We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the markets. The primary driver of the VC PMI is the principle of reversion to the mean ("Mean Reversion Models of Financial Markets"; "The Power of Mean Reversion in Factor-Based Investing"), which is combined with a range of analytical tools, including fundamental logic, wave counts, Fibonacci ratios, Gann principles, supply and demand levels, pivot points, moving averages, and momentum indicators. The science of Vortex Mathematics is used to combine these elements into a comprehensive, accurate, and highly predictive trading system.
Mean-reversion trading seeks to capitalize on extreme changes in the price of a particular security or commodity, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and buy low when an abnormal low occurs. By identifying the average price (the mean) or price equilibrium based on yesterday's supply and demand factors, we can extrapolate the extreme above this average price and the extreme below it. When prices trade at these extreme levels, it is between 90% and 95% probable that prices will revert back to the mean by the end of the trading session.
Strengths and Weaknesses
The main strength of the VC PMI is the ability to identify a specific structure with price levels traders can execute with a high degree of accuracy and probability. The program is flexible enough to adjust to market volatility and alerts you when such changes take place, so one can adjust strategies accordingly. Such changes include when the market breaks out of a consolidation phase or a trend accelerates. Such volatility usually happens when the market has produced a signal at the S2 or B2 level, and the market closes above or below these extreme levels. The day trading program then confirms that a higher fractal in price has been identified and the market will move significantly higher, although the same principle applies if the market falls significantly. By the price closing above the S2 level, it indicates that the buying demand is greater than the supply. This means that the market has found support for the next price fractal. Conversely, the price closing below the B2 level indicates that the selling pressure has met demand greater than supply at the extreme below the mean, and prices should revert back to the mean.
The basic concept of the VC PMI is that the program trades the extremes of supply and demand based on the average price daily, weekly, and monthly relative implied extreme volatility factor and mean reversion.
The strongest relationship we find in the algorithm is when the daily price is harmonically in alignment with the weekly and monthly indicators. We call this "harmonic timing." Such an indication produces the highest probability (90%) that the price will revert from these levels to its daily, weekly, or monthly average.
The Components of the VC PMI Artificial Intelligence Structure?
I want to break down the filters and components that make up the artificial intelligence of the VC PMI.
The VC PMI Filters and Components
1. Weekly Trend Momentum
The weekly trend momentum is the 9-day, 9-week, or 9-month moving average that we use in each of our reports. The 9-day moving average is the filter that we use to identify the trend momentum or sentiment of the market. When the price crosses or closes above this pivot point, it represents a bullish sentiment or that an uptrend is about to start. The AI that we use behind it tells you that if the price reverts below and closes below the 9-day moving average, that it negates this sentiment. So what the AI does is that it looks at the specific criteria that we use, in this case, the 9-day moving average, and it tells you the methodology you can use with this filter.
2. Weekly Price Momentum
The second filter that we use is the weekly price momentum or what we call in the reports the VC weekly PMI, is the moving average that has been identified by the AI. Once we can identify the average price, using daily criteria for the daily, weekly criteria for the weekly and monthly criteria for the monthly, we can extrapolate the extreme relative implied volatility levels above the mean or average price.
Once the AI applies the methodology, it triggers automatically a target and a stop. A close above the average is a bullish signal, and automatically activates the extreme above the mean of the sell 1 (S1) level as the first target, and the sell 2 (S2) level as the second target. The S1 target gives you a 90% probability that the reversion to the mean will occur from these levels. The S2 level gives you a 95% probability that the reversion to the mean will occur, whether you are trading daily, weekly or monthly.
3. Weekly Price Indicator
The weekly price indicator is basically the application levels that are clearly defined by the AI. It gives you the S1 and S2 levels, which are the extremes above the mean, and it also gives you the B1 and B2 levels, which are the extremes below the mean.
At the same time that we are able to identify the extreme above the mean once we identify the average price, it also identifies the extremes below the mean. In this case, it activates the buy 1 (B1) target below the mean and the buy 2 (B2) target. The B1 target has a 90% probability that the market will revert back to the mean, while the B2 level has a 95% probability of a reversion materializing from that level. When the price reaches these specific levels, it activates the trigger point for self-directed individuals.
VC PMI Marketplace Reports
In this segment, I want to refer to our weekly report published November 30 for this coming week.
The E-Mini S&P 500, often abbreviated to "E-Mini" and with the commodity ticker symbol ES, is a stock market index futures contract traded on the Chicago Mercantile Exchange's Globex electronic trading platform. One contract is equal to 50 times the value of the S&P 500 index. The E-Mini allows smaller investors to trade the S&P without having to trade the S&P 500 contract, which is 500 times the value of the S&P--too much for many investors. It can be an excellent vehicle for traders who want to trade the S&P 500 but lack the capital to trade the bigger S&P contract.
E-Mini S&P 500 Weekly Spike Top Completed?
