Weekend Update: Special Situation


When one trend ends, another begins. Almost by definition, that last trading signal in an expiring trend will be wrong, it has to be. The trading system doesn't recognize that the trend has changed until a set number of price bars. But once it does it starts generating signals in the new direction, first on the 30 minute chart, then the 60 minute, then the 120 minute, then 180 minute, and finally the daily chart. Given enough of a time horizon, even the weekly chart. Waiting for those final few time frames can miss out on some high probability signals. 

We have that progression happening right now in TLT, the ETF for the 20-year Treasury Bond. Note on the charts below how in the 30-60-120 minute time frames the final buy signals were all wrong, or at least very weak, and the new sell signals have been all right and all profitable. Only the 180 and daily charts think they are still in an uptrend and both are about to issue that last, and wrong, buy signal in an uptrend that has clearly turned down on the lower time frame charts. 

The Short-Term Premium Service went Short TLT on April 2nd, not on a system signal but based on a unique gap-down pattern. It sure looked like a top, so we took it and so far, so good, the options are up over 50% in less than two weeks. If that was the end of the uptrend from early November, the 180 minute and then the Daily charts will both generate their last, and wrong, buys before starting to generate their own system sell signals in line with the new downtrend. We won't officially go short until those sell signals appear, but for aggressive (or just greedy) traders, TLT has fallen from a high of $126.69 to a low of $122.60 in just two weeks, making the June $122 puts at $1.50 a very interesting speculation.