Comment on Neely Set-Ups

My Experience with Neely’s System

I’ve posted in the past few days here and here on a Neely crash call.  We have a small bunch of regulars here who have seen me post on Neely enough times that I assumed everyone already knew my general views on him.  But let me restate these views for anyone new who might wander in.

Like everyone, Neely has stronger and weaker trading set-ups.  I posted about this set-up because it is one of his stronger ones.  He has a good record when it comes to a call this strong.

However, even with that good record, I prefer not to use Neely’s entry points and stops, which is why I also posted my own. I subscribed to Neely’s service some years back for a period of a few months because I like his book, The Neely Method.  I’ve gotten a number of valuable trading set-ups from his book.  (Ironically, he didn’t use, or even seem to recognize, many of those trading set-ups himself at the time I subscribed.)

I didn’t continue subscribing to Neely because, after a few months, I felt I knew how to use his trading discoveries better than he did.

Big Fluctuations are Characteristic of Many Trading Systems

At the time I subscribed to his service, Neely tended to jump in to a trade the moment he had confirmation of a trend change, which tended to be far from the top, and then set a stop a big distance away.

This is not an unusual or incompetent way to enter a trade.  The Turtle Traders entered trades on breakouts from 20- or 50-day trading ranges, with stops set according to recent volatility (2 ATRs, or average true ranges, away).  Since tops and bottoms are often characterized by high volatility, the Turtle Traders often used stops as far away as Neely’s, and they made a fortune.

With these types of systems, you have to accept from the start that your bankroll is going to go through huge fluctuations.  It would not be uncommon for someone using the Turtle Trading system to lose 2/3 of his trading bankroll at some point due to normal losses from stop-outs.

The key to surviving a system like this is proper risk management, which means limiting risk by strictly limiting bet size to a small fraction of your bankroll and diversifying your trades.  One problem with the recent tendency to Fed-managed markets is that all markets have tended to move in sync with Fed actions, and that hurt common risk-management strategies.

Without proper risk management, you are virtually guaranteed to go bust with a system like Neely’s or the Turtle system. Jesse Livermore used a similar system without proper risk management and went bankrupt several times.

I recommend reading Way of the Turtle by former Turtle trader Curtis Faith for the best discussion I’ve seen of trading entries, stops and risk.

How I’m Using Neely’s Call

I hate loose stops and I hate big hits to my bankroll and I hate big negative fluctuations.  That’s why I don’t use Neely or Turtle entry points and stops, even though I recognize that for many people they’re the best way to go.

I always post my own triggers.  I don’t post stops because everyone is using different trading instruments, and some people are going to stick with a trend all the way and others are going to hop in and out on small moves.  You can’t set a stop for a trader without knowing these factors, so instead I try to give an idea of what would tell you a trade is going wrong.

I regard Neely calls as something to keep in mind, not act on. I showed my own potential crash set-ups on the long-term charts here. The trading set-ups I post are never predictions.  They are set-ups to bet if the set-up actually triggers.  If the set-ups don’t trigger, we’ll see a different set-up for another move up and I’ll post about that.

Short-term, I still expect the markets to go higher, but I’m very watchful right now for something unexpected.

In Conclusion

Neely’s system is a valuable tool to be used in trading. I have a lot of respect for Neely. I’ve learned a lot from him. Neely has provided trading set-ups that will make money over the long run if used with proper risk management.

No trading system, including Neely’s, can predict the future, and any trading system, used without proper risk management, is a favorite to kill your bankroll.

ES Break-In and Breakout

ES is Back Inside Its Navy Blue Megaphone & has Broken Out of its Orange Rising Megaphone

ES is Back Inside Its Navy Blue Megaphone & has Broken Out of its Orange Rising Megaphone

ES is back inside its navy blue & light blue megaphones and has broken out of its orange rising megaphone after a legal top.

That means we ought to see at least 2150 before we see ES break out of the navy blue megaphone again, and we could see the navy megaphone bottom. If ES makes it to the navy blue megaphone bottom, we could even see the megaphone break out downwards into a huge correction after a retrace to its VWAP.

ES has Formed a Falling Megaphone (Red) that will Eventually Need a Retrace to its Top

ES has Formed a Falling Megaphone (Red) that will Eventually Need a Retrace to its Top

Big megaphone moves down often start with a price channel melt-down set-up. But instead, ES has set up a falling megaphone (red on 60-minute chart) since its March 16 retest of the high.

ES could form a price channel inside the red falling megaphone and melt all the way down to 2150 inside it (green scenario).  Or the move to 2150 could be a lot messier, with ES forming an inverse H&S bottom around here before retracing to the red falling megaphone top and heading down again (purple scenario).

If we get the purple scenario, it would likely be slow moving enough for the move to the red falling megaphone top to be another retest of the big navy blue megaphone top from inside.

Anyway, at this point you should be short as long as ES is inside that red falling megaphone.  If you don’t mind hanging on through retraces and you’re not playing something time sensitive like options, you could be short unless ES breaks back out of the navy blue megaphone top.

This would usually be a strong short set-up.  The only thing nagging at me about it is that ES failed to complete a potential extension in the orange rising megaphone and put in an indecisive, awkward top on the navy blue megaphone.  That means you have to take your stops seriously in case ES heads up one more time to put a bigger top up there.

Short Set-Up to At Least 2150, But Keep an Open Mind a Little Longer

ES is Back Inside Its Navy Blue Line - That's a Short Set-Up to At Least 2150

ES is Back Inside Its Navy Blue Line but Not Yet Broken Out of its Orange Rising Megaphone

ES is back inside its navy blue megaphone/rising megaphone top. That’s a short set-up for a move to at least the light blue megaphone VWAP at 2150 (green and purple scenarios).

But ES hasn’t broken out of its orange rising megaphone yet and the recross of the navy blue line is still very small, so I would keep an open mind and a tight stop until ES has retested the navy blue line from inside and broken out of the orange rising megaphone.

If ES breaks back out of the navy blue line, the orange rising megaphone is extending and we’re in the blue scenario.  In the pre-HFT days, that would have been a rare occurrence, but the bots these days like to do small ritual breaks of important lines before reversing.  In that case, the price move could be bigger than I could fit on the chart.

The House vote on Ryancare is Thursday.

ES Still at Price Channel Top (Updated)

ES is Still Working on a Megaphone at the Top of its Navy Blue Price Channel

ES is Still Working on a Megaphone at the Top of its Navy Blue Price Channel

ES is still working on yesterday’s megaphone (red on chart) at the top of its new price channel (navy blue on chart), getting close to the top of its bottoming megaphone (highlighted navy blue line).

The megaphone tells you the market has already run out of steam. There’s too much selling into any buying triggered by technical breakouts or stop-eating for the market to continue moving up. So the market-making bots are swinging the price in a megaphone until they trigger some new action.

Because we’re near the top of the recent trading range, the most likely new action to get triggered is more stop eating.

Update:  It’s also possible that the overnight dip is all the retest of the red megaphone VWAP that we’re going to see.  In that case, ES could just break out upwards.  But I don’t see how it can break out very far upwards with the top of the navy blue megaphone right there.  I think the top of this wave will be a crawl between that megaphone top and the price channel top.