The 800 Pound Reversal Signal

It seems like every time I mention one of these descriptive patterns, the market confounds the technical analysts and goes the other way. Even so, I'll play the law of averages, and I won't ignore the 800-pound gorilla in the room. Actually, that's Mike, the IT guy that the temp agency sent over. He likes to call himself a "Quant". (They think they know everything.)

In the image above, Mike is explaining how head and shoulder patterns are formed while demonstrating the best method for extracting ants from a hole with a can of compressed air.

Related Posts:
Seeing Is Believing
Holy Technical Reversal Signal, Batman

Patterns, Scatterbrains, and Another 27

What you focus on grows.
~Anon.



I'll spend all day turning over rocks just to see what's underneath. I don't make many friends with the ants, worms, and termites this way, but research comes at a price. Watching the Dow and Nasdaq diverge on Friday (Dow finished in negative numbers, while the Nasdaq finished with a gain), it got me wondering if there is anything predictive with this type of occurrence.

After crunching some numbers, it was discovered that this divergence happens about 16% of the time using recent five year history. Could this also indicate a rising or falling market over the next few weeks? Let's look at the scatter chart below...



The blue dots represents the correlation between the 10 day price change (horizontal axis) of the S&P and the difference of the closing prices (vertical axis) of the Dow and Nasdaq. The red dots represent the price divergence between the Dow and Nasdaq when one is positive and the other is negative with a difference of 1% or greater. In order to qualify as a red dot, either the Dow or the Nasdaq would have to close with a loss, and the other index would have to close with a gain. Friday's close is an example of this.

The average ten-day price change over six years for all days is about 3.6% versus an average of 6.2% for the ten-days after all 1% price divergences between the Dow and Nasdaq. It's about 5.3% if the 2nd half of 2008 is thrown out. Not surprisingly, the majority of red dots representing a ten-day increase for the S&P occurred when the market was riding above the 50-day moving average. Even with that, based on the paint splatter distribution of blue and red dots, I don't see any real correlation between price divergence and significant price increases or decreases of the S&P over the next ten days. I expected to see a taller, thinner vertical column of blue dots and a wide distribution of red dots. The results in the scattergram look rather random unless I'm missing something.

Looks like this scattergram turned out to be a scatterbrain scattergram. Can't fault a monkey for trying. Some rocks got nothin' but dirt under 'em.

As far as patterns go, maybe I can interest you in the 27 Club. Looks like we have to add another talent to the list.

I know, Amy died a few years ago. She just finally made it official yesterday.

The No Trade Loophole

Looks like the Cheetum Market Indicator (CMI) is trying to think outside the box. The purpose of the no trade option was to prevent entering into a QID trade during brief retracements in a uptrending market, after the completion of a QLD trade. Suddenly the CMI is cutting off the last QID trade in mid-stream making it clear that weak and conflicting signals are good enough reason to get out and wait for a better opportunity.

Maybe tampering with the "air-fuel ratio" set off some sort of weird butterfly effect in the CMI's processor. Sorry, that's the grease monkey in me speaking. Anyway, the CMI is at the helm for the duration.

I'm not insulted that the CMI has taken control after my programming lead to a 16% deficit with five month left in the year to reverse course. The market has to shake out all those longer term, inflexible, trend following systems, including this one, before resuming another steady incline or decline.

Danger, Will Robinson!

Be prepared. Once you start leaning solely on your favorite oscillator, the new trend will kick in rendering the oscillator useless. Apparently, the CMI thinks it can adjust to either scenario.

By the way, if there's actually a Will Robinson reading this, don't be alarmed. The reference is from the Lost in Space series. See below. Will is the little guy on the right.

Walk the Line Stocks

Here's an incomplete list of stocks, in no particular order, that passed the short-term upward slope criteria since the beginning of the year. Specific criteria is used to find stocks that have an inclination for getting from point A to point B using the straightest line. These are not necessarily the best performers but the ones that could pass a field sobriety test with flying colors.

The chart shows the year-to-date performance as a group:



Stock Symbol, Name, Current Price
CSH, Cash America Int'l, $55.92
GIB, CGI Group, $23.22
GMCR, Green Mountain Coffee, $88.96 (not shown above)
HANS, Hansen Natural, $77.88
PLCM, Polycom Inc., $30.74
TDC, Teradata Corp., $56.70
ULTA, Ulta Salon Cosmetics, $63.73
COG, Cabot Oil and Gas, $68.58
AVB, Avalonbay Communities, $132.30

AZO, Autozone missed the cut this year for some reason, but still gets honorable mention.

JC would be proud.



