Hybrid Timing Model for Analyzing Stocks and Indices ©
I received several letters in the last few days that I would like to answer (i.e. share) on this site. I think my answers (i.e. my comments) may also be informative for the other readers.
As background, let me describe the hybrid timing model (combined edition for those who have been following my writings of late). The overall combined hybrid model comprises 2 models which are basically identical except for the time frame for the data they use. One is what I refer to as the daily model and the other is the half-hour model. The ‘future’ boxes you see in the graphics are from the daily model. The ‘past’ boxes you see represent the overall trend that was assigned to the past 5 days. The past trend is arrived at by combining the daily and half-hour results. Since early Jan ’08 the forecasts (if you like – analysis) I have been producing are based on the combined model.
Let me put forth an analogy to help you understand how I view the markets and the forecasting of the markets. My analogy takes us to one of my favorite topics – the weather. Let’s consider the air temperature (akin to a stock price) for the upcoming month of March (today is Feb 24’08, for the record). If we look at the month, we know that, in general, there are 2 trends. The first trend relates to the overall trend of the temperature. I know that those north of the equator would jump and say ‘I know what the trend will be. The overall trend will be UP for the temperature’. One can guess with a fair degree of certainty that the temperature at noon on March 31 will be higher than that at noon on March 1. Or stated another way, if I was showing a graphic for the air temperature in March, the ‘future’ boxes would be (or should be) green. So we have defined a primary trend but, Is that all there is? NO.
There is another trend – a short term trend that is also very important. Sure, the overall trend may be up, but look at the weather with a higher resolution and you find, for example, daily trends. We have a trend that imposes itself on a shorter time frame than a month – we can easily guess that it is a daily trend. So we may be at 40F at 6 am and at 60F at 5 pm and then 45F at midnight. This shorter term cycle exists in conjunction with a longer term cycle – like the monthly one we described above.
What I came up with at the beginning of 2008 was the creation of the combined hybrid model that allows me to view both trends in conjunction with each other. What I see as a major problem with market analysis is the inability of the players to separate short and long term trends. Let’s look at the weather again. If it is 9 pm and the temperature is going down, the ‘uninformed’ may conclude that the overall trend is down because the temperature was higher at 8 pm and it is now lower at 10 pm. But the reality is that the overall trend is up. So most of us cannot differentiate between the two trends when it comes to stocks but we can when it comes to the weather. My objective is to now untangle the 2 trends for the markets.
My Investment Strategy for 2008
As you will see from the following letters, people are asking how I am now investing. I have moved in large part to trading futures on the indices (in particular the S&P500 and the Nasdaq 100). The model is computing the overall trend and the secondary trend. For the weather analogy, it was the monthly trend and the daily trend. At this time, what I do is: I only take a position that is in keeping with the long term trend. I then use the short term trend to get in and out of the position.
Let’s consider an example. Let’s assume the longer term trend (as indicated by the large arrow in the middle of the graphic) is up. I would then go long when the short term trend turned up and I would close the position and sit out the down leg of the short term trend. What is interesting at this time is that the short term trend for the markets is changing on a daily basis. For example, the short term trend may flip to the up side at 11 am and continue until 12:30 pm the next day when it reverses to the down side. And then it may reverse again at 2:00 pm the following day. All this would take place under the umbrella of an overall trend. Trading these trends during the last month has been amazing. I have gone from 2.9K to 6.8K. It has been a tough market but I have managed and I have done so with quite a conservative trading strategy. Initially, I was trading on the down side (shorting the indices) and when the overall model turned a couple of weeks ago, I went into the buying of the indices. Now remember, most of my trades are about a day long with about a day of sitting it out.
Let me say a few words about options. Simply buying options and holding them is out of the question. Spreads (and specifically credit spreads) are what I would trade. I would use the long term trend to trade them. I used to really like spreads but that was before I was able to get a handle on the 2 trends. I now no longer focus on spreads (except perhaps 5 to 7 days before expiry).
Yes We Can
Before I close out this discussion, I would like you to realize that there are people buying and selling at every moment of the trading day. The reason I believe is that there are AT LEAST two trend curves that are superimposed and then there is ‘noise’ on each of the curves. I believe there are in fact many curves but of varying significance. And everyone has their own analysis so that in the end there are buyers at 3 pm because they see a reversal to the up side and there are sellers at 3 pm because they think the market is going lower. And the same can be said for 3:10 pm and 3:15 pm and 3:28 pm etc..
As one of the writers said “All this money going by the screen everyday and there must be a way to tap this”. This is what I am out to show. I believe there is a way. Think the weather analogy. The ‘trick’ is to transform the market trading data into something like the temperature data. Can it be done? I don’t know for sure. Ask me in a year. But if it can, I will be close to the million mark in a year given what I am seeing.
The following are 2
I, like Barack, (and no I cannot compare myself to him – he is a legend) discovered that ‘Yes We Can’ in early January (in my case on New Year’s Day). From that point on, neither he nor I have looked back. What a slogan “Yes We Can”. I love it. Good luck to all.
My uncle is a Professor at grad school at the University and wrote a book and taught spreads. I studied years ago and now your site and the adventure of discovering a way to play the market fascinates me. A few days ago, I played some puts on the S&P ETF called SPY. So now I’m down 25 percent and probably have to close it out tomorrow no matter.
Question is, if I played spreads, would I be down less losses. Let’s say the S&P is 1348 now. Market is slightly bullish waiting for a signal. But what if the signal Thursday is up. Where do you set the spread? (In fact the NDAQ moves faster up, I might look at that).
Your calls are pretty good. Other callers are in the same boat. Market going sideways and everyone is calling it one way and switching the next day. (57% of players holding, 37% selling, 12% buying but more buyers setting in.) Best part of your site is the mathematical tendencies for the next few days. No other site calls the moves the next few days.
I like your idea of 10 straight calls can get you a million. All this money going by the screen everyday and there must be a way to tap this. Keep going.
A very good morning to you. I know you are a busy man but I hope you can help me with understanding yr stock trades based on yr model.
Firstly, I would like to say that I have been following yr website and watching yr model for the past year. I believe that
after the ups and yr downs, you have made a certain breakthrough in fine-tuning the model based on the daily up/down
analysis in alliance with the daily half-hourly analysis.
From yr website, I read that you recently turned yr porffolio of 2.9K to a recent 6K. I really would like to follow
yr trades. Myself, I have been on a losing streak and my account sits at 2K. I hope to follow yr trades and see what
that brings us to. I understand that you trade options and futures. Options for the stocks AAPL, AKAM and GOOG.
Futures for the indices QQQQ, DOW, IWM. I wonder if you can show me the trades you did from 2.9K to 6K?
I recently followed yr SELL signal on AAPL and did a 'Bear Call Spread'. Sold 130 March Call Options and
Bought 135 March Call Options. If they expire worthless,
make US$350. Minimal, but its a start. Am curious Ill
how you were able to turn 2.9K into 6K so quickly. Did you buy straight CALL and PUT options? I used to do
that...but found that the time decay effect of options diminishes pretty quickly if the stock works against you.
Thats how I have been on a losing streak. I know you have no obligation to help me. But I am at a loss of how
to recover. Please consider and help a fellow trader?
I would be most grateful for yr guidance. Hope to hear from you soon.