Sunday, November 1, 2009

S&P 500 Weekly Review (Introduction to Trader Vic's 1-2-3 System) - November 1st 2009

Thanks to Dream for giving me a chance to guest blog here! :)

This week, I am going to do the monthly analysis for S&P 500 inconjunction with a book that I am reading right now named "Trader Vic - Methods of a Wall Street Master" by Victor Sperandeo.

I first heard of Trader Vic from Doctor Alexander Elder's "Trading for a Living". The name came up on Dr AE's Spike Trade blog a few times as well and a few other books on trading. Eventually I picked up a copy of "Trader Vic - Methods of a Wall Street Master" so that I can learn more about this system. It is really one of the best books written for a trader and I urge you to pick up a copy if possible (2nd hand copies can be found on eBay for as little as SGD$45).

I will attempt to explain what I know of that system here. Any mistakes I make are mine alone, through my misunderstanding. Any success you have with this system should be fully attributed to the original author. :)

We will begin by drawing the trend lines on the chart we want to analyze.

1. First determine the time frame for analysis, using months for long term, weeks for mid term or days for short term.

2. In an uptrend, begin the line from the lowest low of the chart and connect it to a highest low prior to the current highest high. In a downtrend, begin the line from the highest high of the chart and connect it to the lowest high of the chart prior to the current lowest low. One very important rule is that this line MUST NOT cut through any other prices/bars in between.

3. In an uptrend, the current highest high shall be the resistance. In a downtrend, the lowest low shall be the support.

The 3 Points

1. Trendline is broken.

2. The last high is tested but failed to break.
OR 2B. The last high is tested and broken but fell back below breakout line a few bars later. (False Breakout)

3. The latest low is tested and broken.

Traders should sit up when Point 1 is activated. With either Point 2, 2B or 3 being played out on the charts, the reversal is more or less a certainty and if all 3 points are fulfilled, the reversal is confirmed. He further adds that Point 2B alone is worth trading, not as a guide but as a RULE!

Weekly Analysis - S&P 500

1. We begin analysis with the October 1st chart of the S&P 500.

On the 1st of October, the trendline was broken strongly. This fulfilled Point 1 above and should had made traders of S&P sit up and start watching.

2. A intermim low of 1019.95 was registered the next day, before the chart started creeping up toward the trendline, and this will become the support to break in days to come.

3. The following 2 weeks were deep inside earning season and prices fluctuated wildly from day to day. Market reacted strongly to good data like extraordinary earnings reports from Caterpillar, MacDonald's, JPM and Intel but also increasingly bad figures like jobless claims. This created some inconsistencies in the chart where prices hugged the trendline (but never really surged high above) and the last highest high was breached and went up a further 20 points due to the earnings reports. This essentially cancelled out Point 2 but wait! The show is not over yet!

4. With the major earnings all reported by the 24th of October, the stream of good news was stemmed. Official positive figures was met with luke warm response and bad news was exemplified. When market resumed on the Monday of 27th of October, the index dived straight back across the previous high, fulfilling a false breakout and gave rise to Point 2B. Remember that Vic said that 2B should not be just a point to watch out for - it should in fact be a rule that screams TRADE! (and in this case, SHORT!)

5. And what happened for the rest of the week is, as they say, history. The market's gloominess is unparalleled and despite a powerful rally on Thursday, Friday's opening took it all back and more. 2 points out of 3 had already been played out and there should be no doubt that a reversal is now in place. If prices go back across 1019.95, that should only serve as a formality of confirmation.

Those of you who know how to use Dr AE's A-B-C system should be able to see this work in conjunction with Vic's 1-2-3. A combination of 2 workable systems cannot be bad and should only enhance your TA abilities. However, remember that price is king and the market will always be right!

For entertainment and, where applicable, educational purposes only! :)

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