Death Blow to the CMI 2.0?

The game taught me the game. And it didn’t spare me rod while teaching.
~Reminiscences of a Stock Operator (Jesse Livermore)


Death blow to the CMI? Where have I heard that before? Check here as a reminder. In 2009 the CMI 1.0 was beaten over the head three trades in a row and was knocked down to +2% for the year by July. By the end of the year it was up over 30%.

On the Bright Side

The CMI is still up around 20% for the year. Both the Nasdaq and Dow are in negative numbers, and AAPL by comparison is up 10% year to date.

On the Not So Bright Side

As stated two posts ago, the CMI did pick up the downturn last Wednesday but due to a 2 point ‘cushion’ the trade was not triggered. We would be looking at a year to date gain of +49% at this point if we were in the QID as of last week. Because this percentage play went the wrong way, half of the year to date gain evaporated.

More importantly, the CMI cannot get out of the current trade until there is some sort of day or multiple day gain. Without that, the CMI will continue to follow the market deeper if that’s where it chooses to go. This is not unlike the uptick rule when shorting stocks. No shorting is allowed unless there is a tick to the upside first. This is what I call a fatal flaw in the system. (Oops.) This flaw has always been in the system and I am sure it was the cause of a least one of the larger losses during September of 2008.

Now What?

Without getting specific, if the direction of a line (1) is down, and it (barely) crosses another significant line (2), and the line (1) continues down on the second day, a change of signal will be triggered. This new 'rule' differs from the current 'rule' because it combines the direction of two days rather than using only a single day to determine a change in trade.

As confusing as this is without showing it graphically, it prevents the trade being stuck on the wrong side if the trend continues. The downside is that it may result in additional, short duration, back and forth trades. If that happens, go here.