After losing 50% of my capital in late 2009 – early 2010, I decided it was time to develop my own system of navigating S&P500. It took me several months of study and research to come up with the best set of indicators for my market model. This post will explain the logic behind the buy and sell signals that my model generates.
My First Trading Experience
I started trading in 2008 by investing $10K into put options on a number of the US traded stocks (e.g., CAT, X, BAC, C, etc) via Wells Fargo brokerage account (OMG, right?!). I purchased those puts days before the Lehman Brothers collapse and my portfolio grew 500% in a matter of several weeks. I did zero analysis before buying those puts – I just decided to follow the trend, which at that time was pointing down.
I concluded that trading options was the easiest way to make a lot of money. Little did I know… that my profits were the result of a pure beginner’s luck.
Fast forward several months and I started to notice that my option trades failed to generate consistent returns. One week I was buying calls, next week I was buying puts and nothing seemed to work for me (I had little to no understanding of the Implied Volatilities, Option Pricing and Time Decay).
Elliott Waves Crushed Me
After struggling for several months, I decided to read some online resources in an effort to improve my trading skills. I stumbled upon the concept of Elliott Waves and an article that showed how the 2007-2008 bear market was just the first wave of a more pronounced and longer bear market to come (which was supposed to resemble that of 1929-1932). There were several Elliott Wave practitioners advocating this view. The most vocal of them was Robert Prechter (the dude in the picture below).
I started to read more about it and got brainwashed into believing that they were right (I still can’t believe I went through that phase in my life). After becoming an Elliott Wave ‘trader’, I decided that I would wait for that perfect opportunity to ‘re-short’ this crazy market and finally strike it big.
I had multiple small attempts at shorting the market which only pissed off my capital on a regular basis as well as two big attempts betting against the S&P500 (I never considered going long – God forbid – because I was smarter than an arrogant and careless bullish majority). The image below shows those 2 big attempts where Robert Prechter sent his bearish alerts to all of his followers about ‘an imminent big drop’ because market provided a ‘screaming sell signal’ after forming bearish Head and Shoulders Patterns (he was also featured on TV a couple of times back then – not anymore).
Initially those trades seemed to work just fine…. Long story short, I lost 50% of my portfolio by mid 2010 and decided it was time to do my own research and develop my own market model.
What Happened Next
I spent several months analyzing the markets in order to figure out what worked and what did not. Once I had the model developed, I wanted to start trading again. Unfortunately, since I lived in Ukraine at that time and legally could not have permanent residency in the US, Wells Fargo closed my brokerage account. I had to wait for almost 7 long years before I was able to trade again… I moved to the US in 2015 with my family and worked on my green card with my ex-employer. I received it in 2018 and was finally able to open a new brokerage account on my name (not with Wells Fargo, of course).
My Market Model
I started to trade again in the middle of 2018. The summer months were quite challenging due to market choppiness. October and December, however, were perfect months when my model shined and helped me make money on the directional put options.
As I started trading again, I decided to share my observations, lessons learned and trading tips on Twitter. If you followed me on the social platform for the last several months, you’ve probably seen a lot of components of my market model.
Market Model Signals
The model consists of several breadth and technical indicators. The buy / sell signals are provided when the breadth indicators are pointing up / down and the technical indicators are in a buy / sell mode. When my model provides a buy signal and is in the accumulation mode, most of my day and swing trades are bullish (one exception might be the day trading shorting opportunities). Conversely, when it provides a sell signal and is in the distribution mode, I am primarily trading on the short side.
Each indicator can potentially generate 3 types of signals: 1) buy, 2) sell, and 3) neutral. The idea behind the model is that when all of the indicators I track AGREE on a signal and direction, I position myself accordingly.
Let’s review NYSI as an example (I will cover other indicators in my future posts).
You can see a chart of S&P500 and NYSI with the 3 types of signals:
– Buy mode (green)
– Sell mode (red)
– Neutral mode (blue)
By the way, notice how NYSI provided an early sell signal in September 2018 despite the fact that the market continued to move higher. That helped me position myself on a short side and take advantage of the expected move lower once other model indicators ‘confirmed’ the new sell signal. Also, notice how NYSI was in the accumulation mode since the late December 2018 and into March 2019: this kept me on the bullish side when most of the FinTwit experts were extremely bearish expecting an imminent big drop any day.
The model generates a strong signal when all of the indicators I track agree on that signal. Back in late 2018 as well as in early 2019, all of the indicators provided the same signals (sell in 2018 and buy in 2019). In other words, the signal strength was 100%.