Diary of a Financier

Get Through the Noise

In Capital Markets on Thu 29 Sep 2011 at 23:35

My suggestion–as it has been since early this summer–is that the trend is irrefutably lower. Nevermind the technicals though; anyone who’s done his research knew that both the fundamentals and the storyline were to erode.

I recommend a review of the ideas analyzed by Edgar Peters in Chaos and Order in the Capital Markets, which I discussed back in July:

Of all the time series fractals a chartist can analyze, monthly charts show the most deterministic trends because they filter-out the noise of outliers. Mr. Peters conducted his dependence test on data sets of quarterly, monthly, weekly, daily & hourly market prices. The monthly data were most significant due to the low noise of [outlier] traders. Further, his studies suggest viewing such a monthly chart from the widest lense possible. Like a shoreline from an airplane looks a lot smoother than from the ground, chart fractals are much less noisy from the 10,000 foot view.

This is noise, the pitfall of a shorter fractal:

ES daily= Noise

This is determinism, the allure of a longer fractal, which is almost like measuring the length of a craggy shoreline with a larger ruler:

ES monthly= Determinism

As I take new long equity positions lately, I know I’m a holder for a short period of time to capture the noisy oscillations in a schizophrenic market. I traded a small amount of CSCO & FSLR off bargain basement pricetags. In such small exposures, I’m not willing to risk much capital, since I’m ever mindful of the overarching downtrend. I cannot wait to build meaningful stakes in singlenames at these discounts, but the time is not now. The market-action is still too noisy for me to take substantive action, whether long or short biased.

In fact, I began hedging the exposure I do have by picking up the Volatility ETF (VXX) this afternoon. This engagement renews the long Vol protection I’ve successfully applied to shield much of my equity holdings twice already this quarter. Just before yesterday’s close, I wanted to enter a VXX position, but I noticed the ETF was really overextended on its 30-min chart stochastic. I found a number of similar overbought analogues from prior VXX intraday sessions, and they all resulted in an early pullback upon the open of the next trading day. So, I waited. The pullback came this morning, but I didn’t fill at my limit. So I reviewed the charts, and I waited. I ended up executing just before the close, right at $50.00. I’m proud of my patience, minding my read of the technicals and not chasing the price higher. It still looks like I’ll have a chance to build upon VXX at a lower basis before the weekend.

To conclude, I’m reminded of one last thought from the pen of Mr. Peters himself:

Fractal structure in the capital markets gives us cycles, trends, and many possible “fair values.” It returns the qualities that make the capital markets interesting, by returning the qualitative aspects that come from human decision making, and giving them measurable, quantitative attributes. Fractal statistics recognizes that life is messy and complex. There are many possibilities.

–Romeo

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  1. […] In praise of skipping the short-term noisy charts and just focusing on the monthly.  (Buttonwood) […]

  2. Thanks Romeo,
    Reading your posts like a breakfast every morning.
    All the Best,
    V.

    • I’m honored to hear that, victor. Thank you. I’ve been getting some good exposure/traffic lately, which certainly won’t change anything here, but it’s good to see.

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  4. […] guess the rumor-mongerining has irritated most investors/traders. I, for one, acknowledge it and deal with it. Yes, it’s a frustrating facet of the noisy, undulating marketplace. Yes, these a-fundamental […]

  5. […] see the full sequence of Denial>Fear>Desperation>Panic>Capitulation>Despondency in SPX’s noisy channel since […]

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