The ACD Method
- Thread starter sbrowne126
- Start date
After Kuroda's comments, short term at least I'm a little wary. You don't foresee central bank intervention to support the yen?King, I think Japan has a much more clearer forward picture then Europe. I personally think Greece is already gone and actually priced in to the market. But Europe is going to be very messy. Japan on the other hand is a one way train. There is no doubt in my mind we will see a 250 USD/JPY at some point in the future and most likely 150 before the year is up. Also watch GPB/JPY, EUR/JPY and AUD/JPY. To me this is the most clear macro trade out there. No, it's not going to go straight up with no pullbacks. No you can't just be long without a stop. I suspect a very ugly pullback is in the making soon. Remember, the uglier the pullbacks, the more bullish the move. Buy the puke!
http://www.ft.com/intl/cms/s/0/a0edf578-0f35-11e5-897e-00144feabdc0.html#axzz3d3G80qSa
One of our active followers sent me an e-mail asking for me to expand on my comments from last week on what I meant by a "puke". I'll try to clarify. Markets have a certain structure to them that is governed by human behavior. Human behavior is often defined as unpredictable thereby making market behavior unpredictable. But this is not always true. For example. If I'm in a building and scream there is a fire (whether there is an actual fire or not) I can model very precisely how people will act. If we take a product in the marketplace that is very elastic in price and take that price to an extreme, we know EXACTLY what people will do. For those of you non econ guys, something that is elastic simply means we are very sensitive to it's price and it's easy to substitute for something else. So put a different way, extreme behavior usually begets predictable responses. Whereas status quo can illicit any number of responses.
This is why market crashes are so one directional and easier to trade. In panics, there is not much to guess. Where as bull markets are slow grinds of back and forth. In a bull market people have choices. In a crash you have one choice. So to get back to pukes here, a puke is a one choice market. The marginal buyer (defined here as the buyer with the highest cost) sets the price. He/she is the most sensitive to market price. In a puke, all the marginal buyers get taken out. It happens because there are too many of them. The price action is very predictable. In a strong upward trend this is very common. These are usually the best buying opportunities in a given product.
So let's walk through some logic on this. Say we created a formula or model to determine just when this opportunity presents itself. First, we would need to define a marginal buyer and one who is highly elastic. We want to understand why is he/she in this product to begin with and why are we so sure they will puke. And how do we know that this price action is just a puke and not the start of something bigger.
The weaker buyer is often attracted to really strong products but often at very bad prices. He chases. So these types show up in products that provide very few pullbacks for them to get in. So they throw in the towel and get in at bad prices, very bad prices. You can define their sensitivity by just how bad of a price they got. The steeper the slope, the worse the buyer they are. Because of just how bad a price they got, they are extremely sensitive to a normal ordinary pullback. But remember the fire example, human behavior becomes "extremely" predictable at the extremes. We know very strong products attract these types and we know when they get in (steep slope). So we absolutely know they will get flushed out. And when they do, a buying opportunity presents itself. Why? Just because the product is down a lot? No. Because you ALWAYS want to be long "in front" of the weak marginal buyer. They are going to take your product down. So the optimal entry will always be when the most of them are gone. And the worst entry will be when the most of them are long.
This can happen in a day, a week, a month. I have found that the ACD levels work very well with the lows of these pukes. Now how we do know this is not something bigger? ACD! That was easy right? LOL. You do NOT, I repeat do NOT, abandon your risk management. If that product is confirming an "active" level on a given time frame, you wait. Remember time ultimately erases those levels. So you wait. There is absolutely no mathematical way possible for you guys to get stuck long. It simply is not possible. That is why the A levels are there. They are your risk management tool!
I know this was kind of long but I wanted to provide the "intuition" behind this and not simply say, follow your ACD rules.
This is why market crashes are so one directional and easier to trade. In panics, there is not much to guess. Where as bull markets are slow grinds of back and forth. In a bull market people have choices. In a crash you have one choice. So to get back to pukes here, a puke is a one choice market. The marginal buyer (defined here as the buyer with the highest cost) sets the price. He/she is the most sensitive to market price. In a puke, all the marginal buyers get taken out. It happens because there are too many of them. The price action is very predictable. In a strong upward trend this is very common. These are usually the best buying opportunities in a given product.
