I have backtested the results of using the VTO rules on the SPY. One thing that became apparent was that during the bear years even though there were some very profitable trades one would be better off not to risk taking the trade as the markets can stay oversold for a long time. My criteria would be once the 200 DMA starts declining one should forego VTO trades. I suspect once we enter a bear phase one would be better to only trade the Bollinger Band crash trade. The BB trade has been profitable about 98% of the time. However the profitable trades won't be as large as the VTO trade since one is only looking for a bounce back above the lower band.
Here are the results from 03 to the present: Exiting when the RSI(5) closes at or above 50. 29 profitable 5 losses, profitable 85% of the time Ave number of days in the trade 5.2 Average losing trade .48% Average winning trade 1.11%. Exiting when the RSI(5) closes at or above 70: 30 profitable trades 3 losses, Profitable 90% of the time. Average losing trade .93% Average winning trade 2.09%
The VTO wins 8.5 and 9 times out of 10 and the winning trades average about twice as large as the losing trades. Those are pretty good odds. I want to note that if you don't follow the rules you will probably turn a postive expectancy into a negative one. Hint the VTO trade from June 26th has not closed yet. If you are going to trade this system you must follow the rules if you want it to consistently produce postive results. If anyone wants to take a look at the spreadsheet just give me an e-mail.
First off I will go over 1-2-3 reversals. Then I'll discuss the 2b variation. Victor Sperandeo describes a 1-2-3 reversal this way. Once a stock or index breaks the up or down trend line there will typically be a reaction move. That reaction move is deemed #1. Then you will normally see a test of the low, move #2. Sometimes this test is strong and reaches the full trend break low or high and sometimes it is weak hardly even worthy of being called a test. The confirmation comes at point 3 if the index can close above point #1 or if it breaks down and closes below the original trend break low or high. I know it sounds kind of complex but just take a look at the chart and it becomes clear. A 2b reversal is the test of the intial break except it actually does break that support only to reverse and close higher or lower as the case may be. This is a strong signal that selling or buying has dried up and the trend break can't be continued. Very often a 2b will signal the exact bottom or top of a move.
I must admit all the talk of a double top totally distracted me from seeing the 1-2-3 correction that was happening in the markets. I don't think the action has been a double top at all I think we just witnessed a very powerful #1 reaction to the intial decline. There was much talk about how quickly the intial break at the begining of June was overcome. The reality is that this little correction is taking the about the same time to recover as the Feb. 27th correction. Today we are getting a 2b reversal in the DOW, S&P, WLSH, NYA, UTIL & RUT. The Nasdaq has been much stronger and never even broke the uptrend line so no 2b there. None needed. The Nasdaq has been trying to tell us that the market is not breaking down yet
I would like to point out something that I think everyone and their cousin is watching very closely. The obvious support level for the S&P is the recent June low. If this level fails all hell will break lose, right? Maybe and maybe not. Take a look at the next chart of an obvious break of major support. The commercials went long in Aug. It looks like the commercial money was more powerful than the technical breakdown. As of last week the commercials had a much stronger long signal than they did last Aug. Granted this may all change on Friday but we won't know that until Friday. I'm just not totally convinced that 1487 is the end all be all level in the market. What better way for the big money to trigger sell programs than to push the market down below this level. It would certainly allow them to accumulate stock at a lower price. Remember the smart money likes to see panic. They know it is a buying opportunity and they don't have a 2-3 day investing horizon like most traders do. So before you panic and sell everything stop and think about who's buying from you. There's always someone on the other side of your trades. Many times that someone is a very shrewd professional.
The rules for the VTO trade are very simple whenever the Q's close with the 5 day RSI below 30 buy long and hold till the RSI closes above 50. This trade could be used with front month options as they are now priced in penny increments. The QQQQ is purchased during after hours trading on the day that the RSI buy signal is generated. It is sold during after hours trading on the day that the RSI sell signal is generated. I suspect that you could also buy the next morning without affecting long term results. From 1997-2005 the strategy was up 349.7%. A “buy and hold” strategy for the Nasdaq 100 was up 76.2%. I'm guessng one could apply the rules to the SPY and DIA with similar results although I haven't actually tested either one of these.
