Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Creating Your Own Trading Indicator (by TheInflationist)

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Hi again fellow slopers. Thank you for your kind comments in our previous post (despite the poorly timed call of 11300 based on 1937 comparison with markets dropping 105 points the same day).

There are just so many indicators out there – most are widely available and
are built into charting softwares and quoted by every technical blog.
How would they work if every trader has in their disposal the same indicator to warn them when to long or short? Does it work simply by being a self-fulfilling prophecy where more people jump in the bandwagon – which in the course of time the overcrowding would lead to a game of musical chair (ie the last to bail
when the music stops spots the bill). For an indicator to work, we believe it has to be a custom indicator not commonly known to all.

We have experimented on a few
indicators (yes, its an experiment and work in progress) and are quite
happy so far with the one we have. It is very much like devising a
medical diagnostic test. Most of the readings of the test come in a
spectrum. Let’s take the pregnancy kit for example. From a consumer
(non medical) point of view, this test appears to be a all or nothing
(positive or negative) test.

If you see a “green +” it means you are
pregnant or a “red -” it means you are not pregnant. The truth is it is
not that simple. There is a spectrum of “positiveness” and the
manufacturers had to pick a cut off which hopes to include as close to
100% of true positive results without having too many false positive
ones. Same with negative results. The lower the cut off in beta hCG
levels, the more likely it is that the user is not pregnant.

Setting it
too low though would risk false negative results, ie patients who are
pregnant with beta hcg levels above the cut off selected by the
manufacturer of the test. The pregnancy test is not the best example
since it is a VERY accurate test. But most other diagnostic tests are
NOT. Apologies for the long winded medical analogy – we cannot help
applying medicine (our day job) in trading. So back to our indicator.

The “overvalued” or “undervalued” zone/cut off is arbitrary. One
could pick any cut off. The more extreme, the more sensitive it is.
Compromise and lower(or increase) your cut off and you start getting
false results (ie false short signals and false long signals). And it
is easy to change your bars to fit what you want it to fit for that
period of time. We have been using this indicator on a more macro
level. Below is a zoom in snapshot of what the indicator is saying now.

At the moment, our indicator is surprisingly flat lining. It is not
telling us that markets are overvalued or undervalued despite the relentless rise. That does not mean markets cannot crash. For our
readers who are statisticians or of medical and science background, its
all about sensitivities and specificities. A highly sensitive test is
great at ruling OUT (ie a negative result has a higher predictive
value) something whilst a highly specific test is great at ruling it IN
(ie a positive test is of higher predictive value). We are still
working on our indicator, but so far so good.

Current Levels

Creating Your Own Indicator by www.theinflationist.com


Back testing of our indicator in 2001-2002:

www.theinflationist.com

1937 vs 2007 Bear Market Correlation (by TheInflationist)

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This is our first post on SOH – hope this finds its way to fellow Slopers (Thanks Tim).

1937 vs 2007 fibonacci correlation by www.theinflationist.com
1937 vs 2007 fibonacci correlation by www.theinflationist.com

Although
the backbone of our analysis is NOT based on fibonacci numbers or
anything conventional, our analysis and comparison of 1937 vs 2007
produced uncanny results.

In 1937, DJI peaked at 194.4, bottomed at 98.95 and subsequent bear
market rally peaked at 158. So it dropped 95.45 points from peak to
bottom. Of this, the bear market rally regained 59.05 points
(158-98.95). The ratio of retracement 59.05/95.45 = 0.6186. For those
of you who are not aware of the principles of Fibonacci and its
application in trading, Fibonacci numbers are numbers where each one is
the sum of the previous two numbers. Read below for more details on
Fibonacci numbers. We arrived at this ratio inadvertently, without even
realising the significance of 0.618 until it was pointed out to us
.
Coincidental? Perhaps.

Regardless, we applied the same Fibonacci ratio to the current rally
in an attempt to see where this rally will peak. Based on the same
Fibonacci ratio, a peak of 11255 will produce the same retracement as
1937. This has to be a closing price, which means the high of the day
will probably hit 11300 for those trading with a sniper rifle (we prefer the shot gun approach!).

We are concern enough to scale back some of our additional shorts
opened Friday, to provide sufficient firepower to short 100% at 11300.
11300 appears high enough to wipe out the remaining bears in our camp
and provide the undoubted confidence in bulls. This would fit with a
"blow off" top we have been talking about. We will take the little
profits we have from our S&P shorts opened Friday. Also will look
into the weekly (or monthly if available) Binary Index trade for 11300
as insurance.

We have a busy weekend ahead so we will rush this analysis to print. We will add more to this as time permits so do check back.

Why compare 1937 with 2007 ?

For new readers, our attention focused on 1937 after we compared all
previous significant bear markets since 1929 and the Nikkei's 1989
(because of the similiarities in monetary policies quoted by many eg
"Mish" Mike Shedlock) – and found that 1937's chart looked identical to
the current. Check the full post here.

www.theinflationist.com
www.theinflationist.com

We then zoomed in on 1937 after noting the striking resemblance and compared with the current decline in more detail here.
We were not sure though, whether the current rally equivalent was at
point A or B (see below). We felt that if we were at point A, then that
would mean that we have topped at 10500, and to expect a pullback
before further rally to hit 11000 at point B. When news of Dubai
default came up, we thought "Perfect timing!" – and that it was going to be used as the "excuse" for
the expected pullback. That was not to be as markets resumed the rally
after the weekend to make higher highs.

1937 Crash Vs 2007 Bear Market

We then searched the web to see if anyone else saw this. We found
one – Louise Yamada. She tries to explain the similarities of 1937 and 2007 both
from a fundamental and technical perspective. Here is what she says about 1937 vs 2007
(2/5 videos)

Where to From Here ?

1937vs2007fibonacci2

Good luck to all.

———————

Fibonacci Numbers, Fibonacci's Golden Ratio

0

1

1

2

3

5

8

13

21

34

55

89

etc

The division of any two adjacent numbers gives the amazing Golden number e.g.
34 / 55 = 0.618

It is called the Fibonacci series after Leonardo of Pisa or (Filius
Bonacci), alias Leonardo Fibonacci, born in 1175, whose great book The
Liber Abaci (1202) , on arithmetic, was a standard work for 200 years
and is still considered the best book written on arithmetic. It was the
principal means of demonstrating and introducing the enormous
advantages of the Hindu Arabic system of numeration over the Roman
System. Leonardo's reputation amongst scholars was deservedly great. It
was so outstanding that King Frederick II, visiting Pisa in 1225, held
a public competition in mathematics to test Leonardo's skill and he was
the only one able to answer the questions (Huntley 158). Fibonacci
ratios occur naturally around us: width vs height of picture frames, no
of petals in a flower, etc (see the mystery of Fibonacci Ratio and Numbers)