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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Kevin Batey who wrote (23346)	8/18/1999 8:20:00 PM
From: Matthew L. Jones	Read Replies (1) \| Respond to of 99985

I use a day and week chart of the $NDX with 20/2 (20day sma/+-2std dev) Bollinger Bands for intermediate support and resistance. I calculate the distance the index currently is trading (from support and resistance) and put those two numbers in a ratio. (For example, today's support and resistance numbers were 2170 and 2358 upper and lower bands). When the index was at 2348 the resistance was 10 points away and the support was 178 points away. Since the stock trades within the bands 99% of the time, the upside potential was 10 and the downside potential was 178. this gives an upside potential of 1:17.8 odds or downside odds of 17.8:1 while the index was still moving up. But the risk/reward factor is only part of the equation. I also needed to determine the "age" of this rally. The insurance companies use an actuarial chart to predict mortality rates, by using odds. The market equivalent is trying to determine the "age" of a particular market move. This move was getting old. This current rally began on August 10 at the near term low of 2120. At 2348 the index had moved up 228 points in 7 days! That is 228/2120 or 11% extent in 7 days. According to my "bullish trends" table, the odds of the rally extending beyond 11% were .6:1 or to put it another way, there was a 61% probability of an immediate reversal. In terms of duration, this rally had only a 1.7:1 chance of continuing (discounting the extent and the resistance overhead). But the real kicker was the rate of ascent of the previous rally. Looking at the "absolute movement over period" table, you will see that any historical move of 11% in 5 days had a 95% chance of reversing. When I weighed all of those factors (17:1 risk/reward ratio, statistically tired rally, and the imminent resistance overhead), the decision was almost a no brainer! In terms of how far will it fall... statistically, the average retracement of 2/3 of previous rally, 2193 or thereabouts (the average 5.24% pullback is 2234). Depending on the duration and the lower bollinger band, somewhere between 2190 and 2240 is my bet. Now translate that into a Put strike price and you get between 109 and 111 target retracement from the high of 117 5/8 high. So, I had to put my money where my mouth was-- I bought 20 contracts of QQQ-SEP110P. The jury is still out. Hope that makes sense. If not, please let me know and I will try to answer any questions you might have. Matt