An Expiring T is Not Necessarily a Short Sell Signal

I have been somewhat successful selectively selling short at an expiring T.  However, this is not a short sell signal.  Many other factors should be considered before initiating a short position.  Just to review things for a moment, I see all my T's have expired as of today.  Also, markets have had a tendency to top out after the job report announcements.  The concluding factor to my decision to sell short is the fact that the S&P 500 has been up for six (6) days in a row.  Just count the green candles on a daily candlestick chart.  Stock markets are not like a roulette wheel because stock markets are not a random walk.  I opened my short position in the late afternoon with the following trades:
Bot BGZ @ 15.30
Sld Sht BGU @ 55.93
Bot SDS @ 32.85
Sld Sht SSO @ 39.89

All the T’s will have Expired By 1:10 on Friday 3/5/10

  

The above chart shows the daily close of the S&P 500.  Take special notice of the small brown T within the much larger Orange T on this chart.  This small T expired on Tuesday of this week March 2, 2010.  It is hard to tell how much influence the large orange T will have on the expiring brown T and the direction of market prices at this time.  It should be noted that the market has noticably slowed in the last two days since this T expired. 

 

The two (2) charts above show the intraday 10-minute prices of the DIA or Diamonds.  The Diamonds are an ETF that is a proxy for the Dow Jones Industrial Average.  The current brown T is similar to the brown T in the daily S&P 500 chart.  The brown T in the DIA 10-minute charts will expire at 1:10 PM on Friday March 5,2010. 
George Rahal has pointed out on his blog White Magic and its Exposure that markets have a tendency to top out the day that job reports are announced. The monthly job report is due at 8:30 AM tomorrow Friday March 5, 2010.  With all these negative signs, I am looking to put on a short position Friday afternoon.  I will post my observations and any executions when I do.   DC

Time Series Analysis of Stock Market Averages: The New T-Theory

By David Corna

When purchasing a stock, the greatest risk to an investor is what professionals call “Market Risk”.  Market Risk is what is happening to the general market averages like the popular Dow Jones Industrial Average or the S&P 500 Average.  This is why investors avoid buying stocks during a bear market.  No matter how well you select a particular stock, the rise or fall of the general market averages will affect the price of your stock selection.  A rising tide raises all boats and investors are more motivated to buy stocks during bull markets.  It is therefore necessary to determine the general direction of the market when considering the purchase of a selected stock and also the possible duration of the uptrend.  Time Series Analysis is a mathematically based tool used to determine the general market direction and the time and duration the direction will persist.

 My New T–Theory is a form of Time Series Analysis that is derived from the mathematical concept of Symmetry and is so named because of the symmetry of the letter T.  Terry Laundry, an Electrical Engineering graduate of M.I.T., named the T-Theory™  at www.ttheory.com and he has been publishing work about his T-Theory™ on the web for many years.  Terry has successfully applied his T-Theory™ to his investment strategy since 1978 and has handily outperformed the market averages.

There are only three variables in Time Series Analysis; these are Price, Volume and Time.  Price and Volume are the dependent variables while Time is the independent variable.    T Theory™ links price to volume and time by identifying a time period of “cash build-up” market under performance followed by an equal amount of time of superior price appreciation.  Special oscillators based on daily up volume and down volume are used as a proxy for the daily ratio of up volume to down volume.  This oscillator is a tool used to identify oversold conditions and identify the center post of a new T. The left side of the T is a lower probability time period of price appreciation.  The right side of the T is a high probability period of exceptional price appreciation.  The key to success in following the T-Theory™ is to be invested during the time represented by the right side of the T and to either liquidate any positions or drastically reduce positions as the right side of the T expires.  

My New T-Theory addresses shorter-term market moves by applying a unique oscillator to 10-minute intra day charts.  For the swing trader, my New T-Theory provides an easily defined system for entering the market on the long side and also specific stop loss sell orders limiting market losses.  If a new center post has been discovered and a new position established in stocks and the price of the market average drops below the low price of the new center post, all positions should be immediately liquidated.   

Below is a daily chart of the S&P 500 illustrating the symmetry of T’s that are constructed by using my special oscillator that is a proxy for the up volume down volume ratio derived from the intra-day price changes.

This chart of the daily closing price of the S&P 500 average in blue and a special oscillator in orange helps to identify periods of cash build up as well as the center post of the T’s.  Examination of the right side of the T’s demonstrates the exceptional price appreciation of the market averages compared to the left side of the T.  Smaller T’s can be identified within the larger T’s and these smaller T’s are helpful for shorter term trading.  These short term T’s are confirmed by intra day charts of 10-minute periods to be shown later.  To use the New T-Theory to maximize your investment returns simply buy your favorite no load mutual fund or ETF after a new center post has been identified.  Place a stop sell order at the price shown at the bottom of the T.  Hold your position through most of the time period predicted on the right side of the T.  Before the T expires, selectively take profits in your long positions so you are totally out of the trade just before the right side of the T expires.

In the chart below you will notice a red dashed line at the bottom of each T.  This is the stop loss signal.  If a T has been identified and a long position taken in the market and the market average drops below the red dotted line all long positions should be liquidated and aggressive traders can consider a short position.  You can set up an alert on web pages like Yahoo that will notify you when a price is reached on the S&P 500, DIA or the SPY.  When you are notified that the price has dropped below the center post low, all long positions should be liquidated before the close. 

The chart below is an intra day chart of the Diamonds (DIA).  This is an ETF or exchange traded fund representing a portfolio of the stocks equivalent to the Dow Jones Industrial Averages.  One share represents 1/100^th  of the Dow averages.  The Spiders (SPY) is an exchange traded fund that represents 1/10^th of the S&P 500.  These stocks are a proxy for the market averages they represent and the price moves in close concert to the price of the underlying average. 

This 10-minute chart above of the DIA or Diamonds, demonstrates the application of the New T-Theory to the Dow Jones Averages.  The T’s are colored the same as the corresponding T’s on the daily S&P 500 above that.  This chart just takes a microscopic look at the New T-Theory applied to a different market average in different time dimensions.  This exercise demonstrates that the New T-Theory works as a fractal and its application to different averages in different time dimentions results in similar predictions.  This supports the validity of the theory.

In the future I will be posting updated charts of this New T-Theory with timely purchases and sales of ETF’s.  In order to explain in greater detail my New T-Theory, the updated charts will be accompanied by detailed explanations and execution prices of various ETF’s.

DC