Let’s look at our most recent trade sequence and
how we played it. As we see in chart 1, we see the (SPY | Quote | Chart | News | PowerRating) in a robust uptrend since
the low made on March 14th. What do we notice about this uptrend? Other than the
brief pullback in late March, we have a very steep uptrend with very narrow
pullbacks. These shallow pullbacks are an indication of a very strong market. A
shallow pullback occurs when market professionals are very bullish and are
competing aggressively to buy stocks. What we are going to focus on today is the
last 3 bars of this chart which shows our most recent trade sequence.
Moving to chart 2, we see this last trade
sequence highlighted as bars 1, 2 and 3. Bar 1 shows a very steep pullback where
two of the TradingMarkets
Market Timing
end-of-month buy strategies trigger. These are two of our
favorite strategies because of the fundamental reasons behind the research and
the fact that they have very strong success rates. Additionally, one of our TRIN
buy signals triggered on the same day.
This signal is highlighted in chart 3 where it
shows a TRIN reading above 1.2 for two consecutive days. When we get a market
that posts two consecutive TRIN readings above 1.2 it shows a market where the
sellers dominated the landscape for a period of time and are at a point where
they may have exhausted themselves temporarily. This is the exact point where
the bulls look for any sign of weakness in the selling pressure so that they can
take over.
Also, in chart 4 we see the VIX move from below
12.50 at bar 1 to above 14.00 in bar 2. (This coincides with the SPY sell off
shown as bar1 on chart 2). This drastic move up in the VIX shows a market where
fear is quickly moving back into the markets. The market participants quickly
move to buy put options to protect their portfolios as well as to speculate on
the direction of the market thus driving up the VIX index. We can also notice on
this chart that the VIX reading highlighted as “bar 2” is the highest reading we
have had since late March.
So, looking again at Bar 1 on chart 1, let’s
dissect piece by piece how the TradingMarkets buy strategies identified
a low risk, high probability buy set up. The first thing I always look at when a
buy set up triggers is whether the move is significant or not. In other words,
has the market moved down, in this case, to a point where there is enough room
for a move back up? We always are looking for that extreme stretch and look to
play the mean-reverting bounce back in the opposite direction. The further the
stretch, the greater chance of a bounce back. In this case, we have a market
that sells off over 1% from the most recent high. This is a big enough sell off
to qualify since there is a lot of room left for the mean-reverting bounce to
carry the market. Secondly, we have two end-of-month buy strategies trigger
which are our favorite strategies because we have short term weakness into the
strength of end of the month institutional money flows. These buy strategies
have identified successful trades with amazing accuracy. Next, we look at the
TRIN strategy that triggered. This buy strategy is confirming what we are
looking at on the daily bar chart and giving us increased confidence in our
trade because extremes in selling volume can signal a high probability buy area.
Lastly, we look at the drastic move up in the VIX
which shows us that the market may be showing an extreme in fear based on its
most recent trading. Often times these extremes signal periods where everyone
has already sold or bought put options which leaves the market ripe for a move
in the opposite direction. So, to sum this up, the CRG buy strategies have
identified a very high probability buy on bar 1 and we enter the market using
the SPY ETF at the close. We buy at 148.30.
On the following day (marked as bar 2) the market
gaps up slightly and then proceeds to sell off taking out the low at bar 1.
After trading well below the low of bar 1 the market posts an enormous rally to
end the day not only in positive territory, but also at the high of its daily
range. We get another CRG buy signal on this day and buy another position size
of the SPY ETF at the close. (148.57) In addition to the CRG buy signal that
triggers on bar 2, we also have a market that is showing us enormous strength in
the way that it not only reversed early morning weakness, but also closed at the
high of its daily range. This price activity gives us greater confidence in the
trade signals that have triggered. The following day (bar 3) gives us our strong
mean-reverting bounce back where we end up selling our entire SPY position at
the close for 149.63.
This was a very successful short term trade where
we used TradingMarkets
Market Timing buy strategies to identify a high probability, low risk trade.
Paul Sabo has been a professional trader for
over 18 years. During this time he has worked as a market maker in both New York
City and San Francisco for some of Wall Street's most prestigious investment
banks, commercial banks and brokerage houses. Paul later became the head trader
for a top-ranked investment advisor and hedge fund based in San Francisco. Paul
recently left his position at the hedge fund to trade his own money as a full
time business as well as working with Connors Research Group on various
proprietary projects.
Learn more about more our
End of the Month research in the "TradingMarkets
S&P Market Timing Course".
