This is a prelude into my view or philosophy of markets and hence my trading style; more formally described as 'financial time series analysis' or 'Multivariate time series analysis', which looks at the relationship of price activity through the lens of multiple trading time periods (micro-intraday to macro-monthly/quarterly). Borrowing from Taleb, I am looking for the 'Antifragile'-Macro: the question I ask myself prior to putting on any trade is what are the odds that this will develop into a short term, relatively sustainable price trend (some persistence in price movement, possibly evolving at the weekly time frame, with an expectation that I can more than double my positional risk in reward)?
December 2012 is a perfect example of how the chaotic and random, short term oscillating nature of the micro-market structure (micro-randomness) in the Nasdaq100 (as per 4 consecutive trade losses 38-41), can develop into a high-probability macro-monthly trading signal (going into Jan 2013). After 4 consecutive trade losses at the micro-level, I had to step out of that time frame and begin to look at the odds on the macro-level to keep my focus - the market tends to test trader's character by inflicting doses of short term (at times longer term) pain, contributing to the trader's antifragility (increased threshold for pain and stress and thus maintaining composure = getting stronger) or enhance trader's fragility - succumb to reflect on loss, remain overly micro-focused, and declare that there may be a 'better' time to participate and so walk away. Just as the market threw me around (Trade 38-41), it was organizing on the macro-monthly time frame, which allowed me to stay with the system through adjusting my own objective view. Because I find that after multiple, consecutive small losses the market is getting ready. And of course, we are all well aware of the catalyst for changing market conditions as per the 'forced' congressional vote.
More importantly, I want to present how we as trader's must constantly shift our objective lens from micro-macro and macro-micro; keeping context in our trades, noticing developing weakness/strength at the micro level and how that may effect the macro, and preparing/adjusting for that --- or how the macro context may be used to position short term, etc.
Lets look at why the chaotic short term cliff-induced market gyrations were organizing into a high-probability January-Monthly trading signal. From the chart below, let's look at the Monthly Regression Overlays and their respective Nasdaq point regressions (previous monthly mean trading price +1 standard deviation == where the market spent most of its time trading in the previous month or its monthly 'fair price'). We can borrow from Toby Crabel's market expansion/contraction philosophy that following a period of price contraction, we can expect price expansion or directional movement. His concepts and research were more applications at the intraday level -- I'm blowing it out to the monthly level -- as an objectively and predictive macro-method to evaluate 'high-probability' months to take trades. From the chart below we can see 'monthly contractions in price' (tight monthly price actions) as per the 'regression' overlay. I have referenced the absolute regression in Nasdaq 100 points, which demonstrate 'tighter trading months' or months of contraction in price, narrowing in price, by arbitrarily using regression < 12 pts (or regressions that equate to movements of .03-.5% of the Index value).
We can take this a step further by classifying narrow monthly regression (monthly contraction patterns) and market activity in the next trading month as follows:
2011:
Jan Monthly Regression = 2 Pts
Feb Monthly Movement = UP, 122Pts (Low to High)
Feb Monthly Regression = 6 Pts
Mar Monthly Movement = Down, 192 Pts (High to Low)
May Monthly Regression = 12 Pts
June Monthly Movement = Down, 206 Pts (High-Low)
July Monthly Regression = 11 Pts
August Monthly Movement = Down, 413 Pts (H-L)
December Monthly Regression = 0 Pts
Jan (2012) Monthly Movement = Up, 174 Pts (Low-High)
2012:
April Monthly Regression = 7 Pts
May Monthly Movement = Down, 285 Pts (H-L)
Sept Monthly Regression = 10 Pts
Oct Monthly Movement = Down, 236 Pts (H-L)
December Monthly Regression = 6 Pts
Jan 2013 Monthly Movement = Up(?), X Pts
Extrapolating absolute monthly moves from previous monthly narrowing patterns, we can find from the sample that movement was directionally biased to the downside, implying a strong technique to anticipate intermediate topping months. We've seen 2 of these contractions resolve to the upside for 122 Pts and 174 Pts (from Low - High) in Feb 2011 and Jan 2012. Carrying this forward into Jan 2013, and using the overnight lows of Jan 2 as the 'extreme low' at 2686, could we see the Nasdaq move higher by a volatility adjusted 200 Pts or so? Thus a 2900 target this month?
More importantly, I want to present how we as trader's must constantly shift our objective lens from micro-macro and macro-micro; keeping context in our trades, noticing developing weakness/strength at the micro level and how that may effect the macro, and preparing/adjusting for that --- or how the macro context may be used to position short term, etc.
Lets look at why the chaotic short term cliff-induced market gyrations were organizing into a high-probability January-Monthly trading signal. From the chart below, let's look at the Monthly Regression Overlays and their respective Nasdaq point regressions (previous monthly mean trading price +1 standard deviation == where the market spent most of its time trading in the previous month or its monthly 'fair price'). We can borrow from Toby Crabel's market expansion/contraction philosophy that following a period of price contraction, we can expect price expansion or directional movement. His concepts and research were more applications at the intraday level -- I'm blowing it out to the monthly level -- as an objectively and predictive macro-method to evaluate 'high-probability' months to take trades. From the chart below we can see 'monthly contractions in price' (tight monthly price actions) as per the 'regression' overlay. I have referenced the absolute regression in Nasdaq 100 points, which demonstrate 'tighter trading months' or months of contraction in price, narrowing in price, by arbitrarily using regression < 12 pts (or regressions that equate to movements of .03-.5% of the Index value).
We can take this a step further by classifying narrow monthly regression (monthly contraction patterns) and market activity in the next trading month as follows:
2011:
Jan Monthly Regression = 2 Pts
Feb Monthly Movement = UP, 122Pts (Low to High)
Feb Monthly Regression = 6 Pts
Mar Monthly Movement = Down, 192 Pts (High to Low)
May Monthly Regression = 12 Pts
June Monthly Movement = Down, 206 Pts (High-Low)
July Monthly Regression = 11 Pts
August Monthly Movement = Down, 413 Pts (H-L)
December Monthly Regression = 0 Pts
Jan (2012) Monthly Movement = Up, 174 Pts (Low-High)
2012:
April Monthly Regression = 7 Pts
May Monthly Movement = Down, 285 Pts (H-L)
Sept Monthly Regression = 10 Pts
Oct Monthly Movement = Down, 236 Pts (H-L)
December Monthly Regression = 6 Pts
Jan 2013 Monthly Movement = Up(?), X Pts
Extrapolating absolute monthly moves from previous monthly narrowing patterns, we can find from the sample that movement was directionally biased to the downside, implying a strong technique to anticipate intermediate topping months. We've seen 2 of these contractions resolve to the upside for 122 Pts and 174 Pts (from Low - High) in Feb 2011 and Jan 2012. Carrying this forward into Jan 2013, and using the overnight lows of Jan 2 as the 'extreme low' at 2686, could we see the Nasdaq move higher by a volatility adjusted 200 Pts or so? Thus a 2900 target this month?