Friday, September 9, 2011

Sept. 6 Breakouts: Where Are They Now?

My favorite part of a movie comes at the end, after all conflict has been resolved, the bad guys foiled and the young couple married in a shower of rice and flowers. After all of that comes the part where we get to learn what happened to everyone after the movie ends.

The Sept. 6 Top Prospects scan, on the first trading day after Labor Day, was dramatic in its way, with a stunning 37 breakouts beyond the 55-day price channel, mainly to the downside. It was such a massive tidal wave that I'd like to know what happened next.

So here it is, The Sept. 6 Breakouts: Where Are They Now...

CSX, FSLR, FTE, PHG, SI and TEF returned to neutrality under the two-day rule, and again moved to bear phase today.

VXX turned neutral under the two-day rule, and again broke above the price channel, but with a sideways average directional index (adx) invalidating the signal.

ABB, CS, EFA, EWG, EWJ, FIS, HBC, TS, VEA and VGK turned neutral before breaking out to the bearside today, but with a sideways adx.

AFL, AKAM, CY, FRX, GES, GLD, GM, GPS, JNPR, KLAC, MET, MON, MS, PRU, PWE, SLB, SMH, TRI, TSU and WU ran afoul of the two-day rule and remain neutral today.

So, in this gigantic whipsaw, everyone returned to neutrality. Each of the signals proved to be false under the tight-stop version of Turtle Trading used by Private Trader.

But, none of these stocks and funds turned neutral under the original Turtle Trading rules, which require that the price move above the opposite 20-day price channel boundary. And none showed a breakout in the opposite direction.

This exercise points to the problem of whipsaws that plagues any trading method. Whipsaws can be avoided, most of the time, by setting wide stops. But in those cases where a whipsaw results in a changed trend, the losses resulting from a wide stop can be devastating. It's far cheaper to pay the trading fees for multiple exits and re-entries triggered by tight stops than to accept the truly huge wide-stop losses.

The two-day rule says that position must be closed if, after breakout, the price closes two days running within the channel. Two days is entirely arbitrary -- it could just as easily be one day or three, or two weeks.

Under the Private Trader rules, the two-day rule is hitched to a stop/loss equal to twice the 14-day average true range (atr). One solution would be to tighten the stop and eliminate the two-day rule entirely. Since the whipsaws mainly produced upside price gaps on Sept. 7, any stop/loss sales would have had unpredictable losses. In many instances, the atr stop/loss would never have been triggered.

That's it. Time for the trailer.

The End.

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