As we examine the Seeking Alpha E-mini S&P 500 Marketplace report we published on May 10, the price after the report was published came down below 2,884 and activated the extreme levels below the mean as we came into this week of 2,829 to 2,771.
The Variable Changing Price Momentum Indicator (VC PMI) artificial intelligence identifies these areas as strong areas of supply accumulation or demand.
"When the price comes down to these levels, it is telling us that mathematically, the buy 1 level (B1) is a 90% probability that the price will revert back to the mean. If the price comes down to the buy 2 (B2) level, there is a 95% probability of the price reverting back to the mean, in this case of 2,884."
The low that was made on the 13th at 3 PM was 2,799.75. This came into the area that was identified by the VC PMI as accumulation of supply.
The VC PMI tells you that in order to identify the trigger point, the price has to close above the pivot point once activated.
If we look at the price coming into May 13, making a low of 2,799.75, the market did not have enough supply to bring prices down to test the B2 level of 2,771. Instead, the demand was greater than the supply offered and the price responded by closing above 2,829 at 6:30 AM (as I write this report) on May 14.
The close above 2,829 at 7 AM activated the current buy trigger point. It tells you to put your stop at 2,829. What we teach our subscribers and traders is not to use a straight stop. For day traders, use the 15-minute bar and a close below 2,829 would stop you out. Or you can sell at the market if it closes below 2,829, exit your position and go flat. This is the most conservative way to manage your risk from the buy 1 level.
The buy trigger has activated the initial target of 2,884 on a weekly basis, which is the level above. In essence, the VC PMI has identified a buy trigger point at 2,832. It is giving you a stop level of 2,829, a three-point risk. It is telling you to take profits at 2,884. That is a very clear and transparent methodology offered by the VC PMI artificial intelligence.
As I write this (7 AM May 14), the E-mini S&P has activated a buy signal at 2,832 with a stop using the 15-minute bar close at 2,829 or below. Do not use straight stops. Use the close of the 15-minute bar. Your target is 2,884. If the position begins to move in your direction, you can use the 9-day moving average to trail your stop. In this case, the signal that went long at 2,832 is carrying a trailing stop now at 2,833.
The VC PMI Automated Algorithm
We use the proprietary Variable Changing Price Momentum Indicator (VC PMI) to analyze the precious metals markets and several indices. 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's between 90% (Sell 1 or Buy 1 level) and 95% (Sell 2 or Buy 2 level) probable that prices will revert back to the mean by the end of the trading session. I use 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 SPY. 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.