September 13, 2023

Volatility Reports 9/13/23

Long Term Risk Off Cash is King

The battle for the minds of the market continues. Back and forth around the 50-day MA, trend lines and other traditional internal measures of the market’s bullishness or bearishness.

This month, if not this week, is the last best hope for the bulls to pull the market up.

The rule of alternation favors changes at regular calendar demarcations. After the first quarter of the year, and the end of the first half would have been the time for a change of condition, but not to be. The direction was higher, but the trend was low energy and focused on a handful of shares. The old gang of FANNG. Their time is running out with bulls undeterred by anti-trust and massive new competition. 

The government fiscal year ends on September 30. I expect the change to hit by Friday the 22nd.

The long-term point of view is capsulized in this monthly bar chart of the Dow

From a risk management objective, the Dow has the potential of decline 26% from here, this date and this price level. The potential advantage is capped at 15%. I give more than a 50/50 shot to the decline happening before an advance greater than 10%. The risk to reward levels shift annually, which at this point would pull the levels (collapse them) on each other.

That idea allows me to refer to the period of 2000/2001 as the last time in memory of an inside year. That period was also a terrible period for trading. Where the high and low of the year is contained by the highs and lows of the previous year. It was also the last time traders had to deal with what can be described as trend interrupted market action.

The monthly bar of the Dow featured above tells the story. If you are a puzzle solver, there are items on the chart that give you the precise date of the secondary high, 8/14/23. If you see it, let me know and you will receive three months of both MarketMap™ 2023 Scenario Planner and Volatility Report (a retail value of $299) with my complements. It’s simple math. The details will be published with the year-end offers. 

Trader’s tip: The natural bar, the 1440-minute intra-day charts instead of daily charts

Particularly useful for getting volume data quicker. End of day volume data is delayed – the exchanges don’t release it until well after the close. But if you use a 1440-minute intra-day chart (1440 minutes = 24 hours) then you’ll get the running total volume traded and know what the daily volume was before it’s released by the exchange. Sometimes the exchange makes some adjustments to the figure but it’s usually close.

In addition, on a 1440-minute chart TradeStation splits the day’s volume into “Up Volume” and “Down Volume”. “Up Volume” is volume traded at the Ask price and can therefore be considered aggressive buying. “Down Volume” is volume traded at the Bid price and can similarly be considered to be aggressive selling.

By keeping track of this “real” buying and selling volume you can keep track of the strength of a trend. Breakouts into trends typically start with a large volume of aggressive volume. And trends peter out when the buying volume backs off, even as higher prices are printed.

So, this “real” buying and selling volume data is useful.

PLUS, it also gets Globex data, which provides some leading information.

Harmonics for day traders: 1440/10=144-minute intraday bar are 72 min, 48 min, 36 min. 24 min. 18min, 16 min and 12 min.

TEM is the answer to getting chopped when the market goes directionless

The reason for the lower win percentage for traditional trend following is that markets tend to range or behave in a choppy manner more often than they trend, and as a result there are a lot of trends that stop as quickly as they begin to form.

So, the win rate of a typical trend following system is between 30-50%. This means you need to be willing and able to tolerate many losses when following a trend trading system.

A trading strategy with a low win ratio normally has a higher drawdown. We consider anything higher than 25% as high. We believe most traders can’t tolerate higher drawdowns than this. A low win ratio increases the chances of many successive losers and, thus, a high drawdown.

Another major bearish factor being ignored is the deflation hitting the second largest economy in the world.

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Money management is a defensive concept. It keeps you in the game for the duration. Risk assessment first tells you whether you have enough new money to take a position. Don’t confuse your account management with stop placement. Stop placement does not answer the right question, it only tells you of the amount of money you are willing to lose; and the market does not care.

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This work by Jack Cahn is licensed under a Creative Commons Attribution-NonCommercial 4.0 International