Trading the Bounce

[ducati916]

So this thread is switching the emphasis from trying to (find) trade the bottom of a big move down (assuming it is the bottom) to trading the bounce.

jog on
duc

 

[tech/a]

Don't think its a bounce.
A few Trillion into the world markets
Definitely qualifies as an outlier
Outliers move markets.

 

[ducati916]

Don't think its a bounce.
A few Trillion into the world markets
Definitely qualifies as an outlier
Outliers move markets.

That is true and I largely agree.

However I like to plan for negative eventualities, even though they may never occur. I would like to the markets to resume the trend in a perfect 'V' shape. If they don't, then I'd prefer the option of being prepared with a plan to capitalise if possible. Of course, possibly the best plan is to simply sit and do nothing currently (assuming of course that you bought near the bottom) and let the market shake out, but hold onto those new positions. Sometimes trying to be too clever and micro-manage, leads to you f***ing up your good-work in grabbing the bottom in the first place.

However for those that didn't buy and don't have a mechanised way of re-entering the market, catching the bottom of a bounce which could be near the initial lows, would be beneficial and profitable as a first entry back into the market.

jog on
duc

 

[ducati916]

So the closest market conditions that we have (except 1987 which is a very interesting one) is 2008.

Below is another bear market rally, this one 25% at the end of 2008. The market turned around and fell 27% until finding a bottom in March 2009.

Had you “chased” this rally in 2008/2009, and picked up the S&P index at say 925 in early January, then in a year, you would have earned 25% in returns going out to January 2010. Had you waited until the recession ended in nine months, and not purchased the index until say September 2009, then you would have only made 11%.

That is a buy and do nothing further.

What if: you bought the 2008 decline, pocketed 'some' of the profit and then recycled those profits into the 2009 opportunity? Obviously, your profits would have increased. Sounds a bit like fairy land.

Taking Mr Tech/A's point re. deficit spending:

Deficit spending 1929-1971

From 1970-2020

As already indicated, this is an outlier.

The Fed is essentially flooding the market with liquidity. The Fed in a just a couple of weeks has already added over $1.5T in assets to its balance sheet: Treasuries, commercial paper, muni’s, Agencies. Under their old QE regime, the Fed typically purchased $60BB to $80BB of bonds per month. In just days, the Fed has literally pumped almost two years of normal QE buying into the bond market.

My position would therefore be: we have bottomed, but we are not immune to a profit taking exercise on this current bounce. Profit taking can quickly push markets lower, not to new lows, but lower enough to give people a good scare and revive the perma-bears to a new lease of life.

Mr Skate has programmed a mechanical indicator that will (I'm betting) pick (near) the top of the bounce. Check out his thread. I'll have to (try) and do it long-hand, we'll see.

As this post is already a bit long, just timing a turn (unless you are deadly accurate) isn't the only way to play the bounce.

jog on
duc

 

[ducati916]

So, I am starting to get signals that this bounce is starting to run out of steam and that we will get a correction that is a little more than just chop.

I don't mind chop, chop is normal. I don't like big declines when I have open profits on the table. Therefore, as my signals are starting to turn, I'll be taking a defensive posture tomorrow and trimming positions.

The risk of course is, if the market just powers on up, I have lost (partial) positions, which, means I lose potential profits. Psychologically, I can deal better with the loss of potential profits than open profits.

In addition, I may open a hedge. Probably not tomorrow. A hedge will cost money. Unless the fall (is more or less guaranteed or underway) a fact, it will cost additional potential profits.

jog on
duc

 

[Skate]

So the closest market conditions that we have (except 1987 which is a very interesting one) is 2008.

"The Ducati Stop & Go Indicator"
How would "The Ducati Stop & Go Indicator" handled the GFC period 2007/2008

"The Ducati Stop & Go Indicator"
This indicator is so versatile the periodicity of your trading strategy is insequential, meaning it works in all time periods. I'll post two charts one Daily & one Weekly.

Recap
"The Ducati Stop & Go Indicator" lets you buy green bars & prevents you buying red bars.

