Wednesday, April 25, 2012

Update for Thursday, April 26th -- Combo Timer Signals New Long

.
Effective with the close of markets on Wednesday, April 25th, the GGT combo timer, which is comprised of both the Elder Force Index timer and the GGT 13d / 65d cross timer, has signaled a New Long.  Entering positions early in the morning the day following a transition of this timer to a long state has been profitable more often than not since November 2008.

Let's look at the timer performance coupled with the GGT index (which generally looks like the ETFs IWM or VTI):





(Right-click on the image to open in a new tab or window)

As many of you know, I have developed a number of timers -- their performance since 1/1/09 is shown above.  The best timer -- the 13d/65d timer, has considerable drawdown and most people would abandon it once they gave back half their gains.

Surprisingly, when we combine the best timer and the "worse" timer (someone has to be last), we get a complementary pair that works well together.  The "worse" timer is the Elder timer.  Combining with the best timer gives us the purple curve, and as you can see, it behaves well overall.  Not perfect, and I want you to look closely at the areas I've circled -- these are areas where all the gains have been given back and then some, which is certainly a possibility at this stage in the market.

You must be aware that no timer is perfect, all timers whipsaw, and all timers are subject to their worse drawdown IN THE FUTURE.  Internalize this statement, and make sure you understand it.

Now, with that caveat out of the way, let's look at the performance statistics.  There is more than equity to quantify the behavior of a timer -- and you should at least be somewhat familiar with how I do this.


The timer has been in CASH since 4/4/12.  At that point, since 11/25/08, the timer was responsible for turning an initial $1 into $2.03, a gain of 103.7%, and a compounded rate of return of 23.15%.  The timer is only in the market 49.5% of the time, so consequently, it has a very good efficiency -- a bit under 2.1.  Values above 2 are considered quite good.

The worse trade in this entire time, not counting commissions and slippage, is only -2.41%.  This is accomplished by executing early the following morning as close to the previous close price as possible (or better).

The best trade is +19.59%, and it goes without saying, when the system works, it works.

Dropping down, the system has only had 19 trades since 11/25/08, so this is a low-cycle timer.  I'd like this number to be higher, but my time machine has failed and I can't advance to the future to check the performance, so we must do this the old fashion way -- day by day and trade by trade.  The system values will start converging around 24 trades, and more is better.  All in time.

Dropping down a bit further, Van Tharp's t-test/SQN metric is a solid 2.65.  Not a great system in his book but not bad either.  We want values above 1.7 to assert that our gains are not due to chance.  More trades improves the quality of this value.  I'm looking to see it go up with increasing trades -- we'll see.

Dropping down to the yellow line, mathematical expectation (ME) is 2.62.  This is an amazing number, relative to systems like Connors' and others.  This shows that there is a high degree of probability that the system will produce gains going forward -- we have a significant edge on the long side.

Finally, the PRR value is the Pessimistic Return Ratio, and it improves as the number of trades increases.  A value above 1.0 shows that we'll most likely make money, and values above 2.5 are considered very good.  We're there.

Again, I cannot stress enough -- 19 trades is a low number of trades for metrics on any system.  It is quite possible that the 20th trade will be a significant loser -- AAPL *IS* the market right now, and if AAPL goes down, the market will likely follow.  Unrest in Europe with the ECB, Spain, Italy yields, "Sell in May and Go Away", I could go on and on.  Markets climb a wall of worry and we're there.

===========

A number of conditions triggered this timer long today.  The Elder Intermediate timer turned to "mixed" mode, which is essentially "long" but not confirmed by a slower-moving average method:


Essentially, I use both a simple moving average (SMA) and a exponential moving average (EMA) method to calculate Elder's Force Index.  The SMA is still below 0 (by very little), and the EMA is above 0.  Hence we get a "mixed" signal there.

Of some importance is that the 13d Force Index slope is pointing upwards -- it is gaining day over day.

Next, the 13d and 34d EMAs on the GGT index are positive slope - they are pointing upward.   Prices are moving upward.

Hence, by a pure EMA method, we have Elder LONG going into tomorrow.  If we incorporate a slower moving average to require confirmation, we're not there yet, hence we're Mixed.

I tend to be more aggressive so I'm long at this point.

===============

The 13d / 65d timer was already long going into today:



As a result, we have the necessary and sufficient conditions for the combo timer, and we have a "Enter Position" signal.

It's difficult at this point to know if this signal will work; your crystal ball is as good as mine.

I had lunch a few days ago with a fellow HGSI user and I made a statement "start with ETFs ... if you can't make an ETF work, then stock picking will be more difficult over the long haul.  I believe that here too.

At a bare minimum, I plan to enter IWM tomorrow at the open (or even before).  I base this on answering the question "What does GGT look like in the most recent time frame?"   The answer lies in the Pearson correlation with the GGT index and various other indexes:



The closer the value is to 1.000 the more the GGT index is acting like the various ETFs shown over the time periods shown.  You could argue that the VTI and IWM are close -- they are -- and I simply am picking IWM because I picked VTI last time  :)

How big will my position size be?

Let's say you have a $100,000 account.

Let's further suppose that you only want to risk 0.5% on this "newfangled" idea from Paul.

Here's how I calculate the position size.

Account Equity:  100,000
Risk:  0.5%
Amount to Risk:  100,000 * 0.5% = 500.00
Worse Trade in System:  -2.41%
Position Size = 500.00 / 2.41% = 20,746.88
Closing Price IWM:  80.94
# shares = (round down) 20,746.88 / 80.94 = 256 shares
Stop Loss:  80.94 * (1-0.0241) = 78.99

With this stop set, your maximum exposure on a 20K position is $500.

REMEMBER:  the worse trade has NOT occurred, and the worse drawdown has NOT occurred.  This could be a bumpy ride.

For those who regularly read my entries at the Effective Volume site (http://www.effectivevolume.com), here are the obligatory price and LCR model tables and figures, without commentary.




I intend to set my stops as indicated, and let the markets do what they do.

Enjoy your Thursday.

Regards,

pgd