Stop is below 1302.
This is a small add to a long I have from the beginning of January.
Tuesday, January 31, 2012
ACH on Jan31: Straight up from here?
I was getting ready to analyze the possibility that the correction has ended, but the evidence is overwhelming against a continuation of the correction so I am focusing on something more useful: Will the market go straight up or it will correct 8 points or more in the next day or two before moving higher?
Hypotheses:
H1 - the market continues rising without corrections greater than a few points;
H2 - the market corrects 8 points or more today or tomorrow before moving higher.
Evidence (I only kept evidence that has some relevance for the analysis):
E1 - two previous analogue cases (10/27/2010 and 01/13/2012) suggest there will be a greater intraday correction today or tomorrow;
E2 - the rhythm on the 3 hours Globex ES chart seems to be 17-21 points rallies followed by at least 8 points corrections;
E3 - European lunch entry was strong, suggesting strength further in the first part of the US session.
Matrix:
Hypotheses:
H1 - the market continues rising without corrections greater than a few points;
H2 - the market corrects 8 points or more today or tomorrow before moving higher.
Evidence (I only kept evidence that has some relevance for the analysis):
E1 - two previous analogue cases (10/27/2010 and 01/13/2012) suggest there will be a greater intraday correction today or tomorrow;
E2 - the rhythm on the 3 hours Globex ES chart seems to be 17-21 points rallies followed by at least 8 points corrections;
E3 - European lunch entry was strong, suggesting strength further in the first part of the US session.
Matrix:
| E1 | E2 | E3 | Total | |
| H1 | -0.5 | -0.5 | + | -1 |
| H2 | + | + | + | 0 |
H2 is winning. The market will probably correct 8 points or more today or tomorrow before moving to new highs. That correction will probably be a good buying opportunity.
Also, notice that evidence is scarce. This is because there are not many indicators or signs to determine whether the market corrects or not over the short term.
Monday, January 30, 2012
ACH on Jan28 Updated
The ACH method allows updates and corrections as new evidence comes in or as things become clearer. After all, it is dealing with continuously flowing data and uncertainty.
Here is new evidence or evidence that I disregarded/overlooked for the ACH on Jan 28 and here is how it influences the score of each scenario:
E9 - the market did not correct more than 20 points after the January break-out and now it is not against any big resistance - the next resistance on the weekly chart is around 1340. (E9 was not a valid observation; I rewrote it below);
E9 - the weekly ES chart hit strong resistance at 1330, which can lead to a greater than 20 points correction ( I overlooked this);
E10 - the market dropped about 10 points in 30 minutes after the GDP report on Friday (in my experience this kind of drop is strong evidence that the market has enough momentum to go further lower - I wrongfully disregarded this.).
Here is the updated/corrected matrix:
The score becomes equal.
Anyway, the market is dropping to new lows as I am writing this which clearly invalidates the 20 points correction scenario (H1). Given that this comes after consolidation on Friday we could see a trend day down today. In an uptrend a trend day down usually takes the market to the bottom of a small correction.
Here is new evidence or evidence that I disregarded/overlooked for the ACH on Jan 28 and here is how it influences the score of each scenario:
E9 - the weekly ES chart hit strong resistance at 1330, which can lead to a greater than 20 points correction ( I overlooked this);
E10 - the market dropped about 10 points in 30 minutes after the GDP report on Friday (in my experience this kind of drop is strong evidence that the market has enough momentum to go further lower - I wrongfully disregarded this.).
Here is the updated/corrected matrix:
| E1 | E2 | E3 | E4 | E5 | E6 | E7 | E8 | E9 | E10 | Total | |
| H1 | + | + | -0.5 | + | + | + | + | + | -0.5 | -1 | -2 |
| H2 | -0.5 | + | + | + | -1 | + | + | -0.5 | + | + | -2 |
The score becomes equal.
Anyway, the market is dropping to new lows as I am writing this which clearly invalidates the 20 points correction scenario (H1). Given that this comes after consolidation on Friday we could see a trend day down today. In an uptrend a trend day down usually takes the market to the bottom of a small correction.
Sunday, January 29, 2012
Nasdaq Inverse H&S
Inverse head&shoulders with break-out on the weekly Nasdaq100 chart.The pattern is projecting to 2800, a 15 % rise from here. A move to 2800 would make the leg up that started in December about 37% long, equal to the rise from September 2010 (green box).
Saturday, January 28, 2012
Introducing ACH
I've decided to continue writing the blog. I have some new plans, I have refined some tools and also got new ones. I hope to make it interesting and useful for the readers.
A new tool that I want to present is the Analysis of Competing Hypotheses (ACH). This is a framework in which decisions can be made by comparing different hypotheses (scenarios) with the help of evidence/observations at hand. It is a method inspired from the book Psychology of Intelligence Analysis, written by Richards J. Heuer, a CIA analyst. The book can be downloaded for free at the CIA website.
The method relies on identifying possible scenarios from a certain point and then trying to invalidate each scenario using the available evidence. The scenario that is the least negated is also the most probable. I adapted and simplified a lot the way it is done in the book as it will be seen. I have used it for some years but never methodically. Recently, I noticed that, if used methodically, the ACH greatly improves the process of decision making by focusing attention on multiple pieces of continually changing evidence, by eliminating the "confirmation bias" and by leaving a trail that can be reviewed later.
Here is an example. (This would make this post quite lengthy but it is just for the first time as I introduce the method.)
ACH on Jan28
Will the market correct more from these levels, maybe 40-50 points, or will it start rising after the ~ 20 points correction on the daily chart without going lower than ~ 1307 ES? (the analysis is done in the context of a developing bull market - this is in itself a subject of analysis but the evidence is overwhelming against the bear market so I am taking it as given).
A new tool that I want to present is the Analysis of Competing Hypotheses (ACH). This is a framework in which decisions can be made by comparing different hypotheses (scenarios) with the help of evidence/observations at hand. It is a method inspired from the book Psychology of Intelligence Analysis, written by Richards J. Heuer, a CIA analyst. The book can be downloaded for free at the CIA website.
The method relies on identifying possible scenarios from a certain point and then trying to invalidate each scenario using the available evidence. The scenario that is the least negated is also the most probable. I adapted and simplified a lot the way it is done in the book as it will be seen. I have used it for some years but never methodically. Recently, I noticed that, if used methodically, the ACH greatly improves the process of decision making by focusing attention on multiple pieces of continually changing evidence, by eliminating the "confirmation bias" and by leaving a trail that can be reviewed later.
Here is an example. (This would make this post quite lengthy but it is just for the first time as I introduce the method.)
ACH on Jan28
Will the market correct more from these levels, maybe 40-50 points, or will it start rising after the ~ 20 points correction on the daily chart without going lower than ~ 1307 ES? (the analysis is done in the context of a developing bull market - this is in itself a subject of analysis but the evidence is overwhelming against the bear market so I am taking it as given).
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