I think its time to have a look at the point and figure charts. Lets get rid of all those goofy squiggly Stochastic, MACD, RSI, etc. etc. and just look at the price action. In other words lets get rid of all the distractions and see whats really happening. After the S&P had a powerful nonstop run it looks to me that it is just consolidating those gains kind of like it did in Feb. & Mar. only this time it's giving back even less than before. On to the Nasdaq. The Naz is so strong that it hasn't even been able to put in a 3 box reversal yet. Neither index is even close to breaking the up trend lines. How much stronger can you ask for? Now add in a very bullish COT report. If you are going to try and fight this market I would keep positions very small and be ready to take profits quickly. Its probably safer to use the pullbacks as buying opportunities.
I realize that it is human nature to want to find the perfect trading system. The system that will catch every little up and down in the market. I see it quite often on the blogs. When the market has a 2-3% pullback the bears gleefully point out that the COT doesn't work and the semi believers start to get nervous. Let me assure everyone there is no holy grail. All systems will have losses and that includes the COT. The sooner you accept that fact the sooner you can start making money. I'm going to give you my mindset when I enter a COT trade. I know that all the data for 21 years says that my odds of producing a profitable trade are about as good as they are ever going to get with any system. Keeping that in mind I still tell myself "self this is going to be that 1 in 4 losing trade I just know it" So if you know you are going to lose what is the smart thing to do? The answer of course is to bet small so if it is that losing trade you won't lose that much. However if the odds come to your rescue and it is one of the 3 out of 4 winning trades then congratulations you just made money. So what if you don't double your account you also didn't cut it in half and believe me it's more important to not cut it in half than it is to double it. Eventually with odds 3 to 1 in your favor you will double it. As long as you keep worrying about how much you could lose then you will eventually double it with virtually no chance of cutting it in half. That my friends is how you make money investing.
Large contract the most bullish it's been in over 7 years. COT says the big boys are still buying. Remember to consider if you are panic selling who is buying your shares. Someone who's probably not panicking that's who. Who doesn't panic when the market falls hard? The smart money that's who.
After consolidating for 7 months the semis are on the move. Semis are economically sensitive and tend to lead an economic expansion. For the market to have a meaningful decline I believe we would need to see the economy falter. The semis are saying on the contrary the economy is ready to accelerate again. The tech sector has held up much better on the last several declines. The Q's are actually up on the week while the S&P and Dow are still down a bit. I try not to get caught up in the daily action. Sometimes it's hard to see the forest for the trees. Keep your eye on the big picture and currently the big picture is still up.
Looking at the weekly charts the S&P is down 1.31% for the week and the Q's are again holding up better than the general market only down .88%. Is this the start of the big one or just another buying opportunity. The COT is saying it's a buying opportunity. I have a feeling that the use of too much leverage is causing these volatile moves. When you panic and sell because you are using too much leverage you might want to stop and think who's buying from you. Chances are it's someone who's not panicking and is thinking clearly.
The market is making a double top scream the bears. This is the latest doomsday prediction from the bears. Again the permabears are letting their bias control their decision making process. Lets look back at the last couple of double tops and you will notice they encompassed a much longer time span than the one week decline we experienced. No the odds are in favor of the market just needed a little rest and used the interest rate spike as an excuse to take that rest. The chances are much greater that we move through the old highs than make a double top and fall from here. Which is not to say that it can't happen just that your chances of shorting the market here for a double top aren't nearly as good as staying long per the COT bias. And yes I know I left out the o in "double" on the chart. I'm just too damn lazy to go back and change it :)
There are some interesting similarities developing between the 90's bull market and the bull from 03. I would never trade on the expectation that the market will duplicate the same price action as the 90's but it is an interesting comparison.
Here is a pattern I want to pay attention to. Oil has broken through resistance convincingly. Technical rule #1 would imply we could see a level of $83 later this summer. You can find the Technical rules on the lower right side of the home page.
Here's the latest one from the chartists. I see them drawing these lines on the charts and predicting dire results when this megaphone pattern breaks down which apparently it is guaranteed to do. However the Nasdaq was forming this same pattern at the beginning of the year and actually did break down out of the pattern. But if you'll notice that didn't stop the bull. My guess is that since the commercial players were long their buying was more powerful than the pattern drawn on a chart. "Money speaks louder than lines". Hmm... I like that one :). Anyway I would suggest you just ignore this goofy crap. As long as the commercials are buying then the odds are in favor that bearish patterns are going to keep getting negated.
