Wednesday, April 14, 2010

IT and VST sell signals

The IT run which begun in Feb has produced three VST sell signals on my system. The first sell produced a max profit of 20 points from the sell trigger point. The second sell was good for 8 points and the third sell was even worse. Well, it only goes to reinforce the lows odds nature of countertrend trading.

Low volatility gives a false security of limited upside risk and hence draws the short sellers. And then divergences are too juicy for the countertrend cowboys to ignore. It's not a crime to short an uptrend, provide one follows some simple trend rules.

1) Don't short a divergence unless, it's accompanied by a trendline break or a pivot break.

2) Don't short a momentum crossover like MACD or Stoch, unless accompanied by a trendline break or pivot break.

3) To take it one step further, don't short any kind of sell signal, unless accompanied by price confirmation in the form of a trendline break or pivot break for the given timeframe traded.

4) Even, if the above rules are followed, strong trends can create pseudo trendline/pivot breaks and reverse. So after shorting, draw a downtrendline and get the hell out of your shorts, if the down trendline is broken, and reverse long.

5) Trendline and pivot breaks should be on candle closing basis, to avoid false breaks.

These are simple TA rules that everyone knows, but ignored, carried away with esoteric TA or personal ego. Then they foolishly state that divergences do not work or Oscillators do not work or TA does not work.

As i posted on March 26, a break of SPX 1181 put us back on a buy signal. The IT picture is not showing the necessary loss of momentum to call any sort of top here. But then the market always looks strong at tops. It's this contradiction that "market does not show any signs of top" and "market rarely shows any weakness right at the top" makes it a futile endeavour to pick tops. When a top of any significance occurs, it will be written in BOLD letters. Yes, you may miss the top 1%and the GURU title, by not picking the top. I will update here, when i see either signs or confirmation of an IT top. Until then, enjoy the trend...