Best Dressed 2011

8/3/2019 Best Dressed 2011

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Best Dressed List -- 2011

Each year at about this time I publish the Best Dressed List, showcasing the best examples of

classical charting principles from the just-completed year.

The Best Dressed List illustrates the types of trading situations that Factor LLC has sought over theyears in its proprietary account. These type of trading situations will become almost the sole focus ofFactor LLCs trading in the future. A more complete perspective and discussion on this aspect ofFactor LLCs proprietary trading and its relationship to our blogging activity is at the end of thisdocument.

To qualify for the Best Dressed List, a market must meet the following criteria:

1. A clearly defined (no doubt about it) classical chart pattern at least 12 weeks in duration on thedaily and weekly charts in a tradable market.

2. A decisive breakout with little or no pattern retesting. Secondary breakouts are consideredwhen an initial earlier breakout failed.3. A sustained trend to the implied target.

Whether or not Factor LLC successfully captured the pattern is not a criteria for inclusion (at least notconsciously). The list is broken down into two sections: The Best Dressed List and the HonorableMention List.

Best Dressed List

Market Pattern(s) Date completed Target(s)Cotton 8-week symmetrical

triangle top4/13 at 180.43 151.80 met on 4/28

The historic bull market in Cotton ended with a classic 5-point symmetrical triangle top. What this toppedlacked in duration it made up for in form and clarity. Massive bull trends often end with brief and simpletops.


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Market Pattern(s) Date completed Target(s)

USDCAD 7-month W bottom 9/21 at 1.0049 1.0480 met 9/30W or double bottoms can be tricky to trade because the official breakout is the clearance of the mid-pointhigh and allowances have to be made for pullbacks up to a third of the height of the pattern. This patternfirst broke out on Aug 8, but then chopped sideways for 6-weeks, forming a 6-week ascending triangle.The breakout of this secondary pattern on Sep 30 reconfirmed the double or W bottom. The marketreached its target in just nine days. There is a lesson here. Sometimes patterns that develop over manymonths can become fulfilled in a matter of days. Lengthy patterns, quick thrusts will be a reoccurringtheme in this document.

Market Pattern(s) Date completed Target(s)EURCHF 5-month rectangle 5/23 at 1.2380 1.1570 met on 7/12

There is a special lesson in this chart. EURCHF broke out on May 23. After the breakout the market drifteddownward for four weeks, then experienced a sharp one week rally. Yet, throughout this lack of downwardprogress the entry point was never really challenged. This chart also shows that markets can far outshootthe implied minimum targets of their launching patterns.


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Market Pattern(s) Completion date Target(s)S&P 500 7-month H&S 8/2 at 1255 1155 met on 8/8

A short trade in the S&Ps in late July/early Aug had two things going for it. The decline simultaneouslysliced through a classic 3-fan principle from the March 2009 low and completed a 6+ month H&S toppattern. Significant patterns such as this H&S top often complete small patterns just prior to the majorbreakout. The right shoulder completed a small double-type top on July 29 prior to the Aug 2 completion ofthe H&S. The target of 1155 was met in four trading days.There is a lesson to be learned in this market example. It was difficult to step up to the line and short the

stock indexes on Aug 2 when it had been down hard for five straight days. Yet, going short was the thing todo. Often times the best trades are the toughest to pull the trigger on. There is another lesson. After takinga quick but large profit in a matter of days everything in a traders gut will plead there is money left to bemade. It is difficult to remove winnings from the table and walk away. The subsequent two months of chopwould have eaten into the profits taken from the decline.


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Market Pattern(s) Completion date Target(s)USDMXN 4-month rounding

bottom and 6-weektriangle

8/8 at 12.10 and 9/9 at12.68

12.60 met on 8/9 and13.50 met on 9/21

This pattern provided a 1-2 punch. A 4-month rounding bottom was initially completed on Aug 4,confirmed on Aug 8. The target of this bottom was met almost immediately by the thrust on Aug 8 and Aug9. The market then formed a symmetrical triangle right above the iceline of the rounding bottom. Thecompletion of this triangle on Sep 9 provided a swing target of 13.50, reached on Sep 21. It is not unusualfor very thinly traded markets such as the Peso to provide an excellent signal every year or two.

Market Pattern(s) Date completed Target(s)Platinum 8-month rectangle 9/22 at 1660 1452 met on 10/4

The elongated trading range in Platinum formed a textbook rectangle pattern. It would have been toughstepping to the line and selling the market early on Sep 22 after a $75 per ounce drop the day before, but asale on Sep 22 would have become a profit immediately, never to be put in danger. The target was meteight days later.


