Friday, May 4, 2012

Update for Friday, May 4th - Short Term Timer = Cash, Intermediate Timer = Mixed (Warning)

We've had a state change in my timer system:

The short-term 4d Long-Cash Ratio (LCR) timer has moved to cash. This occurs when the database begins to contract, and the daily LCR value falls below a 4d simple moving average (SMA). 

The intermediate-termed Elder Force Index timer has moved to a mixed state. A mixed state occurs when their is disagreement between the 13d Force Index calculation using a faster exponential moving average (EMA) and a slower simple moving average. The faster EMA value is now negative, while the slower SMA method is still (barely) positive. This is a significant warning.

The longer-termed 13d / 65d price index crossing is still positive. 

Correspondingly, we are in a long-term uptrend, but the intermediate time frame is under tremendous pressure and the short-term is telling us to exit if we took the most recent signal.

The natural question is "what to do?" 

To answer this, I draw upon past model performance:

As with all my images on this blog, right-click to open in a new tab or window.

The Combined Long-Term (13d/65d) and Elder Timer model is still long, and is shown at the far right. We are a bit underwater from our starting point (-0.13%, no commissions or slippage), but in terms of practical, sustained performance, this model is telling us to hold the line and remain long. The worse realized loss from this model is only -2.41% since 11/25/08, and while intraday drops will certainly be below this value, and while we have yet to see the next worse trade (a model's worse trade has not yet occurred), this model is telling us to sit pat. The confidence in this model is high -- the t-Test/SQN value is 2.65, and we want values above 1.7 -- this is telling us that we are far better than chance in performance. Further, the mathematical expectation (ME) value is well above 0 at 2.62, which is very, very good and tells us that this model has a solid edge to the long side. Finally, the Pessimistic Return Ratio (PRR) is 2.77, well above 1.0, and again, confirms the model's long-term efficacy.

The Short-Term and Re-Entry Timer models both had conditions which were triggered with the 4/25 buy signal. They are now both indicating that we should exit, so it is not surprising that their gains for this last trade are equal. You can see from the statistics that the 4d, short-term model has the poorest performance overall and the weakest PRR value, so despite the good ME value, we can rank the signals from the 4d model as the lowest of the 3. On the other hands, the Re-Entry Timer has performed quite well at getting us in and out of trades if the master signal is LONG, and correspondingly, this one is telling us to exit.

So we have a mixed situation -- the combined model is long, the short-term model is indicating cash but is not a solid performer, and the re-entry timer, which performs well, is telling us to exit. It's a coin toss but the coin is biased to 2 against 1, and I intend to reduce 1/2 my positions at the open today. I will keep a nominal position on the table due to the combined timer.

I'm also holding a QQQ position which is based on a new test system. I've held the position since 4/17, and am now slightly underwater. The test system is indicating to hold QQQ on Friday, which I will do. I will not adjust the position size, as this runs independent of the systems described above. Hence, you may see me refer to a QQQ position, and that is the rationale of continuing to hold.

In my TSP account, which I discuss here, there are no signal changes going into the day on Friday. This is a long-term portfolio and I can only make two transitions per month, so I need to protect those moves.

Make it a great weekend!