Related post: Candidates for a Stock Chart Beauty Contest

Panning for Gold with a School of Piranha

It must be time for gold and silver to continue onward and upward. The piranhas in the local stream have stopped devouring the wildebeest carcasses recently. The only explanation could be a shift from cash to gold and silver. It might be my imagination but I could have sworn that I saw one of those monkey-eaters with a mouthful of rapper teeth bling.

Anyway, I thought gold was only used for the manufacture of toilets, or ballast for the sock drawer, but according to these charts at Kitco, both gold and silver have other uses.






Since I'm as bullish as a monkey can be as far as precious metals are concerned, and due to the fact that I haven't thrown a dart in a while, here is my hot, lottery ticket pick for the month...

North Bay Resources Inc.



...a three to five bagger upside according to one piranha...if you can trust a piranha.

There's a Monkey on the Wing

Not really. Since you might see an occasional "thinking" monkey in the left sidebar, it just reminded me of that Twilight Zone episode where that gremlin-monkey was scaring the spock out of a young pre-Captain Kirk.



What's a thinking monkey doing in the sidebar? Since the CMI is focused on a non-existent, long-term trend right now, and paying the price, I thought I would mix and match several of the indicators just to see if I could coerce the CMI to 'go with the flow' occasionally instead of stubbornly holding firm (which, unfortunately, is exactly what I wanted it to do a few months ago) .

In doing so, it occurred to me that the short term signals, the ones that are considered noise, were outperforming the rest. Makes sense in this type of market. To flatten the noise spikes (false signals), I combined a long indicator with a short indicator, in two places, using four indicators, and then scrapped the rest.

These four indicators are required to sit in a quiet room and discuss the path of least resistance until all agree on a QID or a QLD.

The raw results were good enough to peak my interest. I didn't go back in history very far, and won't clutter the page with reporting backtested results for now.

So without changing the current method mid-stream, I'll quietly track these results in the sidebar under the AlphaMonkey area for the next few months starting at the 6/27 buy signal.


I once spent an entire day trying to get an apple out of a jar by sticking my hand in there only to find that, with apple in hand, my hand would get stuck in jar. Finally, I learned that just by tipping the jar upside down, the apple would fall out.


Just in case you are wondering what the numbers below the monkey profile are...

QL062711/8341/141/141
070711

QL or QI = QLD or QID
062711 = date of signal
8341 = price of opening buy of QID or QLD ($83.41)
141 = gain or loss of current trade (14.1%)
141 = cumulative gain or loss (not including current trade) since the beginning of the year.***
070711 = last update

But that's just between us.

Note: ***- Update 7/29/11 after conducting backtest for year 2011.

Following Ed Thorp

Ed Thorp has been beating the "system" for years. He is a professor of mathematics and finance, author, hedge fund manager, blackjack player, and had even made efforts to take the chance out of the game of roulette. He has made his fortune in the stock market by exploiting price anomalies in the securities markets.

Some of his fascinating history is chronicled in The Quants, by Scott Patterson, and Fortune's Formula by William Poundstone. Both are good reads without the need to review your math skills.



If you are more of a Vegas casino type rather than a Wall Street casino type, Bringing
Down the House by Ben Mezrich should keep you entertained. Thorp puts the special skills of several M.I.T students to use by teaching his card counting method and then sending teams out into the casinos for fun and profit...mostly profit.




I haven't seen the movie based on this book but there's a good video series, BBC's Making Millions the Easy Way, on YouTube documenting this exciting ride.

If you still can't get enough, I remember reading a book many years ago called The Eudeamonic Pie, by Thomas Bass. This is a true story about a group struggle to predict where the ball will stop rolling on the roulette wheel. This may have been the first, somewhat successful, use of the shoe computer. Maybe if these guys would have teamed up with Ed Thorp their attempts would have lead to more profit. Of course, Ed had his sights on the bigger prize...Wall Street.



Sort of rekindles the urge to exploit a loophole or two, doesn't it?

Here Lies the CMI...

There you go again.
~Ronald Reagan

It seems like every year the grim reaper comes calling on the CMI, only to be vanquished by a healthy trend to the right side. This year is no different...unless the CMI digs itself too deep. Maybe it already has, even though the year is only half over.

I still believe that the CMI is on the correct side, but more than a bit ahead of itself, and judging by the latest computations, it will stubbornly hold the QID at least through next week.

________________________________________________________________

Sigmund's Promise

If the stake has finally been driven through the heart of the CMI and there is no profit this year, I will promise to go deep into the jungle never to be heard from again.

Of course, I will rise from the ashes if Ron Paul is finally elected. I mean, who wouldn't want to be around for that?

________________________________________________________________


So, in lieu of flowers, please make a donation to the charity of your choice.

That reminds me, if you happen to have some cremated remains of a loved one, or a hated one for that matter, you can turn it into jewelry at LifeGem. Sure beats that cow dung necklace that Ponzi Schemer gave me.