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Market Pattern(s) Date completed Target(s)Gold/Swiss 15-week symmetrical

triangle8/12 at 1362 1593 met on 9/6

I think it is important to periodically check out unconventional price relationships, such as Gold priced in

Swiss Francs, the FTSE priced in EURUSD or Silver priced in Yen, etc. Sometimes a real gem can beuncovered. Who is to say that Gold should only be traded against the USD. Remember, when a persongoes long Gold, being short the USD is implied.On Aug 12 the price of Gold measured in CHF completed a massive triangle. I would have never guessthat the final surge in this spread would come from the CHF side of the spread (when the Bank ofSwitzerland intervened in the forex market on Sep 6).In a spread such as this a trader wants to have approximately an equal US dollar commitment on bothsides of the spread. In this case, a contract of Comex Gold and a contract of IMM CHF were worth aboutthe same US dollar value.

Market Pattern(s) Completion date Target(s)Soybean Meal 7-month broadening top 9/22 at 335 282 met on 11/25

The weekly chart only is presented. I am including this market to make one point. The market droppedsharply by a full $60 per ton before breaking the lower boundary of the pattern. Talk about selling a marketin the hole! Yet, a sale made on Sept 22 at the close would have never been put in jeopardy prior to theattainment of the target. The biggest profits are made in market that are really moving quickly. Yet, manytraders are afraid of chasing big breakouts.


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Gold 11-week symmetricaltriangle, then measuring

gap

7/12 at 1571 1674, met on 8/3, then1880 met on 8/19

The last leg up in the historic Gold bull market (at least the last leg so far) concluded in grand fashion. Theadvance on Jul 12 completed a textbook continuation symmetrical triangle. The target of this pattern of1674 was met in three weeks. Then the real excitement occurred. The up gap on Aug 8 was a measuringgap. I blogged about the gap at the time at http://bit.ly/oiND9s. This gap provided a measured target of1880, met on Aug 19.

Market Pattern(s) Date completed Target(s)Russell 2000 7-month H&S top 8/2 at 767 680 met on 8/5

Seldom is a H&S pattern so picture perfect and symmetrically balanced. The decline on Aug 2 completedthe pattern and the target was met within a few days. Notice the small failure top completed on Jul 27when the market closed below 811. It is very common for mature patterns to provide an early entry.However, there is a danger for a trader to force an early entry. Attempting to anticipate the completion of amassive pattern can lead to getting chopped up in a trading range and then missing the real move when itcomes. I know this trap all too well.


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FTSE 100 6-month symmetricaltriangle

8/3 at 5573 5010 met on 8/8

Most of the global stock index futures collapsed along with the U.S. markets in early August. The FTSEformed a textbook symmetrical triangle top.

Market Pattern(s) Date completed Target(s)London Sugar 3+ month falling wedge 5/18 at 628 764 on 6/28

The price targeting of wedges can be tricky (not as if any price measurement is exact science). The wedgein London Sugar appears to have originated at the Feb high. However, a proper falling wedge should bedefined with five contact points, the first of which should be a low point. Thus, the Feb low is actually thefirst definition point of this wedge, with the Mar high as the first high point. The Mar high then becomes thetarget, which was met in late Jun. Note the small H&S bottom during the final 6-weeks of the pattern.


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Soybeans End around thesymmetrical triangle

9/15 at 1358 1110 met 11/25

Failure patterns are a very nuanced category within chart construction and the biggest error a trader canmake is to find too many failure patterns. True failure patterns are rare, but when they occur substantialprofits are possible. The Soybean market completed an upside breakout of a continuation triangle on Aug26. I remember the breakout because I bought it. The market drifted sideways for two weeks beforemoving back into the triangle. Note that prices never moved above the Feb high before rolling over. Thefirst full day below the upper boundary was Sept 14, but if there was any doubt about a failure sell signal itwas cleared up by the big down move on Sept 15. There is usually one way to get into a failure patternsignal at the market. This signal sprang an enormous bull trap and the market was not going to make iteasy for the longs.The original measurement of the triangle (applied downward) identified a target of around 1110, met in late

November.


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5-Year T-Notes 6-month H&S bottom 5/5 at 118-28 121-24 met on 8/1I recommend monitoring the daily and weekly charts of both the nearby continuation graph as well as thenearest individual contract. Sometimes you will see a tradable pattern on the continuation chart that is notvisible on individual contract charts. When this happens it is necessary to become creative in both entryand exit strategies. An excellent example of this type of event occurred in the 5-Yr. T-Notes when theweekly and daily continuation charts showed a wonderful H&S bottom not visible on the individual contractmonth charts. Yet, note how the breakout on the continuation chart coincided with an important chart pointon the individual contract month chart.