"The Ducati Stop & Go Indicator" (applied to a DAILY Strategy)

"The Ducati Stop & Go Indicator" (applied to a WEEKLY Strategy)

In the next post
Let's see when "The Ducati blue bar strategy" would have started taking positions during this "virus crisis"

Skate.

 

[Skate]

Mr Skate has programmed a mechanical indicator that will (I'm betting) pick (near) the top of the bounce. Check out his thread. I'll have to (try) and do it long-hand, we'll see.

"The Ducati blue bar strategy"

So, I am starting to get signals that this bounce is starting to run out of steam and that we will get a correction that is a little more than just chop.

@ducati916 using "The Ducati blue bar strategy" as a guide picked the turn on 24th March & currently steaming ahead.

The risk of course is, if the market just powers on up, I have lost (partial) positions, which, means I lose potential profits. Psychologically, I can deal better with the loss of potential profits than open profits.

"The Ducati blue bar strategy" has the ability to make that decision easier. Meaning don't sell till there is a RED bar - if you see a red bar PANIC & GTFO.

Skate.

 

[InsvestoBoy]

"The Ducati Stop & Go Indicator" (applied to a DAILY Strategy)

Assuming you wait for EOD, this is wrong @Skate.

The strategy would still be allowing buy signals on 1/11/2007 because you wouldn't know it turned red until the close of the bar on 1/11/2007.

The strategy would not be allowing buy signals until the 28th because you wouldn't know if it turned green until the close of the bar on 27/11/2007.

 

[Skate]

Assuming you wait for EOD, this is wrong @Skate. The strategy would still be allowing buy signals on 1/11/2007 because you wouldn't know it turned red until the close of the bar on 1/11/2007. The strategy would not be allowing buy signals until the 28th because you wouldn't know if it turned green until the close of the bar on 27/11/2007.

@InsvestoBoy you are correct when it comes to trading. The Ducati Stop & Go Indicator charts were a quick visual reference to the colour coding of the bars whereas "The Ducati blue bar trading strategy" has the one bar delay for all to see.

Skate.

 

[ducati916]

I see the topic of timing the bounce via a signal or combination of signals has already addressed. One issue is that the signal is always going to be after markets close and reopen. There is a delay.

There is really only one way to pre-empt that: you take a guess and either act or don't. Sometimes you get a bit lucky, sometimes you don't. Or you follow a mechanised system.

Now I don't really have conclusive evidence for this, but from experience what I have found is: tops in trending markets usually develop over a space of time. Tops in bounces come very quickly.

So I have reduced my positions (profit take) by 25%.

(a) If the bounce continues higher, I still participate; if
(b) The bounce reverses, I look for the turning point, add back that 25% taken off.

jog on
duc

 

[ducati916]

So developing on the Oil thread:

The oil market currently going into meltdown. This could be enough to spook markets generally, into a bounce reversal as (while it should not be a complete surprise) the ferocity of the fall in the oil markets is different than just a fall in price.

That type of fall could again cause a short term liquidity crisis across debt markets, which always infect the equity markets.

If it plays out, it will play out pretty quickly.

jog on
duc

 

[peter2]

Excellent point. Indices have started to fall as news of the oil futures contract hits rock bottom before expiry. This could start the stone rolling down hill.

 

[qldfrog]

Yeap US markets down today.
What will this oil rout trigger?

 

[ducati916]

Yeap US markets down today.
What will this oil rout trigger?

Not sure. But as tech/a mentioned yesterday, outliers can have an effect. I don't think this (oil market) has ever happened before. So that is an outlier. It is an outlier in the 1987 crash type of outlier. After all, everyone and their granny knew that there is an oversupply issue in the oil markets.

Someone had to close out at massive losses or take delivery. Clearly they could not take delivery. This suggests then that it was a Hedge Fund(s) on the wrong side of the trade rather than a consumer (refinery/etc).

(a) Do those losses create a margin or liquidity event for some Hedge Fund? If yes, do they get a bailout?
(b) If no, then (I guess) no major issues going forward and markets just carry on.

