Trading the Tides, Part 2

Last week I posted a few charts showing equity growth if one were to trade the tide turn dates over the last 3 plus years. If you scroll down to earlier posts, you'll see the two charts, one based on what I have termed a 50% entry/exit and the other labeled nirvana trading where the absolute best entrys and exits are assumed (not possible). The reason for these two charts is to frame what is felt to be the absolute best and possibly worst trading results (although it is entirely possible for a trader to do worse than an average 50% entry/exit).

With the extremes set, we should now take a look at the range in between these two. A little more explanation is in order to understand the following charts a little better. When I refer to a 75% entry, here is what I mean. Lets say that an impending tide turn is imminent (for instance this coming monday) such that the trade called for is to close out a long position and reverse to a short position. Also, lets assume that the snp ES range for monday is a low of 1,060 and a high of 1,073. A 75% exit long and entry short then would be 75% of the difference between the high and low, and since we are looking for a long exit/short entry, we want: (1,073-1,060)x.75 plus 1,060. If I have done the math correctly, this translates to a price of 1,069.75. So this price of 1,069.75 then represents a 75% entry/exit for this day.

Similarly, if monday were instead a tide low date (short going into that day) and the price range were the same, a 75% exit/entry to exit short and enter long would then be: 1,073-((1,073-1,060)x.75) or 1,063.25. Pretty simple concept.

Now, lets look at some equity charts with varying degrees of success with average exits and entrys. Below are 3 charts illustrating the results.

At the top of each chart in the title block the entry/exit assumption is shown. Below is a chart with all the charts combined.

The heavy white line has been drawn to show a 100% return on investment, on in this case, starting with a $25,000 account and have it grow by $25,000 annually. Apparently, to realize this type of account growth, the average entry and exit would need to be in the 65% to 70% range based on backtesting data for nearly a four year span. At some point, I would like to go further in the past with backtesting. Again, this return is based on trading one ES contract and has no consideration for drawdowns, which if you are a trader, you would know how those can affect a trader's ability to stay in a losing trade. More on this later.

Mid Week Update and Nirvana Trading

Above is a chart of where we are on the snp ES as of about 5:35 pm, tuesday 10-6-09, the day after my birthday. :) Clearly the tidal low expected for today actually came in late last week. There seems to be a tendency for a turn date to occur one or two days early in the direction of the predominant trend. In other words, in this bull market, the low and turn upward seems to come in earlier than expected, as if the market can hardly wait to resume it's upward march in a bull market. I will have to check to see if this the opposite occurs in a bear market......In any event, monday the 12th is the next high point of this rally according to the tides.

.

Now, back to trading. Last weekend I posted a chart based on trading the tides with a 50% entry and exit. Just for giggles, below is a chart of nirvana trading where the basis is that a trader would get the absolute best prices available on the turn dates. Obviously this is not possible, but I post the chart just to frame the boundaries between what should be bad trading (the previous 50% chart) and what is impossible to do (the 100% chart). Now the limits are set and this weekend I'll put up some charts of equity growth based on what we might theoretically expect a trader, only slightly smarter and more experienced than that caveman mentioned earlier, ought to be able to do. Keep in mind this is based on trading a single ES contract and getting the impossible best prices for entry and exits. Also no consideration for drawdowns is included here.

Trading the Tides ?

Since beginning this blog a little over a month ago, I've touched upon the tides and trends but have said nothing about trading. Let's delve into that area a little bit here. It seems obvious that if the tides are anywhere near consistent pointing to top and bottoms, we ought to be able to trade with this information. So here's what I 've done.
.
My tide data goes back a little over 3-1/2 years to the beginning of 2006. I've downloaded the S&P emini daily price data (open, high, low, close) from Tradestation over that time period and laid it up against the tide turn dates I've developed. Since the eminis trade 24 hours a day, understand that the official beginning of a new day is at 4:15 pm est and runs to 4:15 pm the following day.
.
An assumption must be made in order to backtest the data. That assumption being at what price on each turn day one would theoretically be able to either buy or sell the emini contract. For this assumption, I've varied the efficiency of the entry and exit points to examine various equity curves based on these entry/exit points. I start first with what I call a 50% entry/exit. What that means is that on any given tide turn date, a trader would only be able to enter or exit a trade halfway (50%) between the high and low of that particular day. In other words, if the tides indicated a turn next tuesday (which they do), and the trading range for eminis on that day was from 1010 to 1030 and the trade required was to go long, then the trader's best low entry price for that long entry on that day would be 1020, or halfway (50%) between the high and the low of that day. As that long trend and trade played out to the next turn date, his exit long and go short price would again be 50% between the high and the low of the turn date range. So, if the trading range on the reversal turn date is between 1040 and 1052, then the exit long and go short price would be 1046.
.
Using an excel spreadsheet to tabulate all the entrys and exits for each turn date, I then calculated an equity curve using a theoretical $5 per trade commission cost. Below is a chart of those results dating back to the beginning of 2006 with an assumed starting account of $25,000.