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Market Pattern(s) Date completed Target(s)NY Sugar 13-week bull channel 6/2 at 23.53 26.70 met on 6/28Whereas the London Sugar broke out of its falling wedge on May 18, the NY Sugar completed its bottomtwo weeks later, on June 2. Had both markets broken out simultaneously I would have chosen the NYcontract to trade. But in this case both markets could have been traded. The breakout was a little tricky,especially on May 31 and Jun 1, but the pattern was resolved on Jun 2.

Market Pattern(s) Date completed Target(s)Lumber 4-month complex double

top4/5 at 306 265 met on 4/12

This is a very thin market, yet it provides an occasional lay-up trade. The decline on Apr 5 completed acomplex double top. If there was any doubt about this top, the expansion of volume beginning with the Mar28 decline was a big tip off. Expansion of volume should be considered as starting volume or stoppingvolume. Obviously a trader may take the wrong read on the nature of volume. But the close in Lumber onApr 5 and especially Apr 6 should have lead to only one conclusion that the volume expansion wasstarting volume. The market met its target within a few trading days, drifted sideways for a week, and thentrended well past the initial target.


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Honorable Mention List

Market Pattern(s) Completion date Target(s)Live Hogs 8-month rising wedge 12/8 at 87.35 82.20 near miss on

12/16This pattern is also on the Honorable Mention List because the drive down on Dec 16 came 45 points shyof the target before reversing back up. Nevertheless, because I covered my shorts near the low on Dec 16I am including the market. This pattern was absolutely classic. Note the classic exhaustion overthrow of theupper boundary at point A. The close back under the upper boundary on Oct 24 was a good sell signal.

Then at point B the market formed a small double-type top. It is not uncommon in very long durationpatterns for the final high or low to be accompanied by small reversal patterns. I fully expect this market(via the April contract) will be on the 2012 Best Dressed List.


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Market Pattern(s) Date completed Target(s)Swiss Franc futures 28-month symmetrical

triangle9/22/10, secondarycompletion 12/2/10

1.2380 met 7/25

In September the CHF futures completed a massive 28-month symmetrical triangle. This chart situation ison the Honorable Mention List due to the fact that the initial breakout was sloppy. It would have taken a lotof patience to wait out the 2+ month retest, even though the retest would have only marginally placed awell timed entry into a loss. The market provided an excellent secondary entry on Dec 2 an entry thatwould have never been put into question. There are a couple of excellent chart lessons in this market.First, note the numerous continuation patterns along the way to the 1.2380 target. A trader would have

only been capable of staying with this trade and pyramiding if he or she had confidence in the target of themassive triangle. Second, this is an excellent example of how a simple moving average can be use to stayin a major trend.


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CRB Index 6-month descendingtriangle

9/22 at 615 560 on 9/30

This is on the Honorable Mention List as an illustration of classical charting principles. The CRB Index isnot a tradable futures contract.

For the Benefit of Stock Traders

Classical charting principles were originally applied to the charts of individual stocks. I am not a big stocktrader, yet in honor of those of you who are I am including some particularly good chart patterns in 2011from the stock market, without comment.


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Discussion

So, what is the point of the annual Best Dressed List? It depends! If you are a casual user of charts in yourtrading this document will be an interesting read, but not much more. And that is ok. Similarly, if you are aswing or scalp trader this document will have only passing interest.

But, if you rely primarily on classical charting principles and if your goal is to catch the really big andsignificant chart patterns, this document needs to become your point of reference your guiding star.There are lessons in this document that must dictate your approach to markets in the future.

If you are primarily a chartist, if your goal is catching big patterns and if you have three or so years oftrading history, my guess is that your trading performance falls in to one or two camps. Read the followingand determine which shoe fits.

Well intentioned, but impulsive,impatient and undisciplined

Focused, intentional, patient anddisciplined

You over trade. You really want to focuson the big patterns, but you get caught upin the day-to-day price volatility. You miss

a major move (launched from a greatpattern) and you become determined notto miss the next one. You see asubstantial pattern developing andbecome obsessed with getting in early.You get chopped up within theconstruction of the pattern, buying briefbursts of strength, selling weakness.When the pattern finally launches you aregun shy. You catch the initial breakout,but get out way too soon, remembering all

You see big patterns developing, butremain patient. You avoid thetemptation to jump the gun. You place

your entry stops well outside theboundaries of the pattern and keepthem there. You are not interested inthe nicking of a boundary line, but wantto see a decisive breakout. You do notburn through your chips during theconstruction of a pattern. But when thereal breakout occurs you step up withconviction and significant leverage. Youavoid taking quick profits. As long asyour initial position does not run into red


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the losses you had during theconstruction of the pattern. You never getpositioned the way you should and missmost of the move. You become all themore compulsive about not missing thenext big pattern. The cycle continues.Most of your trading occurs during theconstruction of the big patterns. You are

right on a lot of big moves, but have littleto show for it. You know you need to bemore patient in waiting for the genuinebreakout, but market volatility keepssucking you in early.

ink you are willing to stick with yourcommitment. You avoid the emotionalurge to grab open profits or use trailingstops. You seldom look at your positionduring the trading session. You have aprotective stop in place and rely on thatto protect your position. You seldomtrade more than five or so times per

month. Once your target is reached youretreat and have no desire to keeptrading the same market. You turn yourattention, instead, to finding the nextpossible big move.

