Sunday 18 February 2018

What I'm Watching This Week

One of the interesting things Jack Schwager says he learned from his Market Wizards interviews is that there is no Holy Grail in trading. Every trader has a different approach.

The fundamental guys say technical analysis is voodoo, and the technical analysis guys say the fundamental stuff is outdated, and every time they tried to use it they lost money. Similarly, the fundamental guys say every time they tried to employ technical analysis, they lost money.

What traders can take away from this, is that markets in the short term are largely determined by psychology and philosophy. The calculus varies with the approach or the approach varies with the calculus. Even algorithms are programmed by psychologically heterogeneous human beings.

And so we can monitor price levels that we know the algorithms and other traders will also be watching, and incorporate them into our systems after testing for their validity. E.g., we know that 2740 is an important psychological level in the SPX because it has four or more technical inflection points, so there are 4X as many not-so-savvy participants using it for entries and exits.

The price indicators at or near this level on a daily chart are: 20SMA, 40SMA and the 78.6% Fibonacci level. The stochastic oscillator indicators should also be close to reversing, giving an "overbought" signal after a six-day run up.

We can also factor in all of the people that bought after the first week of 2018 who are still losing money or have sold out at a loss and are now "revenge trading." 2740 is a point of hope for them to stay in or to get back in, so it's likely to be used as bull bait lunch for the stop runners.

The only way for us to close above 2740 by a significant margin is if the buyers are stronger than the sellers at that price. If they are, the first move above 2740 will likely be the head-fake.

So, look for: 1. a significant close above that level, to suck in the chasers; 2. a pullback to shake out the weak hands; 3. some sideways price action for a few weeks to shake out the impatient; then 4. another correction back to that level on a weekly basis, but on a concave slope that only gradually turns positive.

IMO, that could possibly be used as an anchor to see if the market really believes in the Powell Put. If they do, the only thing standing in the way of a return to the Goldilocks days is a recession that's statistically overdue and rising interest rates.