I took Friday off... which was a good thing.
When you think you've lost "the feel" for what you're doing, as the markets swirl around you insanely, rather than acting as you think they obviously should... probably best to anticipate and be honest about that. That, and I fully anticipated that Thursdays market moves would drive political responses on Friday that I couldn't control or properly anticipate. So I sold my SQQQ for something over $31 around noon on Thursday... that all fully validated by Friday afternoon. I did buy a very few more GTE, but still just nibbling there... generally, still think its way too early to be thinking about buy and hold on anything... while the markets are still as accelerated as they are now... and when the timing elements are still such a significant source of others uncertainty, giving them hope that "its a pause" and optimism that "its not TEOTWAWKI". That's not me standing on the street corner wearing that sandwich board declaring REPENT... it is TEOTWAWKI. That's me noticing I don't yet see enough others doing that to make me comfortable that they're worth betting against.
Yesterday, I decided to "revisit" fundamentals... get grounded again. So among other things... watched a mess of youtube vids about trading... honing in on leveraged ETF trading vids, and vids about trading in high volatility issues as a proxy for current market conditions. Most of the vids discardable as done by and for idiots, or neophytes, at least. So, didn't learn much "new", but, OK... good to get grounded with that focus. Two of those (too many) vids were useful. Both were done by industry pros with 25+ years trading...duh... so I could have saved a lot of time...
One emphasized "back to basics" in paying attention to "the rules" using a checklist to focus and limit trade participation... only five rules... very simple... everyone here likely doing those without thinking... check direction (up market or down), volumes, flows, etc. Basically, "don't be stupid, but be methodical." But it did make one solid point that resonated with me as a former military aviator... which was... don't be lured into flying "seat of the pants"... but use the instruments you have to validate what you see and feel. Use a simple crosscheck... and keep it simple... but do it. Yeah. Of course. So, I did adjust my "usual" screens a bit... to back away from the minutia in the technical, and amplify the BASIC picture elements... and found a surprise or two in result.
The second of value... was focused on trading volatile shares. It was of particular interest because its focus was on oil and oil shares... and it was done in 2016... so not influenced by the current markets' manias. Adding to the "focus" and "back to basics" "look at the big picture" issues in the first... he pointed out most of "the instruments" you use in markets are based on moving averages or derivatives of moving averages... so still always looking behind you... while assuming the past will predict the future. The exception is momentum indicators which have more predictive value... so only MORE useful in an accelerated market, as long as there is still enough predictability in the direction in a trade that the greater volatility amplifies results more than it amplifies risks... And, he noted, his personal choice of tools for that use, is the RSI (arranged the same way I've used it to "pinch" with the chart element above it...
He also noted that there is an issue in the opposite... as the RSI gets higher... that at some level you have to accept that its telling you not that the momentum is proving more rewarding with accelerations... but that it is amplifying the elements that make the market increasingly less predictable...
And, at that point I had to laugh... because his personal RSI limit, in order to limit his market risks... was SIX... and I laughed at that, not because its wrong technically... but because it immediately takes us back to the boundary in the difference in risk tolerances between the technical approaches to trading... and what some might call "seat of the pants" that isn't... when taking a more fundamental view of the market situation... expecting that others driving the volatility, are discomfited by cognitive dissonance... and might just not see any aspect of the trend in the same way you do... as the lone dissenting vote... somehow wins.
So, with that... I'll post three charts... as evidences of those lessons. With the acceleration in markets, I've altered Stockcharts basic settings once: I've made the RSI a 3... not a 14... so it both zooms in on inflection points, and is harder to ignore... while shortening the time references to address the accelerations. Alter others similarly, yourself, foreshortening time, as that's the whole point of focus when the accelerations are greater ? I didn't change others in these charts:
For the "big picture": Is the market going up or down ? I'll look at two charts... to note how they work differently versus indications from "the instruments". $DWL Large Cap Index, and PASS, Consumer Discretionary Bear 3X:
The $DWL first: Note the correlation between the RSI changes and the price performance... the instant the RSI moves up off a low... the price moves up. How does it correlate with other indicators ADX up... price is up... but at the peak...ADX down, price up, and then ADX up, price down ? The RSI remains a sensitive direction indicator... but the ADX loses directional focus and gains as an acceleration indicator saying "faster" in whatever direction ? Notice the MACD/ADX "pinch" ? What happens out of a pinch ? Usually... "change"... only flip a coin for a directional indicator ? But, what change is most reasonable, in context ? The chart says decide that based on fundamentals that "the instruments" can't detect as the MA indicators say... rutt roh. Is it defining the bottom of the band here... or just sliding along the slope ? Bounce ? Gonna continue? Look at the right hand values for MACD and ADX ? Maybe the Friday candle is a hammer, but its half head half tail, and looks just like the one from Tuesday only bigger ? So, a hanging man, not a hammer.