I have lived in both camps and I will tell you the camp on the right offers the best living conditions. Living inthe camp on the right equals dysfunction and frustration.

A study of the Best Dressed List trading situations is a reminder that the most profitable major patternshave several things in common.

There is no hurry to get aboard. It is best to wait until the real move begins (although maturepatterns often give an advance warning). An urge to preposition often ends in getting chopped upand then missing the real move when it comes

Breakouts are decisive. While a process of retesting can occur, a well-timed entry is seldom putinto a serious loss

Even though a market can be oversold or overbought at the point of breakout, there is actually verylittle risk at entering at the breakout

The moves to the targets are most often sudden and quick. Patterns that take months to developcan deliver their profits in a matter of days

As a general rule it is best to exit at the target and then avoid any temptation to reenter the samemarket any time soon

Perspective

Historically, my trading profitability has been a function of four primary factors.

1. What proportion of the Best Dressed trades did I catch and what proportion of the tradescaught were exploited all the way to the targets? Obviously, the greater the proportion of tradescaught and carried the distance, the greater the profitability.

2. Did two or maybe three of the Best Dressed trading situations set up in a manner that allowedme to establish a highly leveraged (bet the farm) position and did I take advantage of theseunique set ups? Obviously I do not literally mean best the farm. An example of this categoryof trade that allows me to risk 2% of capital rather than a typical risk of 70 basis points and aspecific set-up allowing for twice the number of contracts per unit or risk. The result could be atrade in, lets use Gold for an example, when I can assume 30 contracts per $1 million ratherthan a typical trade of 10 contracts per $1 million.

3. How many potential Best Dressed market situations ended up failing? It is easy to see thebest examples of classical charting principles after the fact. Yet, there are other marketsituations during a year that look like potential Best Dressed trades, but fizzle out. Obviously,such market situations contribute negatively to the bottom line.

4. How active was I in trading shorter-term patterns and what was the net result of these trades?In other words, did I become more oriented to shorter-term trades than intended? Historically,becoming shorter-term focused has contributed negatively to my net bottom line because I tendto lose the forest from the trees.


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Factor LLC

2 North Cascade Avenue Suite 720 Colorado Springs, CO 80903

Email [email protected] www.PeterLBrandt.com

Factor LLC Best Dressed List 2011

Market Pattern Date

completed

Breakout

price

Target Date

target

met

USDCAD 7-month W or double

bottom

Sep 21 1.0049 1.0480 Sep 30

S&Ps (Sept) 7-month H&S top Aug 2 1255 1155 Aug 8

USDMXN 4-month rounding

bottom and 6-week

continuation triangle

Aug 8

Sep 9

12.10

12.68

12.60

13.50

Aug 9

Sep 21

EURCHF 5-month rectangle May 23 1.2380 1.1570 Jul 12Cotton (July) 8-week symmetrical

triangle

Apr 13 1.8043 1.5180 Apr 28

Platinum 8-month rectangle Sep 22 1660 1452 Oct 4

Gold/CHF 15-week symmetrical

triangle

Aug 12 1362 1593 Sep 6

Soybean Meal

(Dec)

7-month broadening top Sep 22 335 282 Nov 25

Gold (Feb) 11-week symmetrical

triangle

Measuring gap

Jul 12

Aug 8

1571

1681

1674

1880

Aug 3

Aug 19

Russell 2000 7-month H&S top Aug 2 767 680 Aug 5

FTSE 100 (Sept) 6-month symmetrical

triangle

Aug 3 5573 5010 Aug 8

London Sugar 3+ month wedge May 18 628 764 Jun 28

Soybeans (Nov) 7-month symmetrical

triangle end around

Sep 15 1358 1110 Nov 15

5-Yr T-Notes 6-month H&S bottom

on continuation chart

May 5 118-28 121-24 Aug 1

Sugar (Oct) 13-week bull channel Jun 2 23.53 26.70 Jun 28

Lumber (Jul) 4-month complex

double top

Apr 5 306 265 Apr 12

Best Dressed 2011

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