This is the Variable Changing Price Momentum Indicator (VC PMI) weekly update for March 6, 2019.
Looking Back: VC PMI Bull Trap Predicted
On February 26, I wrote an article for Seeking Alpha titled, "The E-mini S&P 500: It is a Bull Trap!" When that report was published the E-mini S&P was at 2791. At that time, we indicated that if the market rallied up to the levels of 2805 to 2815, to take profits. We clearly stated in the report, "Look to take some profits on longs as we reach the 2805 to 2815 levels" (sell 1 and sell 2 levels of the VC PMI), which are the highest probabilities for the reversion to occur back down to the mean. The sell 1 (S1) level has a 90% probability of a reversion to the mean based on a 1:1 factor. The sell 2 (S2) level has a 95% probability of a reversion to the mean with a relative implied volatility factor of 2:1.
Since the report was published, the market on March 4 made a high of 2819.75, going right through the S1 and S2 levels indicated in the report. The reason why we anticipated that this was a bull trap was because the price action came right into the area of supply that was identified in red by the VC PMI in our report.
After a second test of the new high of 2719.75, the market came back down to where it's trading last (at 5:07 pm March 6) at 2766.38. We can clearly see that the VC PMI was precisely able to identify the reversion from the supply levels of the S1 and S2 levels of 2805 to 2815. We were prepared to activate a short signal once the market closed below 2805, and particularly at the S2 level of 2818. After making a high of 2819.75, the E-mini came back down and closed below 2818, activating the weekly short signal of S2 to close below 2805. The market activated the profit objectives of the first target of 2805, which was completed.
Now the Market is Heading Down
Upon closing below 2785, the market activated the levels below of 2771, which was completed today, to 2751, which is the B2 level of the weekly VC PMI. We completed the reversion from the top and we have taken profits at the mean of 2785. We then reverted and went short again. Now we are taking profits at the 2771, and potentially overnight at the 2751 levels, as indicated in the report.
New lows at 2627?
The action from the reversion at the 2805 to 2818 level has activated long-term, intermediate and now a short-term signal in the market. We expect that the lower levels of the long-term charts of the VC PMI will be accomplished. We are looking at the potential for the market, once it closes below 2760, which is the monthly mean, to come down as low as 2706 to 2627. The weekly B2 level is 2759 and we are expecting overnight or over the next day or so these levels to be met. We want to see how the price action relates to these levels and how strong the demand levels turn out to be. Will the market be able to absorb the supply that is coming into the market since the 2819.75 level was established this week? The monthly B2 level is 2627, and it has been activated as a potential target if the market closes below 2760.
The VC PMI Automated Algorithm
We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals 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 Vedic 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. I used this system to analyze the gold and silver markets.
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. 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.
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.
To learn more about how the VC PMI works and receive weekly reports on the E-mini, gold and silver, check out our Marketplace service, Mean Reversion Trading.
Disclosure: I am/we are long SPXS. 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.
Additional disclosure: Disclosure: I am/we are long SPXS. 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.
Additional disclosure: 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.