The E-Mini S&P 500 closed at 2758. The market closing above the 9-day moving average confirms that the trend momentum is bullish. A close below the moving average would negate the weekly bullish short-term trend to neutral. This filter can be used as the first level of protection. Even though the market closed above it, activating a bullish sentiment, it tells us that if the price closes below it, it would negate this sentiment to neutral. This is the first filter we use to measure the sentiment of the market from bullish to neutral or bearish.
The weekly price momentum indicator as we come into next week is 2718. With the market closing above 2718, it confirms a bullish price momentum for the next week. The VC PMI gives you the alternate trend, that if the price closes below 2718, it would negate this average price bullish sentiment to neutral. The weekly price momentum indicator is a 50/50 standard deviation.
Because the price closed above this mean or average price as we come into next week, it's telling us that if the price reaches the S1 level of 2804, to take profits. The S1 level starts to give you a 90% probability of the reversion to the mean to unfold from these levels, but it gives you a structure of two levels. The S2 level is 2851 if it does not revert from 2804. But what it does, is that it identifies the supply area, where we expect sellers to begin to appear or basically supply and we can see if supply is greater than the demand at these levels, which is what these levels define. The S1 level is the relative implied volatility of the supply and demand factor in this equation, with a 1:1 ratio. The S2 ratio is the 2:1 ratio of the relative extreme implied volatility factor. Therefore, what this tells us is that if the price reaches these S1 and S2 levels, you are looking at a 90% to 95% probability of sellers or supply coming into the market.
As we come into next week, we have a clearer picture, due to the market closing at 2758, the first target is 2804. Our first stop level is at 2748, the second one is at 2719 and what we teach you at the Equity Management Academy is how to synchronize the signals from all three trends, from the daily, weekly, and monthly. In this case, we are looking at the weekly report and we are referring only to the weekly data.
Silver Weekly In Bullish Mode
If we look at the weekly silver VC PMI price report we sent out on November 30, 2018, it provided a clearly defined structure for the coming week. The silver market futures contract closed at $14.22. With the market closing below the 9-day moving average of $14.59, it is confirmation that the weekly trend momentum is bearish as we come into next week. However, it also tells you that a close above the 9-day moving average would negate this bearish trend and change it to neutral.
The weekly price momentum or the average price for next week, the VC weekly PMI is at $14.30. Closing below $14.30, it confirms that the price momentum is bearish, but it also tells you to be on the watch for a close above $14.30 that would negate this bearish trend to neutral. Given that the market closed below the average price of $14.30 on Friday, it activates the B1 level of $14.04 and the B2 of $13.87, if activated. If it closes above $14.30 it would negate this bearish sentiment. A second close above $14.30 would activate the S1 level of $14.47 and the S2 level of $14.73 for next week, where it's recommended, as you can see on the report, to take profits as we reach S1 and S2 during the week.
Gold Weekly In Bullish Mode
The VC PMI weekly trading instructions report for gold, published on November 20, 2018, gives us a clear picture of the structure for the gold market as we come into next week. The weekly trend momentum is at $1,228. Based on gold closing at $1,226 is a bearish indication for the coming week. If it closes above $1,228 this week, then it would turn this bearish sentiment to neutral and a second close would activate the uptrend. A close below would activate the downtrend.
The second filter that we use, the weekly VC PMI is at $1,226 and with the market closing at the weekly VC PMI of $1,226, it is an indication that the price momentum is bullish. It also tells you the opposite that if it closes below the VC weekly, it would trigger weekly stops and negate the bearish signal to neutral.
The third weekly price momentum indicator is the extreme above the mean or the extreme below the mean. In this case, closing above or at $1,226 has activated S1 of $1,235 and the S2 level of $1,244 as we come into this week. A second close below $1,226, it activates the B1 of $1,217 to $1,208, which are the extremes below the mean.
(Note: the first close at or above a pivot point activates the new setup. If you're long into that setup, it tells you to liquidate or go neutral; and you're neutral, wait until the close on the next bar. We use the 15-minute bar to activate the daily signals.)
What we are going to do going forward is make these reports available in the Marketplace for you to see in more detail how the reports can help you improve your trading results by providing a mathematical concept and automated system with AI that eliminates emotion in your execution for self-directed individuals. The methodology and logic of the AI when a market price first approaches any level (S1 or B1), is what we call a setup. In using the 15-minute bar for day traders, the signals are triggered on the close. We do not use straight stops. It is on the close. If you're a day trader, use the 15-minute close. If you're a swing trader, you can use the daily close. If you're a monthly trader, use the weekly close. But the close is the most critical metric that we use, which defines for us the structure of the VC PMI AI automated algorithm.
Seeking Alpha Marketplace
I am launching a Marketplace subscription service called Mean Reversion Trading on Seeking Alpha. Please watch for our launch announcement to take advantage of this opportunity to learn how to apply the proven VC PMI to the gold, silver and E-Mini S&P markets. We will still offer various summaries of our reports based on the VC PMI on the free part of the Seeking Alpha site, while subscribers will gain access to regular full reports for gold, silver and the E-Mini S&P, as well as Early Bird reports when the market requires them. We also offer a book on the EMA site, if you are interested in more information about mean reversion trading.
The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.