I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Tuesday, August 16, 2011

August 16

First the quick status:

The 15-min chart divergence did in fact play out as a pullback today. Right now the 15-minute divergences have cleared and reset. We are back to price support and the longer MAs have now turned up and become supportive.

The 60-min cycle chart still looks very healthy. The 60-min 'short-term' overbought condition has cleared, and the 60-min 'long-term' indicator is still firmly positive indicating that this is still the middle of a very strong uptrend.

Second, some more interesting results:

I relayed a backtest study I did with my 60-min system looking for a specific non-divergence bottom on August 3 (updated). Here is the jist:

...But with the backtest study, I wanted to look for
a) Sub-Cycles that bottomed with no divergence
b) with a similar setup to this wave (very wide MA spread, similar stochastic readings, etc.)

I found only 3 that matched that criteria: Sept 18, 2008 (crash), Oct 13, 2008 (crash), and May 8, 2010 (flash crash).

Of these 3 cases, all triggered sub-cycle bottoms on no divergence, and a sharp move up that failed within a couple of days, and within a week or so was moving down again, triggering another sub-cycle top signal and making new lows with follow through. ....

Since then, if you have been following my recent posts, we did in fact get a divergence signal at the bottom of this sub-cycle: August 9 (Updated). What that means is that the low at the bottom of this wave could not only be a legitimate sub-cycle low, but a cycle low as well.

But now for the interesting results:

I did a backtest study that looked at the low value of my main indicator (oversold-ness) at the bottom of a wave (similar to the levels of the recent decline) after very large price declines. My main indicator is mean-reverting which means that very large negative values at the bottom of a wave snaps back like a rubber band and goes to a positive value (usually a large one), without any fakeout tops along the way. And in a 10 year backtest I get two sets of results:

1) Sept 18, 2008 (crash), Oct 13, 2008 (crash), and May 8, 2010 (flash crash) are the only three exceptions with a fakeout top before the main indicator goes back into positive territory. All three of these cases are met with a) no divergence at the first main bottom and b) Clear declines and re-establishment of a downtrend within a week and lower lows within a week and a half

2) Every other bottom fitting the above criteria had large price runs up and my Main Indicator goes positive (usually at least 50% as positive as it was negative on the decline)

And I think that we are seeing another manifestation of a group 2 move.

First we had divergence at this bottom (Group 1 had none) and second it has been a week since the bottom and the downtrend has not reasserted itself.

I think the current pullback is very temporary (might even be over) and we have a continuation of a very strong uptrend awaiting us. And at the rate my main indicator is climbing, it is telling me we have at least another week of an uptrend, possibly more.
blog comments powered by Disqus