2:45 p.m. New York time
Rules are a bulwark against failure. Rules are fallible. Such are the Scylla and Charybdis through which traders must navigate every day.
Today’s six-headed monster and giant whirlpool, described in Homer’s Odyssey, are the signals from the Fisher Transform vs. the ambiguities of the Elliott wave count.
In beginning my trades into and out of the triple leverage inverse fund SPXU, which is based on the S&P 500, I proposed to rely solely on the daily chart’s Fisher Transform signals.
My resolve happened to coincide with a period of weak trending by the S&P 500 and consequently, a series of whipsaws, even on a metric as whipsaw-resistant as the Fisher.
And whipsaws, as we know, are like the gluttonous geese, also of the Odyssey. They nibble away at the prospect of profits until only the impossible dream remains.
What is a trader to do?
The chart below cover a month with daily bars. The upper metric is the Fisher Transform itself, with signals occurring when the yellow line crosses the blue line. The lower metric is a signal chart, showing the state of the Fisher: Uptrend or downtrend.
The Fisher whipsawed on May 15, moving to a downtrend signal , and then moved back to an uptrend signal the next day. The price chart itself shows a three-day sideways move, with the two lines in the upper metric crossing each other only in the most minuscule way, without an real change in the price trend. It’s as through Odysseus’ boat had only inches to spare to avoid the six-headed monster.
Under such circumstances, the signals aren’t meaningful. Add to the confusion the face, discussed in the May 16 live post, that by the Elliott wave count is clearly downtrending at the degrees I care about. Market charts are fractal in nature, with trends within trends. So a downtrend at one degree can contain both uptrends and downtrends at lesser degrees.
One way to navigate through the waters is to calm them by moving to a longer-term chart for the Fisher signals.
A monthly chart, for example, signals at a more stately pace, as seen on this five-year chart with monthly bars.
And I think that provides the solution. In assessing the Fisher Transform, I shall initially look at the daily chart signal. But I shall look at the monthly chart for confirmation. And I shall use the Elliott wave analysis as a tie-breaker.
In today’s case, the daily Fisher is showing an uptrend, but the monthly Fisher is showing a downtrend and the Elliott wave count is also downtrending. The consensus, then, is to continue to hold my bear positions on the S&P 500, including my long shares in the inverse fund SPXU.
10:55 a.m. New York time
The Fisher Transform on the SPY daily chart continues to signal an uptrend, and the intra-day signals agree. If the signals remains uptrending my rules require exiting my shares position in SPXU today.
My Elliott wave analysis shows SPY continuing in 3rd waves to the downside of both the Minor and Minuette degrees, so I shall continue to hold my options positions on SPY (here and here). See the chart in Wednesday’s Live discussion.
By Tim Bovee, Portland, Oregon, May 17, 2018
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