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Adam Grimes
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Adam Grimes brings nearly two decades of experience in the industry as a trader, analyst and system developer. His trading experience covers all major asset classes–futures, currencies, stocks, options, and other derivatives, and the full range of timeframes from very short term scalping to... More
My company:
Waverly Advisors
My blog:
The Blog of Adam H Grimes
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  • Short Treasuries: Structural Support

    I want to share the thinking and reasons supporting a technically-motivated short position in Treasury Futures. I think it is possible to simplify the trading of patterns too much, and to imply that all a trader has to do is to simply execute some basic patterns and make money. Maybe it works like that for some people, but I've never personally seen anyone find enduring success with the simple pattern approach. (An objective reason might be that the market is too competitive and too "smart" to allow simple patterns with a huge edge to persist for very long.) Context is very important, but sometimes context is discussed as if the concepts are unteachable and nebulous. I've seen a lot of discussion of, for instance, accumulation and distribution where people say you just have to feel it on the chart. I'd also object to that. Yes, high level synthesis is important, but if you can't delineate the major structural points, something is wrong.

    This is position that we have been watching for about two weeks in my published research with Waverly Advisors. Monday night (11/18/13), I wrote that we would enter a short on a stop around 132 9/32, the red line on the chart below. Tuesday proved to be an unusually strong down day, and, as of Tuesday's close, shorts have a nice head start and a profit equal to about 30% of the initial risk on the trade. Rather than focusing simply on a trade that, so far, is working let's consider some other factors supporting the short, and why we've been leaning short on Treasuries for many months.

    (click to enlarge)

    30 Year Treasury Futures, Daily

    The monthly chart, below, tells an interesting story:

    A. A multi-year strong bull market rolls over into a year-long flag. Remember, this is a monthly chart and patterns take a long time to play out here. This type of structure is perfectly consistent with a healthy bull market.

    B. Another upthrust exhausts above the upper Keltner, and begins another long pullback. At this point, there is no reason to be anything but bullish on this timeframe.

    C. The pullback begins to break to the upside, but quickly fails into a selloff. This is one of the classic pullback failure patterns that I cataloged in my book. (See, for instance, pp 73 ff.) This tells us that the bulls have stumbled here, and in a way we have not seen in the last 10 years.

    D. Moderately strong downward momentum sets up a small pullback on this timeframe, and we are justified in pursuing shorts on a break out of that pattern.

    (click to enlarge)

    30 Year Treasury Futures, Monthly

    The weekly chart (below) gives a little bit more context. I have retained the letters from the monthly chart here, and highlighted two weekly points with numbers:

    1. The pullback attempts a selloff, that fails and…

    2. …leads to another upthrust. At this point, we've completed a complex pullback, a pattern which often sets up a good trend continuation trade. In this case, the intermediate term trend on this timeframe is down, so we are justified in pursuing shorts.

    (click to enlarge)

    30 Year Treasury Futures, Weekly

    So, what you see here are several patterns working together. Each of them, alone, is simple to very simple, and reading them together is not complicated. Some traders may wish to simply short the breakdown on the daily timeframe, but this misses a lot of market structure and supporting context for the trade. If you are new to this kind of trading, one of the benefits is that you don't have to "figure it out". All of the concerns about the Fed doing this, tapering, QE, and other risk factors-to a large extent they do not matter for the disciplined technical trader. All you have to do is to learn to read the message of the market, and to understand the balance of buying and selling pressure as it unfolds in the market.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: TLT, treasuries, rates
    Nov 21 11:37 AM | Link | Comment!
  • Toward A Simple Model Of Price Behavior

    For readers who may not be familiar with my work, I am a quantitative discretionary trader. What this means is that I am a discretionary trader, but everything I do is subject to rigorous, quantitative, and statistical verification. Over the years, I have accumulated a lot of statistical evidence for what works and what does not work in the market, and the results may be surprising. (As an interesting aside, I published a 480 page book last year. The book I almost published was over 900 pages, and the "missing" 450 pages were mostly in-depth statistical analysis of the deep workings of price action and market structure. I'll be sharing some of that information in this blog over the coming months.) I'm sometimes accused of being overly negative, as the preponderance of statistical evidence strongly contradicts many of the accepted tools of technical analysis such as moving averages, candlestick patterns, and Fibonacci ratios. Many traders find this message challenging, but many people would rather have confirmation rather than a good hard look at the realities of what works and what does not. In many ways, I'm nearly a market nihilist, as I believe (based on my experience and research) that nearly everything everyone thinks works, actually does not.

    The point of this work is not to disparage anything anyone does; the point is to save your time and money. We'll dig into some of my research in-depth in future posts, but today I want to share a model of market behavior that I've found very useful. Though this is theoretical in the sense that I do not actually know these two forces actually exist as "things" in the marketplace, the model works. It is supported by rigorous statistical research, and, even more importantly, it has proven itself in actual trading for many years.

    The concept is simple. Imagine, for a moment, that there are two forces in the market: Mean reversion, the tendency for large moves to be reversed in part or completely, and Momentum, the tendency for large moves to lead to further moves in the same direction. When the forces are in balance, and they usually are, markets will move more or less randomly. Price will move up and down in ways that look a lot like a random walk. Future prices and price direction will be unpredictable, and there is no technical reason for having a position. We refer to this as a market in equilibrium, and these are the types of markets we try to actively avoid. However, there are other points where one force predominates, though there is always a balance. In trends, momentum lets with-trend thrusts lead to further thrusts in the same direction, though eventually mean reversion overtakes them and the market rolls over into a pullback. (These concepts are timeframe dependant.) At other times, mean reversion will predominate and large moves can be faded. The question of technical trading now becomes this: "is it possible to identify patterns that show, in advance, when one force is likely to be stronger than the other?" If so, then we have a reason for taking a position, putting risk in the market, and the possibility of harvesting trading profits from markets that are otherwise random and unpredictable. Fortunately, the answer to that question is yes.

    That's all there is to the model; it is so simple that it's easy to overlook the importance and usefulness of such a simple framework. These forces shape everything from traditional chart patterns to long-term trends to ultra short-term HFT behavior. There are many nuances here that may not be appreciated in traditional technical analysis-for instance, the balance of momentum and mean reversion are different in different asset classes and different timeframes. This is why technical tools cannot be simply applied "just as well" to "any market and any timeframe", but, rather, why some adaptation and experience is necessary to translate concepts and tools across different applications. We'll dig into all of this in more depth soon, but, for now, begin to think toward a simpler model of price behavior that is shaped by these two primordial market forces.

    Nov 18 1:05 PM | Link | Comment!
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