As you can see, nothing special here. Over almost a four year period, a gain of only about $10,000 on an initial investment of $25,000, or roughly 10% annual return. And some fairly wild swings in equity with undoubtedly large drawdowns along the way. Surely, we can do better than this. Well, we can do much better than this...actually much better by improving the entrys and exits on the turn dates. Keep in mind the equity curve above is based on only being able to get average entrys and exits at prices halfway between the highs and lows of each day. Surely, even a caveman could do better. Mid week, I'll put up some more equity curves based on what a trader should be able to do.

Weekend Whirl and Wierd Wollie Wednesday

Sometimes I'm just amazed at it's predictive power. Maybe I shouldn't be, but show me something more accurate for targeting highs and lows. Not always exact, as nothing is, it just keeps plugging along.

.

So, its targeting down into next tuesday. I see a couple of things that could trip us up a little bit here. First, it tagged the lower up trend line on friday and secondly, we face the vaunted "WWW" on wednesday. For those not familiar, WWW is an acronym for Wierd Wollie Wednesday. Its significance, as espoused by none other than 16 time winner of the Timer of the Year Award, Don Wolanchuk, is that there is a tendency for the market to be taken down into the wednesday before the week of options expiration or OE. OE occurs the third friday of every month, being on the 16th of October this month. Therefore this coming wednesday is WWW so we might expect a low at that point. So, low maybe tuesday or wednesday.

.

Those who dont know Don Wolanchuk are missing out on a real market guru gem. He's controversial, outspoken, sometimes arrogant......but he's also good at what he does. So for me, that trumps any fault, and we all have them. Besides, once you get to know the old geezer you'll see he's of a large heart for people. His picture is, by the way, next to the word mega-bull in your dictionary. Don worked with Joe Granville for many years and took his on balance volume work to new heights with his clx. Someday in the future I'll delve into that system for you....but by necessity due to the clx's many intricate features, it is beyond the scope of this blog. However, I can direct you to a full course on the subject as Don has done for many others over the years. I was fortunate enough to get in on the ground floor of his technique in the early 2000's......it has become an integral tool for me and it was the key he says to winning so many timer of the year awards.

.

On the oppisite side of the bull, if the bear case is taken, this tide turn date and/or WWW will be rejected and the market will continue the short term trend right on down through the trend line and we "crash" at that point. With bearish sentiment as it is right now, not a likely scenario.

.

I have been running some backtesting on a simple strategy of using the tide turn dates to buy and sell the eminis (ES). I'll get those up on the blog, hopefully this weekend.

Mid Week Update - 2 Charts

Starting with the standard tide chart. Just barely had a successful trend last week with yesterdays high. This weeks trend into next tuesday is forecast as a downtrend, which seems entirely feasible given where the market has been in recent weeks, and why wouldn't it come down a bit and tag the lower trend line ? Nothing says its got to be that way though.

Okay, second chart. Revisiting Tom Drake's 2cs below. You can see that sentiment has backed away a bit from the log trendline. Does not seem to be a lot of bullish exuberance showing up here yet. My take anyway.

RUH ROH ???

I'm not saying watch out, but I dont like seeing what I think I'm seeing. Last weeks trend was a bad trend...this weeks also looks bad...at least at this point in time. What concerns me a little is the combination of two things....first, its looking like this weeks is shaping up to be an "inversion" to the downside in the midst of a bull trend. Secondly, if you look down below to the Price Projection post, you see that we have filled price projection #2 right now at 1,065 to 1,070. So, this could be something more than just a blip on the price chart......we would have some work to do to correct this trend which ends on monday.

In any event, my antennae are all the way up. ;)

Update

Just a midweek update. I've seen targets from 1,085 to 1,200 for this run. I'll pick a point about 1,115 ES before some sort of a correction which begins this coming monday.