So let's walk through some logic on this. Say we created a formula or model to determine just when this opportunity presents itself. First, we would need to define a marginal buyer and one who is highly elastic. We want to understand why is he/she in this product to begin with and why are we so sure they will puke. And how do we know that this price action is just a puke and not the start of something bigger.
The weaker buyer is often attracted to really strong products but often at very bad prices. He chases. So these types show up in products that provide very few pullbacks for them to get in. So they throw in the towel and get in at bad prices, very bad prices. You can define their sensitivity by just how bad of a price they got. The steeper the slope, the worse the buyer they are. Because of just how bad a price they got, they are extremely sensitive to a normal ordinary pullback. But remember the fire example, human behavior becomes "extremely" predictable at the extremes. We know very strong products attract these types and we know when they get in (steep slope). So we absolutely know they will get flushed out. And when they do, a buying opportunity presents itself. Why? Just because the product is down a lot? No. Because you ALWAYS want to be long "in front" of the weak marginal buyer. They are going to take your product down. So the optimal entry will always be when the most of them are gone. And the worst entry will be when the most of them are long.
This can happen in a day, a week, a month. I have found that the ACD levels work very well with the lows of these pukes. Now how we do know this is not something bigger? ACD! That was easy right? LOL. You do NOT, I repeat do NOT, abandon your risk management. If that product is confirming an "active" level on a given time frame, you wait. Remember time ultimately erases those levels. So you wait. There is absolutely no mathematical way possible for you guys to get stuck long. It simply is not possible. That is why the A levels are there. They are your risk management tool!
I know this was kind of long but I wanted to provide the "intuition" behind this and not simply say, follow your ACD rules.
I bought some. I believe Kuroda as much as those emails that I am Nigerian prince
He HAD to say that. The currency was behaving like a penny stock. They have to talk it down. The only way for Japan to create inflation will be through their currency. They still have negative interest rates!!!!!! I would be much more likely to give his words credibility if Japan started raising rates. Japan wants a weak currency but.....they also want a stable currency. No country in the world wants a volatile currency. It creates a lot of dead weight loss in the economy through higher transaction costs.
Now let me be clear, if he makes those comments repeatedly AND the price action both in number line and ACD levels "confirm" that, I would change my tune. Let me ask you something. If you were in a building that was on fire and I told you everything was fine but you could see the fire and smoke around you, would you stay? LOL. When the smoke is gone, I'll listen more. Until then, let me remind you of the Soros short pound trade. Where the Bank of England came out publicly and said absolutely they will not allow their currency to depreciate. Won't happen under any circumstances. They even spiked interest rates to force the shorts to cough up huge borrowing costs. What happened? The pound crashed off course. The fact that Japan came out to try to talk it back down only makes it worse. The FX vigilantes now smell blood. Not good.
Having just read this once through ...... I"m very excited for the golden nuggets I'll get with each new read. Just freaking so thankful Mav wrote this. He obviously put time and his experienced thought into this. We are so very fortunate. Thank you Sir!!
Thank you Mav.
Regarding volatility, would I be correct that you are referring to something along the lines of “Relative Volatility” as measured by ….. say the ATR?
Thank you Mav,
Now, I am a rather dull witted Norwegian. For my own clarity, are these your confirmation numbers (meaning not your OR numbers)?
If yes, it appears all your confirmation numbers, like mine, mirror the OR numbers (no ½ numbers like Fisher describes). Your intraday of 30 minutes is interesting because I wrongly assumed you used primarily a 5 minute for constructing your numerlines.
Hello Mav,
Say you are going to buy a stock that has pulled back into what you consider a good puke candidate and you decide to go long. How do you enter?
Thank you.
Say you are going to buy a stock that has pulled back into what you consider a good puke candidate and you decide to go long. How do you enter?
Thank you.
