Waiting on Alpha

The L1 (Level 1) Alpha pulse kept grinding higher on Friday as an uptrending price bar was made in the cash S&P500. Nothing has changed in the fact that we won’t have “proof” that a significant high is in until we break below last Tuesday’s 897.34 low.

Last Wednesday saw a TD Combo Sell Setup and the following day the trigger of a TD REI “sell” signal when 903.95 was broken. In my view both of those Tom DeMark warnings are still active until 936.76 is broken (the true range of Wednesday’s bar added to Wednesday’s high). Also of continued interest: 929 is trine the March 6 low in price. In time, 929 is square May 8. The high so far is 930.17.

There is a new TD Demand Line in play (see chart) that sits at 918.99 today. Break that level and not only will that line be qualified, but the currently in force TD Supply line target of 943.17 will be negated.

Draft Trading Plan: I think I will use a different stop loss method on future trend-continuation trades; more on stops just below. The core of the “system” is the trend-reversal trade. Both trade ideas are completely divorced of the need to forecast market prices and will be mechanical. A short position would be taken on a move below 897.34 today. All such trades are hypothetical (based on the cash S&P 500; not a tradable contract) and do not constitute advice to buy or sell any instrument. Initial stop would be placed at the most recent high.

As far as stop loss levels go, I am leaning towards letting them “drive” position size after setting money management rules that allow a risk of no more than 3.0% of account equity. For example, on the theoretical pending short trade above, the risk would be set at 3.283 points (using 1/10 the value of the cash S&P500 and a stop at the current high). If the account was worth $10,000 we have a situation where $10,000 x 0.03 yields a maximum loss of $300 allowed on the trade. $300.00 / 3.283 stop = 91.3798; rounded to a 91 share position. The practical result is that 82% of the account is used to “bet”. If 82% is deemed to high for individual tolerance it could be capped at a more comfortable figure. This will be my preference ... if only to keep funds available for possible coincident trend-continuation trades.