Then the PASS chart with the same setup: The RSI directional signal is more muted in the bands, but given the direction outside the bands, it works as more of an acceleration indicator in the red and green. Opposite in directional indications in price as down is up on an inverse chart, of course. The MACD correlates really well with the price performance... would be useful to shorten its time frame to exaggerate the effects. The ADX ? The chart is an inverse issue, so price does, but the indicators shouldn't work in the opposite ? ADX rose from the second week of December as the price fell... until January 22 when both reverse but remain opposite until January 27 when it all works right again ? The MACD and ADX form a pinch on Jan 22, and the change in performance matches the change out of the pinch, after which it all works right again in direction and speed... And now, the MACD and ADX are forming a channel... suggesting continuation... and not a pinch...
An order of magnitude difference in this chart, versus the first, in the right hand values for MACD, and ADX is higher here ? The candle is an inverse hammer... tiny head, massive tail, rather like the one from Tuesday only much more so...
Fascinating to do the same chart as above for DPK... which shows the dislocation in ADX versus price pushed all the way back to October... while the Bollinger bands show the pinching better than here, and better than the MACD/ADX does here.
Overall, that leaves me pretty confident that the directional indicators are probably sound. Even the MA looks like you might trust it as far as routine indications of the change in direction... the big moves still ahead after the 50MA crosses the 200 ? I know that challenges people "normalcy bias"... but that's what the chart says.
What I don't trust, still, is that taking a position won't come paired with making you subject to bombs being lobbed at you... intending to blast you out of it. Normally, I'd say take a position in the inverse 3x and ride it for a couple weeks to a month... and that will probably still work... but expect to own the risk... When they move 50% in a day, you can't use a stop loss to reduce risk... so your risk reduction here is either MORE time, not less, in the exposure... or its trading in and out fast enough that you catch more of the move in the morning, and less of the risk in the afternoon... when the pols step up to the mike trying to obliterate your position.
The final note on those charts, introducing my last. I mentioned the trade video said to use ATR as the indication when flying on the instruments... to measure the excess risk and the value of "more" in the acceleration gained with volatility relative to the unpredictability of the volatility flipping the direction on you ?
He said his "limit" in risk tolerance was an ATR of SIX... after which its just crazy town and he's out. The ATR on the DPK chart has ramped up steeply from 0.25 to 1.737. The ATR on the PASS chart is similar in a less round curve from 0.5 up to 3.069. The ATR on the $DWL chart is... swallow that soda first... ramping on a straight line from "down" around 70... up to 286. That must mean something about the risk distributions in the trade as a function of direction... and the odds of directional reversals ? But, of course, its not possible that adding 3X leverage in an ETF has LOWERED the risk... right ? Each chart is a presentation of data relative... to itself... not others... particularly in relation to the DIRECTION of the trade ? Maybe test that idea on a couple more charts before taking it to the... or having it take you to the...
One last chart, in context of that comment:
Ask yourself, first, where in the band, relative to the RSI, does the direction in price change, on this chart, and with what bias in sensistivity ? Look at the other things I've mentioned above, too... The "Checklist" I mentioned from the video included as the last item, the need... to check every chart in multiple time periods... for validation. So I Iooked at this one in the Stockchart standard, at one month, and at a set date from the first of March.
But, notice what happened on this chart... when the ATR hit 6 ? And then, how disproportionate the moves were in relation to changes in the ATR... once it becomes disconnected as a directional indicator ?
Anyway... that's how I spent my #staythefuckhome weekend. |