I want to talk a bit today about why I use the COT. You can get a brief view of my thoughts under the profile. Generally speaking for me to use a system I have to not only be able to back test it and have it show a positive expectancy but it has to also make sense. I have tested the COT for the 20+ years that it has been available. During that time the COT has produced roughly 3 winning trades for every loser. On top of that the winning trades are much larger than the losing trades on average. That's about all anyone can ask for in the markets. As a matter of fact I've never found anything else that even comes close to producing those kind of returns. The challenge is to be ready to adapt as the COT evolves. Pre 2001 the flip zone was at 0 meaning that when the net commercial position was positive one went long and when it was negative you went short. However after 9/11 the world changed. At that point I think the commercial traders became aware that risks in the world had become elevated. At that point in my opinion, the zero line moved from 0 to a zone around the -15,000 level. All this means is that the big boys were always hedging to some extent because of geopolitical risks. At that time waiting for the commercials to reach a positive net became a losing proposition. Now lets take a look at who the commercials are and why I think its a good idea to follow behind them and not stand on the tracks in front of them. The Commercials are for the most part large banks (think Goldman, JP Morgan, Lehman, etc.) or large pension funds, etc., etc. These are players that control billions and billions of dollars. In fact they control about 75-80% of the money in the markets. For all practical purposes the market is the commercial longs battling the commercial shorts. These are institutions that have huge research departments. They can afford to buy information that's just not available to you and me and they're going to get it weeks or months before we will. So when the COT position doesn't agree with the current fundamentals I have to keep in mind that yes maybe it doesn't agree with the fundamentals today but it might very well agree with the fundamentals 2 months from now. So I have a system that has produced superior returns, I can test it and be assured that it has worked for many years and on top of that it just makes sense to me. There you have it the reasons why I trust the COT to keep me on the right side of the market.
I'm going to show you a very simple way to determine market direction that any 6 year old can do. First enlarge the chart. Then go stand on the other side of the room. If you can determine from the that far away what the trend is then trade in that direction. If you are going to try and trade counter trend then be ready to take profits very quickly and keep position sizes very small because the larger trend is going against you. Very important don't ignore bottoming signals. We just got very clear bottoming signals but I see many permabears again ignoring the signs.
Finally got the updated charts. I'll repost so we don't lose the comments on the previous thread.
Oil has now broken out of the 2 1/2 month consolidation phase to the upside. Notice the double top breakout on the Point and Figure chart and the bullish price target of $80. I will be watching this closely. Author Stephen Leeb notes that when energy spikes rapidly in a year it almost always brings on a recession. If oil can get to the $85 - $90 level this summer I think the economy is going to be in trouble. This is part of the problem when central banks inflate the money supply. Eventually the extra money will find it's way into commodities. Throw in the fact that the world hasn't found a giant oil field or built a refinery in 30 years and you have the beginings of an energy shock. Stay tuned.
Oil has now broken out of the 2 1/2 month consolidation phase to the upside. Well it has as soon as the daily chart updates. (I'll update the chart as soon as the data changes) I will be watching this closely. Author Stephen Leeb notes that when energy spikes rapidly in a year it almost always brings on a recession. If oil can get to the $85 - $90 level this summer I think the economy is going to be in trouble. This is part of the problem when central banks inflate the money supply. Eventually the extra money will find it's way into commodities. Throw in the fact that the world hasn't found a giant oil field or built a refinery in 30 years and you have the beginings of an energy shock. Stay tuned.
Victor Sperandeo in "Trader Vic" describes a 1-2-3 reversal. 1. The reaction breaking a trend line. 2. A test of the lows (or highs) and then 3. The confirmation that the trend has changed when the index closes above the reaction. Occasionally the market will form a 2b reversal. This just means that the market dropped below the previous low but then reversed to close higher. Sperandeo points out that when a 2b reversal forms it many times marks the exact bottom of a trend change. BTW we got confirmation of the trend change back to up today when the SPX closed above the reaction high from last Friday. Of course nothing is written in stone but it is a positive sign.
