May 142012

Today was a tricky day.  It tested down and that made it more difficult to detect an open drive.  I tried a short and stopped out and then looked for a pullback to get long and couldn’t find one.  So I worked on other things as it continued up.  Eminiplayer said he expected a low to be put in and a strong move up, and this looked like it was it.  I expected a pullback to the LVN and more continuation up.  I was finished by then and was shocked to see it had retraced almost the entire move up.

Bulls had their chance to blast it up and put in a bottom.  And they fumbled.  37 is a key area below and I think we’ll see that (I’m writing this on Monday during Globex and ES is at 41).  And I have a hunch that we don’t put in a major low but that we keep going down.

I also want to show the balance area for last week (profile on the left), which explains why the trading wasn’t been very good.  ES is in a pretty big balance area.  Last week I tweeted a few times that 45-55 needed repair.  I believe that is still the case.  So we may rotate more in this balance area before moving on, or we may probe lower and come back for the repair later.  But while ES is in this large balance area, I expect a lot of chop.  My best day of the week was on Wednesday when ES put in a bottom and had a strong buying tail.  Thursday and Friday were inside this balance area.  I think it’s not a coincidence that I did well on Wednesday and poorly on Thursday.  And I think this is a key part of trading – knowing when your setups work and when they’re less reliable.  This takes a long time and I’m still trying to figure it out.

The core algorithm I use for the signals has not changed in over 9 months.  Some weeks they work great.  Most weeks they work well.  And a few weeks they seem to have a lot of failures*.  I think the failures cannot be avoided.  For example in the chart above the first set of short signals was at a very valid resistance area.  I’m not surprised that shorts gave it a shot there.  It just didn’t work out.  But lately there have been more of these.  I think most of them can be avoided by avoiding fading (especially open drives like we had Friday (OTD actually)), looking for good trade location, and using the composite profiles.

*One addition I made was to have 5 levels of signal strength, with strength 3 being “normal”.  In the charts I’ve posted lately, I’ve included lower strength signals which are less reliable and should be used mainly for quick pullbacks.  The higher the strength the more reliable.  The real time indicator (now available) has a setting for the minimum level.


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