Price Projections

One of the things I've picked up over the years is that there are folks out there in cyberspace who have been studying these markets much longer than I. People who have scientific inclinations that have or are pushing the discovery envelope so to speak. One such person is Joanne Mcable who often is posting at Wollie World http://www.crystalball-forum.com/context/main/wollieworld/msgindex.htm.

She has a terrific talent for research and discovery not often found in this business, often searching for the hidden clues or indicators of market direction. Unless I have misrepresented her work in this area, the chart above describes one of her little discoveries.....though I think she would probably describe it as a work in progress or esoteric piece of work. It is one my little favorites though because it is a price projector and not based on fibonacci work, though there is nothing wrong with that either.

Here's what it will look like. Plot the closing prices of the snp and run a 10 day simple moving average (yellow line) against it. On top of that, plot a 12 day exponential moving average (red line). I use excel extensively so it is easy for me to do it in this manner; most plotting software out there will easily overlay these moving averages over the snp.

Here's how it works. The 12 ema is the faster moving of the two moving averages. It will turn up quicker and turn down quicker than the 10 dma. As price rises or falls, the 12 ema will lead the way until at some point, about halfway along the total price movement, the 10 dma will catch up and cross over the 12 ema. So, what the crossover of the 10 dma over the 12 ema indicates is the halfway point of a price movement.....as the 12 ema turns up and gains momentum, likewise it gets to a point where the momentum of the price movement slows and the ema is eventually overtaken by the slower moving 10 dma. In other words, the moving averages are measuring the momentum off a price low or high. For instance, below is a listing of the measurements taken off the 6 indicated lines:

#1 Price low = 670, crossover = 775, projected top = 880

#2 Price low = 670, crossover = 875, projected top = 1080

#3 Price low = 670, crossover = 920, projected top = 1170

#4 Price low = 670, crossover = 940, projected top = 1210

#5 Price low = 880, crossover = 1020, projected top = 1160

#6 Price low = 670, crossover = 1035, projected top = 1400

As you can see, #1 price projection was met on April 17th, and #2 price projection is in the process of being met right now. Number 3, 4, and 5 have projected to the 1150 to 1200 area within the rectangular box. And lastly, but not leastly, #6 is pointing to a high of 1400 presently based upon an apparent crossover occuring right as we speak. This one may be a bit premature, but it looks to be another crossover in the making, and I am more than happy to give it a thumbs up at this point. :) So, quick summary.....projections 1 and 2 have been met. Projections 3 through 6 not yet satisfied.

One thing to keep in mind of which Joanne herself has cautioned several times. Often the crossover will point to a top or bottom and not the halfway point of a move. This is obvious because as price makes a turn, its 12 ema will crossover down, or up, through the 10 sma making it look as if it is the other way around....i.e. making it look as if the 10 sma is catching and overtaking the 12 ema where in fact it is not, and what is happening is the faster moving ema is responding to rapid price movement instead. Something to watch out for.

In any event, I like this tool. Certainly can be open to interpretation and can sometimes be misleading but arent they all? I keep it next to my hammer..:). Another point is that this tool does not seem to work well with individual stocks, although with some I seem to recall it does. You would have to work with it on various stocks and even play with the lengths of the moving averages to find one that fits best.

What does this all have to do with tides? Absolutely nothing, but I like to stray from the waters edge once in a while.

Looking at That Spando Thing Again.......

A while back I posted a tidal chart wondering if the possibility of a spando thrust was underway in the snp. Taking another look at the chart today, we see that price has broken above and outside of the narrower trend range and is currently parked up above the upper trend line. In addition to that, yesterday (friday the 18th) was in fact a tidal low date. Does that mean that we are heading back up again next week to satisfy that criteria? We are several days past a new moon and consequently the forces of gravity from the moon are weakening each day. Keep in mind, the hypothesis from Taylor is that decreasing gravity results in higher market prices and increasing gravity in lower prices. Time will tell.

Our last tide trend we have to qualify as a bad trend. In other words the white line on the chart (indicating incorrect trend) "should have" terminated in a price lower than the beginning of the trend because it was supposed to be a down trend. But, bullish forces being as they are right now, did not allow that to happen. Generally, the trends are 75% to 80% correct as indicated by the tides.