The chart of INTC demonstrates again how unreliable chart patterns are. The odds of making profitable trades based soley on chart patterns are roughly 50/50. Not very good odds. Definitely not good enough for me to trade soley on them.
Take a look at NYSE new highs. They are currently at levels that have indicated bottoms over the last 4 years. Just another sign that this market is very oversold. When markets get extremely oversold smart money starts looking for bargains. I've also noticed that everybody seems to be jumping on the high interest rate train. When everyone is thinking the same thing it usually means that nobody is thinking.
Lets take a look at the point and figure charts shall we. The point and figure charts eliminate the noise and give one a clear view of what is actually going on in the market. Notice after moving straight up 12 & 14 boxes the Dow and the S&P have pulled back 3 boxes. Doesn't seem unusual to have a little consolidation after such a strong move to me. The Q's are even stronger. So far they haven't been able to even put in a 3 box reversal. I don't think the sky is falling just yet.
I want to relate a trade I saw today on one of the Blogs. At the open this investor bought the QLD on the gap down. The trade is that the market will usually fill the gap sometime during the day. I know from back testing this that over the long haul this trade has a small positive expectancy. However this investor was nervous about the trade and closed it very quickly for a small profit. He felt that he had done the right thing by taking the profit. However when you violate the rules of the trade and cut your profits short then when you do hit the losing trades they will be larger than your winning trades. So by taking his profit early and not following the rules of the trade he is actually turning a small positive expectancy into a negative expectancy. If this investor doesn't learn to be disciplined in his trading this particular gap trade will over the long haul end up costing him money.
The popular belief right now is that interest rates rising are what is putting pressure on the markets. Lets take a little closer look at that concept. Notice from the chart that interest rates have been rising since this rally started in Mar. Did we all of a sudden reach a level that was just too much for the market to handle? I guess it's possible. However rates have been rising since June of 03 and the market is up almost 100% since that time so I don't know if stock market return is extremely correlated to what happens with interest rates. Seems more likely to me that the market was just extremely overbought and was looking for an excuse to pullback a bit. Interest rates just happened to be the whipping boy at the time.
Several weeks ago when I got into my small call position on SLW an investor on another blog made the comment that SLW was forming a head and shoulder pattern and so he would not consider buying this stock. Sometimes it is tempting to go ahead and complete a chart pattern in our heads and make investing decisions based on what we're "pretty sure" will happen. However Jack Schwager of "Market Wizards" fame notes that there is no evidence that chart patterns in general improve the odds of investors making a winning trade. As we can now see SLW did not break down out of a head and shoulder pattern. A 50/50 odds of something happening is not a great way to invest. You might as well just flip a coin.
I've mentioned in the past that the only large losses with the COT have come on the short side. Here is the last one. In Mar. of 03 the commercials went long almost exactly at the beginning of this bull market. Then at the end of June they reversed to a huge short position in one weeks time. I suspect they thought the rally was just going to be a short counter trend affair. When the market didn't start to head back down they quickly figured out something was different and removed the large short position towards the end of Sept. So yes the COT does get it wrong from time to time. However unlike the emotional retail trader when the big boys are wrong it doesn't take them to long to figure it out and fix the problem. This is why I'm careful when I take a COT short signal. I want as many odds in my favor as possible before shorting the market.
Last month I noted that intermediate tops are usually accompanied by momentum and money flow divergences on the weekly charts. You can see in the above chart that the S&P is just starting to show divergences. Of course this doesn't mean the fall is imminent. The last intermediate top these divergences lasted 16 weeks. The market is just starting to lay the groundwork for a coming decline. Now we need to see the market continue up as these divergences grow and the commercials start to short the market, eventually they will get to an extreme level.
