needed to turn this market down. I have a fairly large short position now but I will get out if we can close the end of a week above 1150. I am fairly sure 1150 will be breached, it's a question of what we do after that point. I don't just want to bail when they run stops at 1150.
    One lesson I've learned is the manipulators will run these trends, both up and down, almost beyond what anyone can imagine. It happened to the bulls down to 666 and it's happening to the bears now. Once the trend turns down for good, if it does, it will probably go lower than anyone can imagine. But I'm beginning to doubt how likely a big downturn is. The big money obviously has a vested interest to see higher prices.

  • bobthehorse

    There is always a vested interest in higher prices, the entire western democratic social structure relies on it. But we have added to shorts this morning. Now about as short as I am prepared to be. 1140 was my top of the range level, initially went small short at 1121.

  • tradejane

    The DAX is now about 80 pts away from the 5980 mentioned some time ago.

    An index that goes above point A may very well reach point B. It's called probability and gmak's post shows why it's a good idea to keep track of that.

    Regardless of whether it makes a new high or not, it “should” drop to 4800 from there. Theoretically.

    Practically, of course, anything can happen.

  • gatopeich

    Good morning and nice post, gmak!
    Good point about the numerology “(55 is a FIB number), because EVERYONE looks at the even numbers for moving averages”.
    For a similar reason I tend to use PRIME numbers (e.g. 53): to evade side would effects of non-prime numbers like 'exact number of weeks' or 'many people using it, or an even fraction'…

  • Graphite

    I love it when people talk about the “vested interests” in higher prices. If that was enough to keep them up then why would any bubble ever burst?

  • Graphite

    It's like they said after LTCM: liquidity is an illusion. It's never there when you really need it.

  • Chedly

    Although I agree with bananaben's analysis, one should remember that “trees do not grow to the sky”. Stimulus, zero percent interest rates and money dropped to the PPT from helicopters cannot continue forever. At some point in time, something gotta give, and you wanna be positioned for that drop. There are limits as to how much they can prop up this market!!

  • bobthehorse

    because belief in the power of vested interests gets out of control.

  • rangefinder

    Gmak – nice work. However, it looks to me that we're bulling our way rapidly out of this correction and I think this is the point of recognition that we really are in a bull market. I think this week is going to be epically bullish – 5-10% gain on the indexes, this is derived from sentiment, charts and news.

    The sovereign debt bubbles will not be allowed to pop, so I think the idea of another crash needs to be shelved – at least for a while until either the cracks heal or news emerges to suggest that they are widening. None of us knows what's going to happen next but given where we are in the cycle I get the impression that we're headed higher and I'm prepared to bet that this will be for at least a couple of months (May?).

  • bobthehorse

    I don't wish to be rude but this makes no sense to me. When the Eurostoxx was at 2600 4 weeks ago, everyone was declaring the sovereign debt crisis was insurmountable and so much 'technical damage' had been done that we were now in P3. Now at 2900, all I hear is that things won't be 'allowed' to go lower, etc.

    Sellers at 2600, buyers at 2900. Doesn't sound like the path to riches to me. We were buyers (not without stress) at 2600 and are sellers now. As ever, I have no crystal ball but the reason we are at 2900 is because the Greek bailout is fully known about. The key to to anticipate what the market will focus on next – for me, that is any one of a number of negatives.

  • tywo

    have just finished a detailed long and short term analysis for the SPX if anyone is interested.

    http://www.tradeyourwayout.com/2010/03/sp-500-w

  • Graphite

    Seriously, we're not even at new highs on the Dow or S&P but I feel like the bears are even more despondent than they were in early January. Tim Knight is even entertaining the possibility of an 80% long portfolio, for pete's sake!

    Who out there is still aggressively bearish, besides the much-maligned EWI?

  • bobthehorse

    the basic problem is that too many people are too static in their views. I've made this point ad nauseam on this board but the game is not about being a bull or a bear, it's about making p&l. Also, being bearish on a medium term outlook (as I am) should not preclude you from trying to make money on the long side in the short-term. But people can't seem to do it. It's about pragmatism.

    When you've had some profit and watched it being destroyed in a rally, it's hard not to be despondent. I'm always depressed when we lose money – but that's because I get it wrong, not because the market has gone the opposite way to a view I never change.

  • CorporalCarrot

    I'm busy in a totally epic sense at the moment, which means I haven't had time to post much, but in browsing I felt obliged to log in and “like” this fantastic comment.

  • CorporalCarrot

    Guys

    So busy at the moment its unreal. Just wondering however at the sense of desperation and “surprise” at the ability of “PPT” (I hate the term but will use it since everyone knows the broad sense of what it implies) to keep a market moving higher.

    I mean, people are genuinely surprised that a market is moving contrary to their views of underlying reality………….and yet, cast your eyes back but a few years for so many examples of such a situation.

    Is it really that surprising?

    And the funny thing is, that in terms of realtionship to fundamentals, this market is not as crazy relative to fundamentals as it has been.

    I mean, anyone remember Nasdaq 5,000?

    I hate to trot out cliches but the old ones are sometimes the best, and never did “A market can stay irrational………” seem more appropriate.

