ARKK ETF Approaching Sell Zone

This ETF peaked on February 16th and has since seen a steady move lower the past 3 months. This downwards move produced a bearish ABCD pattern with a smaller abcd pattern inside of it. This double dose of patterns is called a butterfly and typically extends out to its 127 and/or 161 fib extensions. The May 13th low dropped just in between the two and has rallied over 10% since. However, I believe this rally is setting up a potential short trade.

Why? The dominant ABCD pattern had a neutral retracement (less than 50%), which indicates a strong bearish trend. The skewing on this pattern was to the left (7 bars up to 38 bars down). This indicates a downwards move that lacked momentum. So it’s no surprise that we would get a move back inside the breakout level. However, I still believe the 100% projection target of the ABCD pattern is still in play. That would mean a move down to 77.35 before it rises above 130.80 is still possible. Therefore, I would still look to make bearish trades.

But where? That’s where we look to volume profile for answers. If we look at all the volume from the Feb 16th peak to the May 13th low, we will find a large volume cluster zone between 120.34 and 126.25. This clusters point of control (POC) is roughly 122.14. The POC is the price level with the heaviest volume. This resistance zone alone is enough to be bearish, but there’s more. There’s a tight cluster of 3 separate Fib retracements and/or projections inside this volume cluster between 121.09 and 123.61. Price action often finds resistance in these situations.

What’s the trade? Look to buy puts when price trades between 120.34 and 126.25. You could build a small position towards the bottom of this zone and increase the size towards the POC. Or you can just wait to see if price moves to the POC at 122.14 or the middle of this zone at 123.30 and build your position there. This set-up is no longer valid when price breaks above 130.80. Initial downside targets would be the recent low at 97.22 and the 100% Fib projection of the ABCD pattern at 77.35. Look for further posts for other targets that will be available if this pattern develops. Stay tuned!

Soybean Meal Enters Support Zone

Soybean Meal soared 61% from late April 2020 into its mid-January 2021 peak. Since then, we have seen prices fall back to the 38% retracement of that rally. This 14% correction has touched the top of a potential major support zone. If you look at all volume traded between April 2020 and now you will find a large volume @ price cluster between 398.10 and 375.10. Inside this cluster is an even larger one between 390.90 and 381.20. This entire zone’s point of control (POC) is around 385.90. Further supporting this area are the 34 EMA wave (weekly chart), the 100% ABCD projection, and a Fib extension cluster. Long trades could be placed inside the 390.90-381.20 zone with stops below 375.10. A trade entered at the POC around 385.90 with a stop at 375.00 would be risking 1090.00 per contract. The largest upside obstacle would be between 417.60 and 424.70. This could be a first target area on any long trades. The recent January high at 471.40 would be the longer term target.

Trading System Drawdowns

Drawdowns are a loss of capital after a series of losing trades.  They are calculated using equity curve peaks and troughs.  New equity curve highs will reset them.  You can calculate them as dollar amounts and/or percentages.  Both come in handy and are essential to monitoring a trading system.  Some rules of thumb for maximum drawdowns are 50% of equity or 50% of best yearly performance. The other important component is the time it takes to recoup a drawdown.  This is measured from peak to new peak.  Whether you are a trader or an investor, drawdowns are inevitable.  When one does occur, it's important to put the percentage and days into context.  Is the current percentage within the range of previous years? Or is it the biggest one for your trading system? Is it near the maximum allowed? Is the length of the drawdown within the range of previous years? Or is it currently the longest one for your trading system?

The reason I'm writing this article is because my 3-tiered trading system recently went through a larger than normal drawdown.  My conservative fund dipped 12.93%, my moderate fund dipped 13.23%, and my aggressive fund dipped 12.50%.  This system has been trading in simulation since January 2019 and these dips were the systems’ largest to date.  Was this the start of a trading system failure? Should I lose faith in it and stop trading? That's where the statistics come in handy.  Even though they were experiencing their largest declines, they didn't check one of two boxes for maximum drawdowns.  First, did it reach 50% of equity? No.  Second, did it reach 50% of best yearly performance? I had to look back to 2019 and the answer was no.  The 2019 returns were 57.61% for the conservative fund, 60.25% for the moderate fund, and 54.17% for the aggressive fund.  The drawdown levels to watch would be 28.81%, 30.13%, and 27.09%, respectively.  Luckily, I stuck with my system and all 3 funds recently made new equity curve highs.  BTW, all are also in the top 10% of all funds traded at Collective2.

The use of drawdown statistics can help prevent you from pulling your invested money too soon or from you losing faith in your own trading system.  Remember that next time you find yourself in a drawdown as either a trader or an investor.