Trade and Investment - A Strategic Review

By: Joseph Russo | Sat, Jan 2, 2010
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In setting the stage to reveal much of what worked and what failed in 2009, we must first briefly describe a few of the most obvious and basic approaches to putting ones savings at risk in quest for profit. Along the way, we shall display various charts illustrating Elliott Wave Technology's proprietary experience amidst such endeavors.

Be aware that once deployed, one continually exposes his or her speculative investment capital (savings) to two kinds of risk. One is good, and one is bad. Upside risk (profit) is the desired value adjustment that positively affects the initial stake of one's trade or investment. In contrast, downside risk (loss) is the negative value adjustment to one's initial stake.

At any point throughout the course of one's speculative endeavors, absolute-returns are the present culmination of all activity associated with trading and investing over the course of a specified timeframe. As such, absolute-returns are one's bottom line in defining net profit or loss. Contingent upon when one starts and where one takes such measurements, timing is everything.

The Three Most Basic Approaches
It is safe to assume that the majority of traders/investors can categorize their trading or investment tendencies by answering one simple question.

What is the most consistent method employed to manage existing positions, and prior to exposing hard-earned savings capital to the continuous risk inherent in the financial markets?

In the simplest of terms, we shall assume that most answers will generally fall into one of three basic categories listed below.

Although one may exercise or overlap any or all of these basic approaches, and perhaps do so amid erratic and varying timeframes, at the end of the day, all are subject to the underlying fluctuation of values specific to instruments held within each approach, and their ending values relative to the timeframes goals and objectives upon cashing out.

Since we do not subscribe to hope or faith, and do not trust stories or easily skewed fundamental accounting metrics, we opt to rely exclusively upon underlying technical assessments in deploying and reviewing our experiences over the years.

If one grasps the notion that price chart data reflects all relevant fundamentals, one could easily embrace that it can also reveal the level of faith and hope resident within a given market or issue.

As such, our brief summary and strategic review in closing out 2009 will be limited to the technical picture and tactical exposures to the largest and most broadly followed equity index, the Dow Jones Industrial Average.

The non-strategy of hope, otherwise known as buy & hold, though failing miserably over the last decade, has made a big comeback delivering a 30% return in 2009. The two-year performance of the Dow however is quite a different story, delivering a negative (-17%) return.

The hope strategy goes hand in hand with the "faith" strategy, whereby followers cling to the belief that when one needs it most, the market shall provide. Whatever one does, just remember not to mention "buy and hold" as a viable strategy to the legions of people whom ten or more years ago planned to cash out in the 2008-2009 timeframe.

The Best of 2009
Based on an account size of $5000 and a whopping 600% return, we derived our best results for 2009 using a very aggressive highly levered short-term trading strategy using full sized futures contracts on the Dow. This method captured over 3,000 Dow points, which translates to well over $30,000 dollars in net profit per single contract traded.

Next in line was our Near Term Outlooks Level-III counter-trend trading strategy, which delivered returns in excess of 100% on a $20,000 account size using the same Dow futures contract. Despite an absolute return of $20,000, this strategy had been up twice that, or 200% in March and spent the next nine months giving back over half its previously booked gains. As the below chart illustrates, deploying a counter-trend strategy discipline in a one-way market can be a frustrating proposition. The chart highlights Level-III's non-levered 25% return vs. the 100% return derived from a single levered futures contract.

The Worst of 2009
Of the five levels of strategic engagement we monitor, the worst performer is clearly the Level-II component. Of smaller account size than Level-I, this level of engagement seeks to hedge and or profit from moves counter to those held at Level-I.

The rapid deep swings and sudden market reversals experienced over the last two years have caused Level-II's hedging and counter-trend strategic approach to suffer the greatest portion of losses. It is the only segment to have experienced net losses.

As the performance summary below illustrates, non-levered Level-II standalone accounts lost (-13%) in sympathy with the Dow's (-17%) loss in the same two-year period. In contrast, those deploying single contract futures leverage at Level-II experienced a massive drawdown of nearly (-75%).

The chart below compares performance for each component of our advisory services to that of the benchmark Dow.

We divided the above performance chart into three vertical segments. From left to right, the first two performance bars show the Dow's 30% year-to-date gain along with the Dow's (-17%) negative two-year return from 2008 through 2009.

The middle segment reflects five performance bars comprising Elliott Wave Technology's non-levered two-year performance for the 2008-2009 periods. Level-III's 27% return is for 2009 only, while we have measured Level-V's 26% return from its date of inception in May of 2009.

The last vertical segment on the right comprises the same five performance bars as the middle section but reflects performance results using a single leveraged full size futures contract vs. a non-levered ETF product.

Putting Them All Together in PLATINUM
The stat record for Platinum's integrated approach shows that while the Dow was down (-17%) over the two years spanning 2008 - 2009, Elliott Wave Technology's multi-account non-levered Platinum advisory was up nearly 18% in direct contrast. Those trading single futures contracts across all four levels of engagement were up more than 100% over the same two-year period.

2010 and Beyond
It is highly likely that 2010 and 2012 will play critical roles in marking significant turning points of pivotal import for many global markets and economies. Given the colossal systemic failure of the entire financial system and the unprecedented patchwork of artificial resuscitation attempts currently in progress, prospects for the future are more uncertain they have been since the 1930's. As such, the future is wide open for an escalation of calamity, a unique and rare opportunity of sustainable restoration, or a tumultuous combination of both.

Bottom line:
Remain cognizant that your hard-earned savings capital is continually at risk in the financial markets. It is up to you to manage exposure to risk on both sides of the profit and loss equation. Recognize that hope is not a strategy, and make a firm resolution to adhere to some level of proactive management no matter how simple, boring, or frustrating it may be.

The Takeaway
To get back in the black or simply staying there requires hard work and due diligence. One may experience failures at various levels along the way, but if truly committed, such efforts will reap huge rewards in the end. Abandon hope as a flawed strategy, and embrace a series of simple rules, guidelines, and limitations in quest to make the most of one's hard-earned savings rather than leaving it all to chance.

The Question
Are you adequately equipped to invest or more aptly "trade" amidst the inherent uncertainties resident in the financial markets? Rest assured that we are, so join us in our ongoing quest to journal, forecast, and trade the greatest events in financial history yet to unfold.

The Invitation
For those who wish to obtain a visually graphic, easy to understand actionable guide to the various disciplines and real-time actions needed to achieve a broad array of objectives at every level of market engagement, look no further than Elliott Wave Technology's PLATINUM publication. Those with a more narrow focus may select from the below list of PLATINUM'S three subsidiary publications.

Three Great Options:


1. The express focus of Elliott Wave Technology's Near Term Outlook is to provide equity index traders with actionable guidance over the near and medium term.

2. Our Position Traders Perspective provides actionable guidance for longer-term time horizons.

3. EWT's Day Traders Perspective assists short-term traders in executing proprietary methodology for capturing price moves of shorter duration.

Trade Better / Invest Smarter...



Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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