12/13/09
TICK TOCK
I trade the ES mini S&P. I’ve always preferred equity market indexes because there is a richer vein of market data to mine as compared to commodity markets. A couple of months ago I caught an idea on a blog somewhere utilizing the $TICK (don’t remember who posted it, if you’re out there, raise your hand). The idea is to run a 12 and 26 period MA of the $TICK as an indicator. It sounded like an idea with merit, especially if combined with a momentum indicator. After some experimenting, this is what I came up with:

Top chart is 5 min DEC ES with Fast Stoch at 68 for %K and 10 for %D (there are 78 – 5 minute periods in a 6.5 hour trading session).

Tick chart is 5 minute 12 & 26 period EMA of $TICK using H+L/2 of that period.

Rules are:

1. Wait for divergence in 26 period MA

2. Sell when Stoch drops below 80 and 12 period MA crosses below 26 period MA or

Buy when Stoch crosses above 20 and 12 period MA crosses above 26 period MA

Stop loss at 2 points above or below high or low preceding entry

3. Close position when 12 period MA crosses 26 period MA in other direction

The trade above netted 3.25 points ($50/point on ES).  Stop loss was 9.25 points from entry.  Not to good a risk/reward, right?  I decided to give it a whirl anyway.  The first trade was a loss of 3.25 points, then I hit this:

and then this

On the MA crossovers, the 12 MA needs to cross the 26 MA for two periods to validate the signal.

This is not a day trade approach,  so if used with options one would probably want to do a spread against the position if it’s held overnight.                                    Apple Al

Apple Al here
There is a condition that traders can succumb to that, for lack of a better
term, can be called “Bear Fever”.  I know all about it, I got ill with it in
the late 80’s after the crash in 1987.  It’s caused by the thrill of
enormous returns reaped in a matter of days during a market crash.  For a
trader, being on the profitable side of one of those events is exhilarating.
The problem is that it becomes almost like a drug, leaving a trader craving
for more.  It begins to color your thinking, you become convinced that more
has just got to be right around the corner, it’s just a matter of shorting
every likely opportunity and it’ll happen again.  It’s always easy to
rationalize these assumptions by agreeing with the bearish commentators who
are everpresent no matter the market and by heavily discounting any bullish
opinions.
Unfortunately for that mindset, market crashes are rare events.  I don’t
ever rule out the possibility of back to back events, anyone who has ever
traded knows that markets are capable of all kinds of surprises, but the
odds are long.  If you don’t believe me, find a chart of any major stock
index going back 100 years or so, and you’ll see what I mean.
The reasons for this are easy to figure out.  First of all, we are a country
full of optimists, it’s an inherent component of the American psyche.
Secondly, and most obviously, no one wants economic distress, so it’s in the
interest of everyone (except traders with “Bear Fever”) that the economy do
well, and of course that means bull markets.
I’ve seen a lot of Bear Fever in blogs since last year.  Often those bears
gear their thinking off of Elliott Wave Theory, with the thought that a Wave
1 down completed in March of this year, and we are now in Wave 2, with Wave
3 just ahead.  And of course Wave 3, which should be the strongest in a 5
wave sequence, is going to be an even bigger crash than what we saw last
Fall and Winter. They could be correct, however there is another way to
count the recent years:

http://screencast.com/t/NGUxZTBjM

This EW count assumes that the low in March was the conclusion of a C wave
in a flat that began with the Tech Bubble deflation in 2000.  For those of
you familiar with Prechter’s EW “bible”, this structure is “textbook”, i.e.
it’s close to perfect.  Also, in case you’ve mistaken my position, I am long
term bearish, which is one of the reasons I’ve labeled us to be in an “X”
wave rather than the onset of some decades long new bull market.  As with
anything market related, I could well be completely wrong.  But it seems to
me that we have some serious and deep rooted cracks in the economic
foundation that are going to take quite some years to resolve.  I just am
not inclined to believe another crash is imminent.  But time will tell.