I'm going to talk just a bit about shorting today. Once an investor becomes experienced enough the question or should I say the temptation to short will come up. Shorting can be a very valuable tool. It allows an investor to profit when markets are falling and make money when everyone around you is losing theirs. However there are pitfalls to consider when shorting. The 2 biggest of course revolve around the fact that the most you can win by shorting is 100%. So if you score a home run and the company goes bankrupt you double your money. The bigger downside is that the risk is infinite. Stocks can go to the moon. In your favor, markets fall faster than they go up so you see the gains much quicker if your short call is correct. Lets take a look a PCU. Lets say you think this company is a dog so you short it. Maybe it is a dog. But for you to even make 50% this stock is going to have to really fall apart. This just doesn't happen that often to good companies. Some kind of sea change would have to occur for a company like this to lose 50% of its value. For it to go bankrupt and go to $0 would take some time don't you think? However it only took this outstanding copper miner 5 months to double in price. So you tell me is it better to take the risk and short for a 10 to 20% profit or just have a little patience and hold on for the big money? There's a reason most traders don't short and it's not because they don't know how. It's because the returns don't necessarily match the risk. That being said I definitely do take short trades but I want the "Boys" in the COT shorting with me before I do it.
The Commercials are still long. Which of course means the recent sell off was probably just a wave of profit taking. Remember panic always creates opportunities. There were some interesting developments in this weeks report and I will be covering them in the market summary for subscribers later this evening. I'll also have a few thoughts on how to spot bottoms. Anyone wishing to recieve the COT spreadsheets or become a subscriber just e-mail me a request. The address is on the lower right hand side of the home page.
First I want to show you something from the Nasdaq bubble. Two 12% drops right in the middle of one of the greatest parabolic runs. Neither one of them stopped the Tech train. So far the S&P is down 3% for the week. Just something to think about. I don't think the selling is quite done yet but I also don't think this bull is done yet. At least not until the COT gives me confirmation. So investors have a couple of options. Hopefully you are already familar with position sizing or at least paid close attention to my rant last night in the daily update. If so 3% isn't hurting you. However there's no need to hold on for 12% just in case that's what we're in for. First off you can just ignore the noise and wait for the COT to give you a signal or you can cut back on your size some so that if the decline does continue for a while it won't hurt you. I'm going to be looking for some kind of bottoming action before I put on my leveraged position again (which btw wasn't very much leverage).
Now I want to talk about something that I've been contemplating yesterday and today. This will sound a bit like a conspiracy theory and I may be entirely off base. So feel free to totally ignore what I'm going to say. Last year the Fed needed to stop the rate hikes. However gold was at $725 an oz. and oil was over $70 a barrell. How could they possibly stop hiking and still claim to be fighting inflation. They couldn't without some how bringing down commodity prices. Well the Fed raised one last time, while Goldman rejiggred the CRB to decrease the weighting of gasoline which caused massive selling of gasoline futures in index funds that have to match the Goldman weighting. At the same time I'm guessing we got a wave of central bank selling of gold to bring down the gold price. All in all they accomplished what they needed to do. They crashed the commodity markets allowing them to show that inflation was retreating and they could now stop raising rates. Well what's happened in the mean time. The housing bust has steadily gotten worse. Not good for potential voters next year. Gold was back up to $690, oil is touching $67 and gasoline has been as high as $2.43 in the futures market. The fed has been talking tough the whole time but what have they done? Not a damn thing, that's what. Well now GDP came in at .6% this last quarter and housing is showing no signs of improving. In my opinion the Fed needs to cut rates again but it can't do it with commodities where their at. They need to trigger a deflation again to give them cover to cut. Could it be that the Fed is selling treasuries into the market to raise rates and trigger enough of a scare to allow them to cut rates? I don't know. If anybody here does know where we can find out what the Fed is doing in the credit markets please post and let us know. I have a feeling we may be in store for another episode like last year. But if the goal is for the Fed to eventually cut rates that would explain why the COT is so bullish. Perhaps the smart money knows that the Fed only needs the markets to come in 6-8% again before they turn on the money spiggots. This week the S&P was up 12 points from last week and the NDX was up 33 points. If the COT still increases their longs then I've got to believe the big boys know something we don't. Again this is all just speculation so feel free to ignore everything I just said...except the part about the 12% drops in parabolic runs and position sizing. LOL
While the VTO trade was designed to be used on the Q's I suspect that it will show very similar results if used on the spiders or diamonds. If an investor was willing to continue to hold especially if the COT was giving a buy signal as it is now then every signal would have produced a winning trade. Since the Dow didn't actually close below the 30 (However the DIA did close below 30) level it would be up to individual investors if they want to take the trade this morning or wait to see if the Dow can close down again today. I think I've shown that panic selling has never made anyone any money. However buying when the sheep panic has created billionaires. Do you want to be a sheep or the wolf?
