Sunday, February 8, 2009

DoctorMad – More Weekend Battle Planning…

A good General doesn’t just work 9 to 5, Monday through Friday! A good General is studying the battlefield and making contingency plans for his troops at all times...
Comparing and contrasting the C wave channel on the 3 different major US market index futures reveals some interesting relationships. I leave out the Dow which I know would offend technical purists like Richard Russell, however I just can't kick out my scientific training that tells me that the Dow is simply a bad statistical sample to measure today's markets by. A sample size of 30 with increasing substitution bias in recent years is no way to measure the health of the overall market. The Dow may be the oldest battlefield, but the days where the war was determined by what happened there are long gone.

Now that I'm done ripping the Dow, back to the battle at hand. The first thing you'll want to note is the difference in steepness of the C wave channel. The NDX out performance is clearly captured by a much steeper series of higher highs and higher lows than either the RUT or SPX. The timing of the highs and lows is about the same across the different markets, just the magnitudes are different. A type of trade I have been exploring is capturing the relative steepness of one channel over another while remaining market neutral. This tactic of putting troops where the bulls are kicking the most butt and where the bears are doing likewise can help your troops capture some solid territory (profits) particularly in range bound markets like the current one. I've only started exploring this strategy with some early success and I'd love to hear any comments of what might be the best method(s) for playing channel arbitrage.

I also put up a wave 3 projection for all 3 markets. Even with the bit of overnight slippage thus far, I still highly doubt that this steep of a sell off is what's in store. Still a good general always tries to project out the next battle. Most of these projections don't pan out, but when they do and you nail the next channel early and before it is obvious you gain the initiative for your troops and can set up a string of good trades.

Good luck to everyone's trading next week. The easy smart money trade is going to short the break of the C wave channel or the retest of the break. The bears look to be attempting an overnight tunnel beneath the bull lines. If this gets legs you may have to act very quickly in the morning.

This could be the c of C nanochannel. If you turn on trading hours only, it is possible we had a quick 4 and 5 into the close on Friday and wave 2 is over. Waves 4 and 5 of c of C and also the 4s and 5s on wave 5 of 5 are sometimes extremely quick ending abruptly before most market players realize the count is over. I still think more upside is more probable however.

- DoctorMad