    Cheers

    C

    ps I hope to be picking up my RS shortly….wearing my ES t-shirt (just for Mole!)

  • fisheggs

    Enjoy CC!:)

  • Schwerepunkt

    Glad to hear from you bob. What is your target for this trade in terms of time and price? TIA

  • tradejane

    too static

    Most brains, however, are exactly like that. (Including mine!)

    The trick, I guess, lies in the training. These days I'm less likely to cling to a certain outcome but the work needed to get here makes chopping wood seem easy.

    Anyway, some might be gratified to hear the German banks are starting to keel over. That doesn't necessarily mean we go straight down from here but it's a start.

  • bobthehorse

    Short-term (i.e. this week) looking for 2720 on estoxx which I would guess is around 1090 on ESH0. Longer-term, still looking for 920 on S&P. 920 is a number which I hope has been ingrained on people's consciousness as no one except me will be a buyer there. Just flagging it now.

  • gatopeich

    Gmak, I am trying to reproduce your study here with data from Yahoo!
    Using S&P 500 closing prices since 1960 (http://finance.yahoo.com/q/hp?s=^GSPC&a=00&b=3&…).
    I do the 55 DMA as a simple average of the previous 55 closes.
    Then I set the same bins (-10%,-7%,-5%,…+10%).
    But I get this histogram: http://img51.imageshack.us/img51/6333/jshotr.png
    Where a notable difference with yours is that I get an 7.8% frequency for the “under -3% bin, which makes a spike where there is none in your histogram…
    Maybe I am using the wrong formula for the 55-DMA…

  • gatopeich

    Yeah maybe DMA is not “Daily MA” but “Displaced MA”. So I am definitely lacking parameters and maybe some formula :-).

  • rangefinder

    Bob – I post mainly bullish because its been mostly bullish since Feb 2009. I had a bearish moment 10 days or so ago in the anticipation that we'd bounce lower from the MAs. As that didn't happen and the market is now winging higher I've switched back – I see no point fighting the tape. My comment was based on gmaks post suggesting where next – seaonality is a big deal and has an impact – hence my projection to May. Regards the sovereign debt – if the world economy moves into recovery mode the debts are serviceable and the next much vaunted market crash will be averted for a long time. If your expectations of a decline/collapse are based on the Grand Super Cycle wave effects linked to the South Sea bubble of 1720 – god help your trading account!!!!!!!!

  • bobthehorse

    sorry – I wasn't trying to have a go at you personally, just using your comment to make a general point.

  • rangefinder

    No problem Bob – I always welcome intelligent discussion – so on offence taken. One final comment – I think that the debate about what type of market this is is now ended – the whys and wherefores don't matter for now, just the trend direction and which is the best side of the trade to be on.

  • Schwerepunkt

    Bob, your methods are very different from most on this board, and seem to revolve around money flows. How do you measure these flows? How can retail traders track these market tides? What suite of “indicators” do you look at? How, for example, have you arrived at an 1140-920 target range? Not trying to steel proprietary information, just trying to learn something every day. Again, TIA.

  • rangefinder

    Their hope is for recovery – then the presses can fall silent, rates and taxes go up and the debt can be reduced (or is at least is serviced). That'll do for now – that doesn't mean we're clear of the woods because the next unexpected event could push us over the edge – but until that event materialises then we can balance on this tightrope in the hope that we can grow our way out of this precarious situation. Based on the way things are going I give 'em a 30% chance of success – which means I do think another big fall is highly likely – just not now and not for some considerable time.

  • gmak

    My input data could have errors. Your input data could have errors. Did you start at the same date (Jan 3, 1961)? I take the [SPX close / prior day's DMA -1] as my value. DO you have the same number of data points total? 12, 764 or so?

    My 55DMA is the average of the 55 prior closes beginning with the current date. I use the offset formula to get the range – so that I can change the DMA I'm testing any time.

  • gmak

    So much for numbers. I just want lots of pieces of paper with big ones in the corners, so long as we're still keeping count that way.

    https://evilspeculator.com/?p=14811&success

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  • gatopeich

    We used same init date. I count one more day, maybe because you didn't have Friday's data.

    (close/DMA)-1 is my formula too.

    I am trusting the data from Yahoo, cause that's what I have :-P.

    Maybe we are not drawing the same thing. My histogram counts days when SPX ended some percentage above last 55 days average, (no displacement).

    Another interesting difference is that my histo is symmetric, centered around MA55+1.5%, with two spikes at around MA-3.5% and MA+6%, while yours does not show any such spike in the negative side.

    (From that we would say some typical negative slope keeps closing price at MA55-3.5%, while the typical positive one is around MA55+6%)

  • http://crisismaven.wordpress.com/ CrisisMaven

    Thanks Steve. This is still work in progress, since checking statistics blogs and similar resources I have come across still more stuff. However, the “raw” list (by date found) is getting unwieldy and I need to find time to publish the categorised lists soon.

  • bananaben

    I agree with you but I am far from capitulation. As I said, we may only be in the beginning of the 3rd quarter of this thing. We only want to be short in the fourth quarter. The recovery will wear itself out and a double dip will occur sometime this year.

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