Sunday, June 29, 2014

SPX Charts Show the Effects of Prior Maximum and Minimum Keybot the Quant Algo Numbers


The +81 algo number is an overbot indication. At its heart, the Keybot the Quant algorithm is an oscillator. That is a fancy word that simply means an indicator that fluctuates above and below a zero line which represents neutral with no advantage to bulls or bears. Keybot has a maximum upside possible of +100 and minimum possible of -100. Thus, just like the RSI, stochastics or money flow chart indicators, all three are oscillators, an overbot condition exists at +70 to +100 (markets are topping out) and oversold conditions at -70 to -100 (markets are bottoming) where market inflection points typically occur.

Keybot came on line in the middle of the financial crisis in late 2008/2009 so -100 has printed for the algo which identified an absolute minimum number and grossly oversold market that has no where to go but up. These low readings in June 2010 lead to a strong pop and then also the -100 occurs for the algo number on 7/16/10 which identified the significant market low. Similarly, -88 oversold reading were triggering in August 2011 and also at the start of October 2011 identifying significant market lows. The SPX experienced strong powerful bounces from all the lows. Focus on the short term and the low readings led to about 100 to 200 upside SPX handles in only about one-month's time.

The algo number has not ventured above +80 in its history until the last couple months. Keybot remains relatively young for a program only on line for 5-1/2 years thus far. But referencing the recent VST peaks (red circles), all correspond to market tops with +79 on 4/24/14, +81 on 5/12/14 and +80 on 5/27/14. The algo number is currently +81 in overbot territory. Directly correlating to the mid-May pull back, that +81 led to a drop from 1905 to 1865 in three days time, 40 handles, -2.1%. The other two incidents create 35 and paltry 10-point pull backs. So minor blips but the overbot levels at +79 and higher do lead to pull backs in the markets as the chart shows. At +81, what do you think will happen going forward?

If the oversold readings from 2010 and 2011 are used as a mirror image to help project what the overbot levels may bring, the SPX may drop from 100 to 200 handles to correct the current overbot +81 reading. Mixing all outcomes together the expectation would be at least a 30 or 40 SPX point sell off and  perhaps over 100 points. Keybot is a robot, however, so it simply motors along calculating 1's and 0's doing its thing completely unaffected by human emotion which accounts for its success. Remember, Keybot is not designed to call tops and bottoms but instead the algo provides the smoothest trading ride through the year with the highest gains possible while assuming the lowest possible risk. Keybot's data is very useful in providing insight into makret direction and forecasting, however, as the above analysis shows.

The overbot level at +81 is very lofty and likely will lead to a 30 to 100 SPX handle sell off. Keybot will likely miss the first 20 handles since it is not designed to tag the tops. For now, the algo remains long so this is the market direction. The market bears need weaker retail stocks, weaker copper and higher volatility to create significant downside. The bulls continue to drive the bus. The easiest way to sum it all up is to make sure you are standing at the exit door. Keep one foot outside and one foot inside. The run to the exits may become quite ugly. If you stand by the exit you can be first out the door plus you can still hear and enjoy the band playing what is likely the swan song.

If the markets sell off, watch to see if Keybot flips short; that will be the confirmation that the bears got game. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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