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Technical Models:

The following text was published as part of the comments I wrote on August 24, 2006. They are reproduced here because they are worth referring to – especially when the going gets rough.

 

My Comments after Thursday (August 24):

 

Let me digress and talk about the model. I have not discussed the record of the model very often, even though I have been publishing daily results for the past 5 months. For 4 issues (DIA, AKAM, AAPL and GOOG), tabulations for the year 2006 are posted. So when you look at the model’s record, what do you think? In fact, what do I think? I know the model’s record is good but, until recently, I couldn’t be specific. A few days ago, I came across a short article that is very informative – especially, if one follows trends. The article is on the ‘tradingmarkets’ web site. The address of the article in their archives is:

http://www.tradingmarkets.com/.site/daytrading/commentary/wmgame/Why-its-so-easy-to-lose-money-in-the-markets.cfm

 

Allow me to summarize a few points from the article. The author, also a professor, reports on 12 technical indicators that ‘Barchart’ tracks. He has applied the 12 indicators to look at SPY (the S&P500 ETF) which is one of my favorite options trading tools. He has analyzed the signals for SPY as produced by the 12 indicators for 2 years (Aug 2004 – Aug 2006). The results are not what I expected and, indeed, they are surprising.

 

Of the 12 indicators, only one made money in the past 2 years. Seven of the remaining eleven actually lost more than 15 SPY points (that’s 150 S&P500 points which at a conversion of 8 to 1 is equivalent to 1,200 Dow points). The remaining 4 indicators lost between 0 and 15 SPY points. This overall performance is incredibly poor.

 

One of the indicators, that he highlights the results for, generated 49 moves in the 2 year span. Of these, only 8 moves were profitable. That means that the indicator was wrong 84% of the time. It was right only 1 in 6 moves. The moves averaged a length of 7 days. This is all quite a shock.

 

How does the model stack up? Well, yesterday I reported that this year alone based on the DIA, the model has been right 10 out of 12 moves (5 out of 6) and it has accumulated a net profit of about 1,200 Dow points for 2006. The length of an average DIA move was 12 days. The model’s record for DIA is comparable to that for SPY. So the reality is that the model is substantially ahead of the indicators on Barchart that were analyzed. I am relieved to hear that. Good luck to all.