A downward trending week on the cash S&P500 has triggered several negative events. After breaking through TDST Resistance at 890.4 the week ending May 8, the break was not qualified as we failed to make a higher high this week. The S&P also negated the previously in-force TD Supply line bullish price objective by breaking below the TD Demand line this week at 895.42. We will qualify a price projection to 837.81 by breaking below 878.94 next week.
Odds now greatly favor that the L1 Beta pulse completed at yesterday’s low in the cash S&P500. We are now bouncing higher in a Delta pulse. A lower low today (without being part of an outside day that closes higher) will be a bearish development. All eyes are on the current bounce to see if it can reach for new highs; which will tell us a lot about whether the bull run from March 6 is truly well and done.
The cash S&P500 formed a downtrending price bar Wednesday as the L1 Beta pulse continues to unfold. From a timing perspective Beta has a 72% chance of completing by the end of today, so it is time to watch for a bounce. Whether that bounce can reach for new highs or not will tell us a lot about whether the bull run from March 6 is truly ended.
Tuesday saw another downtrending day in the cash S&P500 which caused Monday’s high to become a price fractal and cemented the view that the L1 Alpha pulse high is in. The move below 897.34 put the blog’s draft trading system short. The move down yesterday also fulfilled the TD Demand Line target of 898.99; after which we promptly rallied back towards the opening price.
Experimental trade position: Short from 897.34; stop & reverse at 930.17.
Is the L1 (Level 1) Alpha pulse high in? The odds favor that interpretation after yesterday’s downtrending price bar. However; the key continues to be the fact that we can’t have a significant high unless we break below last Tuesday’s low of 897.34.
Here is a full update of the current Draft Trading Plan:
Trading Philosophy (draft): The objective is to develop a mechanical trading system based on technical analysis and market cycle ideas. The system will have zero reliance on user input (i.e. a forecast or belief about future prices).
Trend continuation trades will be taken on qualified breaks of TD Supply and Demand Lines. A trade can only be taken in the direction of the current Level 3 Price Pulse. These are the trades based on technical analysis. The maximum number of trend-continuation positions that may be held at any given time is two.
Trend-reversal trades will be taken when a new Level 3 Price Pulse begins. These are the trades based on market cycles. Only initiate a trend-reversal trade-entry when the market has signaled that the current Level 3 Price Pulse has completed and that a new Pulse (in the opposite direction) has begun. There can only be one trend-reversal position held at any given time. This trade strategy is essentially a stop and reverse strategy.
Money Management
Trend-reversal trades: 40% of available account balance.
Trend-continuation trades: Each may be 20% of available account balance.
Each trade may only risk 3% of trade equity.
This is determined as follows:
1) Money Management size = .4 X Account balance; or .2 X Account balance (depending on trade type)
2) Calculate the points at risk: the difference between the entry price and the initial stop-loss price.
3) Position Risk: Result from step 1 X .03
4) Position Size: Divide the result is step 3 by the result in step 2 and round down.
5) Dollar Amount for trade = result from step 4 X Entry Price
1) 10000 x .4 = 4000
2) 93.017 – 89.734 = 3.283.
3) 4,000 x .03 = 120.
4) 120/3.283 = 36.551 rounded to 36
5) (36 x 89.734) = 3230.43
Trend-reversal trades are only made on those days; and at that price level, that confirm a new Level 3 price pulse has begun.
The initial protective stop-loss for this trade will be the most recent high or low.
The protective stop-loss will be brought to no further than one tick beyond the most current Level 2 Price Pulse high or low.
The trade is exited on a confirmed reversal in the Level 3 Price Pulse.
Trend-continuation trades are only made on those days that a TD Line in the direction of the current Level 3 Price Pulse is broken and qualified. The initial protective stop-loss for this trade will be the previous day’s high or low.
This is calculated by using the TD Supply and Demand Lines
There are two trailing stop-loss levels.
1) Trailing Stop: 3-day high or low. Once the Price objective is reached use the 1-day high or low.
2) Current TD Demand/Supply line level contrary to the current trade
The trade will be exited at the protective stop-loss level.
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.
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.
The rally from the March low continues. Last weekend I described five technical ideas that would/could “… lead to the weekly chart pointing to a pullback.” None of those events occurred. The up trend up must be respected until concrete evidence appears.