Tom Drake's 2CS Senticator

One of the most underutilized methods of looking at the markets is probably sentiment....how fearful or greedy investors are feeling at any particular time. Here's a snapshot of Tom Drake's 2cents senticator. Tom's a regular poster on WollieWorld Forum at Crystal Ball http://www.crystalball-forum.com/context/main/wollieworld/ posting as "deuxsous", and at Don Wolanchuk's Valence thread on Silicon Investors http://siliconinvestor.advfn.com/subject.aspx?subjectid=52296 posting in cognito as "dospesos". He has permitted me to post his work here. For those who dont know him, Tom is THE sentiment meister having spent many years studying sentiment....one who is recently retired and most interested in capital preservation......so he necessarily needs to get a market pulse at all times to sidestep deep downdrafts.

Here's what he does. He uses the daily vix and cboe put call ratios and takes the summation of the product of these two numbers for the last five days. I believe he feels this compensates for any games that might be played by the boys.

The chart above plots the senticator against the Dow since early 2003, which is as far back as my data goes. Blue line is the Dow (scale on the right hand side) and the yellow line (scale on the left) is Tom's senticator. You'll see the senticator moves somewhat in tandem with the Dow, but that is not the important piece of this work. For ease of discussion, I've added a logarithmic trend line (least squares fit) of the senticator (light blue line) which from 2003 to present shows a gently down sloping line from about 60 to 80. Now, please note that since the senticator is the 5 day sum of vix times p/c ratio, as stocks rise and the vix and p/c fall, the senticator falls. Since I have a little dyslexia, I've actually turned his 2cs upside down.

Okay, what do we see? Note the 2cs coming out of the 2003 hole....similar in many respects to what we have happening right now. As the Dow climbed, likewise the 2cs climbed with it. Until it hit the log trend line (light blue line) more or less and then hovered above and below this trend line through all of 2004, 2005, 2006 and early 2007 (bull market territory). Once things started to go in the crapper in late 2007 and into 2008, the 2cs likewise dropped well below the log trend line and stayed below it.....even today we are below the trend line with a 2cs value of a little north of 100.

My interpretation: The 2cs, in a bull market, seems to have an affinity for hovering 0 to 20 points above the log trend line. What that means to me, in this environment, is that the rally will continue until the 2cs spends several months or even years bouncing back and forth from 60 to 80 (just above the log trend line), or......between 40 and 60 if past history in 2004 to 2007 is to be believed. A long, long way yet to go.

Notice how the 2cs "peaked" on July 21, 2009 (my wife's birthday) as has actually backed away from the peak all the way through the August and September run up. Meaning that as this rally has gained legs, sentiment has actually gotten more and more bearish! Under a similar situation in late 2003, the Dow simply ran up right through these "seasonally bad months" ahead of us and didn't peak prior to a significant correction until February 2004. So, hold on folks. Are there differences between then and now? Surely there are and there will be corrections along the way, but this senticator is saying, at least to me, higher prices are ahead of us, possibly much higher prices. Next weekend we'll take a look at a means of projecting these higher price levels.

Where We Are...What Lies Ahead

Just a quick one tonight....present picture snapped at 9:47 pm est 9-9-09. Lots of folks seem to be getting a little antsy in here.....No interpretation, just some markers on the chart....have fun!

Credit Where Due

I would be remiss should I not give credit for the tidal / gravity work where due. A few years back, I was directed by a friend to this website: http://www.xyber9.com/Xyber9/Home.aspx. Admittedly, I was a little intrigued by the concept, though I seldom buy books on line simply to learn something new (bad me).

Anyway, to make a long story longer, I purchased Robert Taylor's book Paradigm, as advertised on his site, and gave it a read. In general I thought it to be a pretty good novel, though a little dry towards the end....but the concept that gravity, as measured by our tides, has a direct cause and effect on our markets really, really caught my interest. Maybe there was something to this. I am no astrologer (I did enjoy the study of planets in school though:)), but perhaps there was a connection between those who studied the movement of planets and our moon, with the tides on earth.

At the time, the purchase of the book got you a free, short term subscription to his service....I cant recall, maybe a 3 month subscription. Regardless, the subscription opened his website for one to view his forecasts....ones that seemed to be accurate most of the time. Could it be he had discovered something really meaningful for predicting turning points and direction of the markets? As obscure as the concept sounds, do fluctuations in gravity actually affect the way we feel emotionally and therefore help determine how we invest?

At one point Mr. Taylor had opened a discussion forum on his website for subscribers to discuss any number of topics relative to his discovery and his book. I remember some interesting and lively chats. Some folks actually resrearched various techniques to improve entrys and exits on his turn dates using the moon and its influence on a daily or hour to hour timeframe as the basis for their study. Unfortuneately, he shut the forums for reasons that elude me right now. Thinking back, it would seem maybe not a wise decision, but he had to do what he had to do.

