Seeking Alpha
What is your profession? ×
Profile| Send Message|
( followers)

Continuing from my previous post, my program trading is still working fine. Here is the result as of November 30:

  • Maximum cash reserve for this strategy: $248,400.00
  • Number of shares of DIA I own now: 600
  • Net from trading, after commissions: $7,769.56 (from 8/3/2011 to 11/30/2011)
  • Return on the cash reserve: 3.13%
  • Return on the cash reserve, annualized: 9.9% (from 8/3/2011 to 11/30/2011)
  • Cash on hand: $187,221.76
  • Breakeven price for the DIA on hand: $101.96

The following is a chart of the history of the annualized return since this program trading started:

(Click charts to expand)

The annualized return dropped to 9.9% from a high of over 12% in October. One reason is that I made fewer trades in this month. As shown below the number of trades dropped to 6, because the market (DJIA) had fewer retraces this month.

Another thing I did during November is that I bought some extra shares of DIA when it was about $144. Therefore, I now have 600 shares of DIA on hand that I would be able to sell if the Santa Clause rally materializes. On the other hand, I also have about $187,000 on hand to buy DIA if the market turns south instead.

Where do I go from here? For that I am looking toward Bollinger Bands for guides. The following is a monthly chart of DJIA with Bollinger Bands for the past 240 months or 20 years with a period of 20 months [from Charles Schwarz’s StreetSmart].

The grey curve in the middle is a simple moving average (SMA) of 20 periods (months). Each point on this curve is a simple average of the monthly closing prices of the past 20 months. That is why there is no SMA or Bollinger Bands data in the first twenty months of the chart above.

The other six curves are Bollinger Bands and all are also based on 20 months. There are three sets of them in the chart above, they are:

Line color

Line location

Standard deviations

Chance of the current DJIA monthly closing to fall within this range



Closest to SMA

From -1 to +1



Dark Blue

In between

From -2 to +2



Light Blue

Farthest from SMA

From -3 to +3


Most charts use only BOL +/-2, however, I personally like to have the three sets listed above.

Looking at this chart, we each can form our own opinion. Here is mine.

The market can do only three things: up, down, or going nowhere. We all know that. But it does them in certain ways.

When it goes up, it tends to tear along above BOR +1. This happened during the great tech rise of 1990s (on the left half of the chart) as well as the rise leading to the subprime debacle (in the middle of the right half).

When it goes down, it also tends to tear along below BOR -1. This was very clearly so after the subprime debacle. But, it kind of muddled along during the tech bust (in the center of the chart).

Most of the time, the ratio of BOL +3/BOL -3 is about 3/2. The market did go from BOL +3 to BOL -3 and vice versa several times during the 20-year period shown above.

For my personal trading in DIA, I superimpose my own four guidelines on top of the Bollinger Bands as shown below (from Charles Schwarz StreetSmart):

These four lines correspond to the four demarcation levels I described in a previous article. The four DJIA demarcation levels in DIA equivalents are: 140 (Line A), 116 (Line B), 106 (Line C) and 70 (Line D). They represent past highs (resistances) and lows (supports), and they are very important because many investors do look at them and form their opinions about the state of the market.

For now, Line B is about the same as SMA and Line C about the same as BOR -1. Between them is my current trading range. I will basically be on the selling side when the market goes above Line B (or SMA) and in the accumulation mode when the market is between Line C (BOR -1) and Line B (SMA). In the days to come, I may adjust my Lines B and C with the movements in both SMA and BOR -1.

Here is my reading of the future of the market based on the charts above.

The market is not now in a big move either up or down, at least not yet. It takes a huge national or world event to push the market to make a big move.

The current European situation could be one. I’ll be watching DJIA if it would go under BOR -1 and even lower. If it does, I’ll do some accumulation of DIA. I’ll be spacing my purchases so that my fund would last till DJIA goes to as low as 7,000 or even lower.

At this time, I do not see any big upside events (like the 1990's PC/Internet revolution or 2000's financial engineering) in the immediate future. Most big corporations are already globalized and their earning potentials are not that easy to boost upward anymore (I may be wrong). QE3, if it comes, may boost the market but perhaps only for a short spurt. The next big pusher could be inflation (I may be wrong here also).

Disclosure: I am long DIA.