February 15, 2018 - MDT Update

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.

As a reader of this publication, you know that a downwave should be expected based on two factors:

The first was that the S & P 500 was trading above its upper extreme bollinger bands on multiple long term timeframes. At the very least, this price action should tell you to limit exposure on the long side.

The second factor is the VIX had been trading at historic lows. I don't listen to, or believe the pundits who say that the VIX has lost its predictive value. And this recent downmove proves that once again.

The VIX bottomed out around 9 and exploded to a high of 50.30 in about one month.

The question as to how to time the entry for the short side can be answered by looking at the short term 60 minute chart for the VIX. The 60 minute chart crossed into an uptrend back in the middle of January.

At that point, you expect more upside on the VIX ... and subsequently movement to the downside on the S & P 500.

I don't want to delve into too much detail now, but these are the topics I discuss daily and on the bi-weekly webinars.

The final issue is when do you dip your toes in the market on the longside after a sell off like we had?

Well as you know, in addition to various technical sets ups, the main event I look for is a selling climax.

A selling climax is when the down to up volume exceeds 9 to 1.

On February 5th, the market had its first selling climax when the down to up volume had a reading of 30.91. This certainly exceeds 9 to 1 and was the highest reading I have seen in a long time.

As a point of reference, on June 29, 2015, the market had a selling climax with a reading of 21.42. The next week, the market bottomed at 1,991.68 and has run all the way up to 2,873.

The first selling climax puts you on alert that a bottom maybe forming, but it did not turn the market immediately.

But, a second selling climax formed on February 8th, with a reading of 11.46.

From my experience, if the first climax does not turn the market, the second one tends to.

And the next day, the S & P 500 bottomed right at the lower band on the 60 minute chart and has bounce now for 5 days.

These are topics I will continue to share in the future.