Regardless, for those with an interest in the possibility that forces of gravity actually do more than just suck us down to earth, I highly recommend purchasing the book. Read it and make up your own mind. In it you will discover the basis for his predictions....notwithstanding the alterations he makes to his data with his so-called xyber9 program.

Full Moon Spando Thrust ???

Here is a screenshot of the s&p eminis (ES 60 minute) annotated with a spattering of lunar points of interest, projected tidal turns and even some quick and dirty trend lines. I guess the more technical folks might call the smaller trend envelope a running correction or a consolidation pattern.....but what of the larger envelope? Is it possible that we are inside of a larger degree spando (courtesy of Don Wolanchuk) of some sort? Now, let it be known that although I do own a technical background, I am by no means a master of technical analysis, not even close. I know there are rules and regulations and proper techniques in the world of market technical analysis....far beyond the scope of this blog...but, I'm just thinking out loud here and considering.

I've also "projected" a couple of weeks ahead here.....with options expiration coming up shortly, it should be interesting to see how this resolves. Others are of the opinion that we should see a high coming into September 18th, which coincidentally corresponds to both a new moon and options expirations. My tide data suggests otherwise, but I could be fairly easily convinced that a run up right past the 9-11 date does occur and we end closing even higher on the 18th, especially the way this market feels right now....we shall sea...:)

Just a note about future interpretation of data. My goal will generally be to project turning points and trends based upon my raw data. In my opinion, there is something meaningful and a direct correlation between the tides and the markets. However, there are times when that correlation seems to go down the tubes so to speak. Nothing's perfect....certainly the injection of other's opinions and other methodologies makes perfect sense.

Back to the Basics

A very simple primer on the moon but with some important concepts and facts. While we wait to see what the markets want to do on this full moon day. Good one to just stash away......
http://www.enchantedlearning.com/subjects/astronomy/moon/

Past Performance Is No Guarantee.....

So they say. But history does tend to repeat itself. Anyway, here's some history from December of 2008 through July 2009.

Getting Ahead of Ourselves......But

Originally I had wanted to start at the beginning with tide basics, but at the risk of jumping ahead, I thought I should post the most recent tide chart here as a record and go from there.

The chart above is a plot of the s&p emini contract (esu09) using 60 minute data courtesy of Tradestation. On the chart you see several up and down arrows. Look at the green up arrows and the red down arrows. Clicking on the chart actually makes it readable.

The red and green arrows represent turning points in the markets as revealed by my tidal data. The upward sloping green lines and downward sloping red lines are up trends and down trends respectively taken from the turning points. You can see the tight correlation between the market movement and the tidal trends. This is the basis for my trading.....the beauty of which is that we know in advance when to expect change in trends. Now, understand these are more or less weekly trends, but the advantage to the trader is obvious. If you, as a trader, can enter and exit the market on these trend change days, even if you dont get the best price for the day, you're making money on almost all trends. I say almost because no system of trading is perfect, no system is infallible, but if you can be happy being on the right side of the trend about 80% of the time, this may just be your ticket to profitable trading.

More on how it works, entrys and exits, and the start of real time tracking of the results later. For now, we have just entered (as of last friday) a downtrend with the expected low of this trend on Tuesday, September 8, 2009.

It's About Time

I've thought about this on and off for quite awhile. Either the time or interest was not there in the past, but it's about time I started this blog. Why? Well.....first and foremost, I want and need a place to store and document stuff. Information, that is, about the tides...and their effects on the markets. Call it a hobby....a computer hobby where I can babble, store, stash and learn anything about the up and down cycles we all see in the oceans and are consequently subjected to as humans through the forces of gravity.

Some say that gravitational forces have dramatic effects on us as humans and our emotions. We can't see it but we certainly can feel it, as soon as we get out of bed every morning. But it is the all so small fluctuations in the magnitude of gravity that alter our behavior, moods and risk aversion, or lack of it, everyday. And this, it is believed, helps determine how we investors feel about risking our money in the financial markets. Sounds a little crazy, huh?

By the way, in case you dont already know or havent figured out yet, gravity is the driver behind our tide cycles. And, that large white orb in the sky we call the mOOn, is the engine that adds to or reduces the earths gravitational pull on us as it rotates around our planet. Hence, our moon, besides being a beautiful site in the sky, affects us all in ways we probably dont even realize.