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Thursday, July 26, 2007

Is it time to panic?


We are in freefall at the moment, so what to do next? As indicated on the chart, I just went long the S&P futures, am I nuts? Maybe, it is never easy to buy into declines like this, and also not always the correct thing to do. Why am I doing it?



First, my long term model is still in the long side only mode, so I am looking to buy short term weakness within that. If you look at the red line on the chart, specifically in the first sub-section, we are at a very low level. This is a proprietary indicator that measures advancing issues on the NYSE in a unique way. It has rarely been this low in recent years. Second, I mostly follow my systems with small amounts of discretion thrown in along the way. I have no way of knowing when an individual trade will win or lose, and when I thought I have known this in the past, I have usually been wrong. As a result, I rarely pass a trade due to my opinion about the outcome. It is true, that if this is in fact a trend change, this trade will lose.



From a short term basis, there is no reason to buy into days like this because it is clearly a news driven down trend day and these types of days can really get away quickly. The system that generated this trade is about a 10 day hold on average, and often the first few days go against the position. As hard as it is to watch this adverse move, it is typical of these types of trades.

I am constantly trying to find ways of filtering out bad trades like this one "might" be, and have never been able to find a conceptually correct way of doing so. As a result, I just take them as they come up and hope for the best over time. Ten of the last 11 in this system leading up to this trade have profited, so there is a good track record with it.






4 comments:

superfly19 said...

Thanks for the update Chris, I follow your blog regularly and appreciate all of your updates.

rikkicitos said...

Me too! Thanks Chris.

rich

powayseller said...

I hope you come out okay on this. Seems the financial meltdown I've been anticipating is here. Credit markets are seizing up, and I don't see how this can turn around within your 11 day timeframe. Does your system factor in Great Depressions?

I hope it turns around in time for yo to profit, I really do.

It's just the storm clouds are really ominous now.

Chris Johnston said...

I got stopped out on the original trade for a small loss, because I traded very small size due to the volatility, lost about 1% of my account on it, so not a big deal.

I have to admit that the price action looks very scary right now. I do think the Bond Market will save the day, but I am not sure whether it happens before or after a good sized plunge.

To answer your question, no my system does not factor in opinions, it is a mechanical model. You cannot build something that is dependent upon a once in a lifetime occurrence, or you would be wrong for almost every trade except for the big one. I will just be willing to lose when the big collapse happens, if it does.

I will be posting again Wednesday due to what appears to be setting up to be a wild day based on tonights globex action.