Friday, November 17, 2006

Correlation between indices and break-out trading

One of the most interesting aspects of writing our newsletter is that we now notice connections, or a lack thereof, that we had never caught sight of before. Because we now keep meticulous statistics on all of our picks, we discern patterns that are new to us. For example, in our case anyway, the correlation between the indices and break-out trading is much more random than we had previously thought. June and October were our best months: yet in June the market did very little whereas it rallied in October. However, we are having a difficult time finding interesting new break-outs in November; in fact this month we have had the least amount of selections that we have ever had -- all the while the Nasdaq has rallied strongly into new highs. So far in November we have had 8 selections trigger -- at this time in October that number was 30. Is it us? We doubt it -- we are pretty automatic in our chart selections with very little subjectivity: we go through hundreds of charts independently every night and almost always come up with the exact same picks. The set-ups are either there or they are not there. And right now, the charts that we seek are simply not there.

The only explanation we can come up with is that when the market becomes this overbought, the best moves are continuation moves (like in RIMM which just keeps going up) instead of actual new break-outs. What is the best time for us? A market coming off the bottom or a market that has consolidated for several weeks. This market refuses to consolidate and keeps going up every day. All good things will end, of course, and nothing would please us more than a couple nice big juicy red days. Why? Because ironically, that would set-up many more patterns than the current environment. Until then though, we will keep our cool, surf the net, watch Ugly's kung-fu videos, and wait for our turn.