The market is now in the process of working through another pullback from overbought levels. Is this the start of the big one or is it just a minor correction? If you are a bear my first question is what is your signal to cover your shorts? You do have a plan don't you or are you just flying by the seat of your pants. Flying by the seat of your pants isn't typically a very profitable way to invest I'm sorry to say. So lets take a look at the odds shall we. First off odds number 1 the COT is showing the most bullish signal since 2000. If you take away the short signals then the odds of a profitable trade from a COT long signal are almost 9 to 1. Those are pretty hefty odds to fight against. Next every intermediate rally so far in this bull has lasted 21-32 weeks so far. This rally is only 11 weeks old. Again pretty rough odds to fight. Next, every intermedite rally has topped out with major momentum and money flow divergences on the weekly charts. There are none yet. No help there. The historical data for the last 110 years show an average gain of 34% for final legs up in bull markets. 3 days ago the S&P was up 12% for this leg out of the Mar. bottom. Still a bit short. The final legs up last on average 6 months and 6 days this rally is only a little over 2 1/2 months old. Quite aways to go yet before we even get close to average. Sorry I'm not helping yet. The third year of a presidential cycle has on average produced a 26% gain in the markets. As of 3 days ago the market was only up 9% for the year. Hmm still not what we're looking for. As of today the S&P is down a whopping 1.23%. It is possible that you have caught the exact top in this bull market but I think I've shown that the odds are way against you. I prefer to trade with the odds and I certainly won't be fighting the kind of odds I've just laid out for you. Seems more likely that we just got another buying opportunity. BTW I've mentioned in the past that I think there is a good possibility that we could see a major bottom in Oct. Oct. would satisfy the historical data. The rally would have a chance to mature and Oct. has historically had some of the most hostile declines in history. Keep in mind this is only a guess because nobody can see the future.
As you can see the COT long signal has been accompanied by higher prices in natural gas and in natural gas stocks. The COT reports aren't always correct but they do give the little guy a definite edge in the marketplace.
Let me show you how Bull markets work. Notice in 05 gold traded sideways for almost a year. This is the "wear you out period". This is were you sit and watch other sectors take off, eventually get fed up and jump ship to one of the momentum sectors just as that sector tops and of course that's when gold takes off and leaves you behind. Now if you had the patience to hold thru the dull times then the bull will throw another curve at you. Scary violent corrections that try and shake you out. The long term trend is up. We appear to be in another "wear you out period". Will you hold until the next rally or will you let the bull shake you off?
Tehnical rule #1 says we could see $83 oil this summer if oil can breakout above the consolidation level. If the commercials reduce their shorts a bit this could become reality. Ouch, that will hurt at the gas station.
Notice some striking similarities when markets start trading parabolic. They all seem to trade up roughly 68% of the time. The smallest gain was 25% for the Dow in 87. The largest was the Nasdaq and Copper at roughly 80%. The time span was 2 months for the metals to 5 months for the Nasdaq. The take away here is that these kind of moves produce big gains quickly. The S&P has been rising 68% of the time since the Mar. bottom and is now trading in a pattern similar to other parabolic moves. However it is only up 12.8% as of Fridays close. If it just matches the weakest rise, the Dow in 87, then we should at least double the gain so far. That implies another 175 points on the S&P. Keep in mind anything can happen. The pattern could abort next week. Just something to think about if you are contemplating shorting this market at these levels.
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T1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected. T2. Reversal or resistance to a move is likely to be encountered: - 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range - On approaching highs or lows T3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently. T4. Watch for "crawling along" or repeated bumping of minor or major trend lines and prepare to see such trend lines broken. T5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places. T6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side. T7. Watch for volume climax, especially after a long move. T8. Don't count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps. T9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.
General Trading rules
G1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move. G2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases. G3. Limit losses and ride profits, irrespective of all other rules. G4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing. G5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal. G6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation the the chart formation. G7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons - a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100% G8. In taking a position, price orders are allowable. In closing a position, use market orders." G9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules. G10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag. G11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.
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