Thing is, if there is an issue at a Fund, it will take a few days or week to come out. I'll be watching for any signal closely. In the meantime, I'm happy to take a little off the table while we wait to find out.

jog on
duc

 

[ducati916]

Some 'bounce' history:

So taking out Aug 1932 (that was some bounce) we are currently (historically speaking) in the range for a bit of a correction. Profit taking (the same phenomena creates the bottoms) is fast market action. It does not hang about.

jog on
duc

 

[ducati916]

Some volatility history:

jog on
duc

 

[lusk]

Some 'bounce' history:

View attachment 102507

So taking out Aug 1932 (that was some bounce) we are currently (historically speaking) in the range for a bit of a correction. Profit taking (the same phenomena creates the bottoms) is fast market action. It does not hang about.

jog on
duc

This bounce will probably keep grinding upwards while everyone scratches their head, each short drop shaking traders out thinking its going down to test the low. It could be because we aren't actually in a bear market.

A few reasons:

1. The descent occurred from a high.
2. Bear markets roll over, corrections come from nowhere.
3. Too many expect a test of the lows.
4. Market goes up while CV-19 infections go up. Keeping people baffled until they finally give up and join in.
5. Trillions of stimulus

 

[kahuna1]

CV19 ...

One has to love it .... purchased 200,000 barrels of oil and got paid $35- a barrel or $7 million USD ...to take it. I have asked for delivery of 100,000 barrels in the Trump Tower 5th avenue, just pump it into the elevator shaft from the top floor ... and the other 100,000 barrels on the 5th Hole at Maralago Resort in Florida on the 5th hole.

The EPA under Trump no longer has any enforcement and as such no fear of any fines.
Cost $5- mind you to get it delivered but still $6. million USD profits.

Bounce ?
Trying to pick bottoms ... as they say, all one gets is smelly fingers.

I think any sane look at where Italy went, close to total medical system collapse and NY as well, for USA to even be thinking about going back with 5-10 times infection rates of most other nations, is what it is.

Enjoy the oil Mr Trump.

I note .... WPL ... is nearly not down ... when the NON spot oil price crashed by over 10% .... possibly its denial, then again delusion ... I never know at times like this whether I am using a broken computer or others are. Seriously ? Flat oi producer ? This when every vacant oil tank in the USA is full. Its not a good sign for the coming months about too much of a rally.

Then again, Trump will likely provoke Iran yet again.

 

[ducati916]

This bounce will probably keep grinding upwards while everyone scratches their head, each short drop shaking traders out thinking its going down to test the low. It could be because we aren't actually in a bear market.

A few reasons:

1. The descent occurred from a high.
2. Bear markets roll over, corrections come from nowhere.
3. Too many expect a test of the lows.
4. Market goes up while CV-19 infections go up. Keeping people baffled until they finally give up and join in.
5. Trillions of stimulus

1. Surely all bear markets start from a high...the high being the (previously) existing bull market. Re. whether we are in a bear market or not: I agree that this is a cyclical bear in a secular bull, rather than the start of a secular bear and the end of a secular bull.

2. The 'topping process' usually takes time (1987 is an exception). Far easier (usually) to see the top forming. Bottoms and bounces tend to be fast, in part, because they are both subject to profit taking, combined with new positions (longs/shorts) which adds the speed to the move.

3. That is true and why there is an increased chance of profit taking inducing a breakdown of the bounce. A new element also exists in the US markets, viz. the increase of algo trading. If conditions trigger whatever set-up the algo responds to, we get a wave of selling. That selling (or buying) seems to be exacerbated by volatility inputs. The VIX is setting up for (technically) a move back higher for volatility. For every 19% increase in volatility, the range can potentially expand by 1%. This seems to play out that if volatility increases, and the range (potentially could expand) it does, as the algos seem to ramp up their volume and time in the trade, pushing for that expansion of range, which is always lower.

4. Market could care less about COVID-19 infections/death/etc.

5. Which means that this is simply a pullback rather than a new leg lower. It may retest the lows (assuming it even eventuates of course) but it wouldn't be a market like say 2001 where the initial bounce reverted into another leg lower. This is a more (I believe) 1987 type of market action.

jog on
duc

 

[frugal.rock]

Well, it's still on the pull back...
Nasdaq and Footsie nearly mirror image open with slippage of over 1 percent and running down.
Choppy bearish days ahead...