In retrospect the signal on the Zero was pretty enlightening today. I thought it important to post this chart for the rest of you as a big learning experience when studying the Zero myself in the past two years were two things: One are explicit signals of course – what the Zero does and how it lines up with price gyrations. Another example of explicit signals are divergences, which have kept us out of trouble on countless times. The second most important clues for me is too look out for are implicit signals, meaning what the Zero doesn’t do. Instead of boring you with paragraphs of dry explanations let me just show you:
Early this morning we got a pretty nice bearish divergence (green and red arrows) and it was pretty clear that this blow off top would have to come down during the session. After that the tape kept gyrating lower but the Zero Lite stayed almost completely flat. Only when a few stops were being run it managed to stoop a bit lower but only marginally, especially compared with yesterday’s positive signals.
I knew right away that something was up and that any drop would be reversed – and I was not shy about pointing this out to my subs. The rest is history and we closed near the highs today, another daily white/green candle. Now, you may ask – how about the flat signal during the ramp up? I am glad you asked – and it’s an important consideration as well. If we cannot trust the down tape when the ZL is flat – how can we trust the rally when the signal remains so?
I think this is best answered by referring to a lesson I learned a long time ago, which is that everything in trading is context specific. Had this happened a week or two ago when we were dropping I would have thought – well, the upside is not believed. But it seems to me that we are right now in a temporary up cycle, and the medium term trend rules the day until it is broken. So, when I get downside in an uptrend – I need to believe it! Otherwise it’s just a down fake to reel in a few more bears. The upside does not have to be proven to me – and simply suggests that there is a lack in participation. There – I actually got to the core of the issue. If there is a lack in participation then probabilities usually point towards a continuation of the current trend. Only a sharp and strong counter signal can question the current move.
The above is why turning the Zero into a black box trading system is quite difficult – because there are explicit and implicit considerations. There are probably ways to code all this into a strategy and I may try in the future. But until then just using our own human brains mixed with a bit of intuition (sparingly please) does the trick just fine.
Shameless plug: If you want to give the Zero a spin – here is where you sign up. And if you happen to need any further motivation – if you think this is cool then you should see the way the daily Zero is calling major lows consistently for the past year 😉