Wednesday, November 28, 2007

Lunch Money

Okay, you got me in. Now, when do I get out?

The buy call on Citigroup made yesterday required judgment. The sell call for the trade (it is only a trade as the mega trend indicators are decidedly negative) will also require judgment.

For black box types*, all this talk about judgment is unacceptable. After all, the whole point of quant trading is to remove that human element called judgment from the equation. But the timing tools employed for this (and other such trades and investments) isn’t black box stuff. So, judgment is a key component, just as it is when trying to make mega trend calls like the recent spate of Dow Theory “sell signals” by certain market strategists and pundits. (See prior blog postings on this last point.)

To be clear, judgment is an important component of the timing tools described and employed yesterday (and in prior calls). However, the parameters for the calls are the timing tools themselves. Yesterday, I described how to get in. Now, I will describe when to get out.

What we are looking for in a lunch money trade like the one made into C is when our short-term timing tools – momentum and MACD – achieve the following conditions:

• Momentum gets to zero.
• MACD gets to zero, which is when the two lines re-converge at a higher point.

Now, let’s talk about the length of time it takes to get to these levels.

As the above current chart on C shows (click on image to enlarge), momentum has already almost reached zero. At same time, MACD has actually gone somewhat flat. Both suggest that this will likely be a very short-term trade (as in days not weeks) due to the fact that momentum is close satisfying its requirement of getting to zero (which signifies a degree of lessened selling pressure and, therefore, a move more closely to a balance between buying and selling pressure). Re MACD, its failure to turn the lines upward signifies very poor upward pressure.

Trading Action Implications

Here are the advisable action steps:

• If momentum gets to zero and MACD fails to turn upward, sell the entire trading position.
• If momentum gets to zero and MACD turns upward, sell half the position.
(Note: If this second step occurs, when MACD finally turns down sell the remainder of the position.)
• If momentum fails to get to zero and turns downward and MACD turns downward, sell the entire trading position.
• If momentum fails to get to zero yet MACD does not turn downward, hold the position. Actionable steps on what to do next will follow in a future blog posting.

As I said, this is not black box stuff and does require judgment. However, that judgment component is made within the context of the parameters of the reliable short-term timing tools – momentum and MACD. Now, let’s see how this trade turns out. Maybe we can make some lunch money.

Note: It helps, of course, to have a larger conceptual framework, a fundamental framework, that can makes real economy sense out of the market decisions made. For technical analysis purists, this is unacceptable. But the methodology employed here is a blended approach, both of which have their value added features to contribute to the decision process. For fundamentally-oriented investors/traders, this is unacceptable.

*The same applies to what I call “info junkies”, those investor/trader types who rely to great degree on information (I am not referring to inside information) that can give them an edge. This information often comes in the form of a thought leader who has taken a certain course of action and others follow in his/her steps.

Special Notice: Both yesterday and today’s blog postings are for informational purposes only and should not be construed as a recommendation to buy or sell. Please consult your financial advisor.
Neither Vinny Catalano nor any member of his family owns the above referenced security. Clients of Blue Marble Research have established positions in the above referenced security after yesterday’s blog posting.

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