Examining Sell Signal Failure: Part 1 of 3

This is an important post, which contains a lot of details, so we urge readers to take the time to review it thoroughly.

Last Wednesday, following the Fed rate cut, the market rallied and then sold off hard at resistance on heavy volume. This left a broad range of shooting star sell signals on all major indices and on a large number of stocks as well. It looked like the recent steep downtrend was set to resume.

But the sell signal failed on Thursday and shorts, including us, were trapped by a whipsaw.

Could the failure have been predicted? It's not clear. We know that we weren't the only ones reading the sell signal that day.

We wanted to get to the bottom of the failure and see if we could have predicted the failure, so we spent the entire weekend examining charts. What we discovered is that while the sell signal failure was not predictable, that clearly risk of sell signal failure was high.

We mentioned last week that we were struggling to adjust or recalibrate our strategies to the bear market that arguably started around October or November and confirmed last month. Extensive research over the weekend led to a bit of an epiphany in this area, which in turn led to the development of a simple set of criteria that can be used as a tool to quantify risk and ensure that we end up more often on the right side of the trade.

We will break today's post into several parts so that it can be digested in pieces. We have a lot of territory to cover, but we believe that readers will find the read well worth it as this has the potential to profoundly impact the success rates of each and every trade you take moving forward.