ALGO TRADING (Maya) UPDATES
For those curious about what is going on with Maya’s beta testing, here are some updates. If you are new here, a small group of our members is helping me beta test my trading algorithm but we have hit some snags so we haven’t opened it up to the rest of the group. Read more about Maya here: https://25k.link/algoÂ
- MAYA IS WAITING:Â The last trade posted by Maya was on 12/13/2024 and as soon as it detected a pullback in the markets, it went into waiting mode. If NFLX doesn’t disappoint next week, I have a feeling it will be time for Maya to wake up from her slumber.
- THE FILL PROBLEM : Backtesting comes with some assumptions. One such assumption is ‘perfect fills’. When the algo determines it is time to take a trade, backtesting assumes that the trade gets opened immediately. In real life, you submitting an order doesn’t mean that the exchange will fill the order. What we are experiencing in our pilot group so far is that the ETFs that Maya trades, “SPY”, “QQQ”, “XLK”, “DIA”, “IVV”, “XLY” are all exhibiting a weird behavior where an ATM (at-the-money) $1 wide debit spread is not trading for .50c. In fact, to get a $1 wide spread for .50c, you have to go 4-5 strikes OTM (so if SPY is trading at $600, we are being forced to buy a 604-605 call spread if we want that .50c limit price). We do trade all these ETFs in our group all the time, and I don’t recall seeing this behavior at all. This is a huge problem.
- THE BIG PIVOT! – Sector Rotation, Stocks and $5 wides: The fill problem described above seems to be sticky and not going away. Because of this, I am being forced to pivot and make some fundamental changes to Maya.
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- I have spent the last 2 months adapting the algo to trade stocks (stocks don’t have the fill problem described above).
- I have also changed the algorithm so that it can now trade both $1 and $5 wide spreads (the original version could only do $1 wides)
- I have also introduced a sector rotation model into the picture. By doing this, Maya runs a daily analysis on different sectors, identifies the top performing sectors and then only trades the stocks in those sectors. If this works, this is going to be a game changer for me. I am currently running 100s of backtests and tweaking things here and there as I want to keep the win rate between 55% – 60%. (Note win rate will drop with stocks as opposed to ETFs (ETFs have 60%-70% win rate which is to be expected)
Macro Events – NADA!
Thankfully, there’s nothing major happening on the macroeconomic front this week. The only notable event is the weekly jobless claims data on Thursday, which always has the potential to cause some knee-jerk reactions.
The real market mover next week, however, is NFLX earnings. NFLX has a reputation for sparking significant moves, often causing 1%–2% swings in the Nasdaq overnight. So, keep an eye out—it’s bound to be an exciting one!
DIA – In recovery
For the past 3-4 months, we’ve been using Dow Jones as the primary index to track the markets. It has been the driving force behind the market’s movements, from the post-Trump spike to the pullback and gap fill, and now this bounce.
In my market outlook over the last two weeks, I highlighted 421 as a potential strong support level, and so far, it has held up beautifully.
That said, SPY, QQQ, and DIA are all entering a sideways consolidation phase, as indicated by Bollinger Bands squeezing into the Keltner Channels. This signals a period of lower volatility, but given that we’re knee-deep into earnings season, a round of strong earnings reports could break the markets out of this consolidation phase very quickly.
Keep watching those earnings—this could be the catalyst for the next big move!
DIVERGENCE INDICATORS – TNX
I’ve been pointing out for weeks that TNX (10-year treasury yields) rising like this is a troubling sign that could bite the equity markets—and it already has. The result? We’ve just endured a five-week-long pullback.
While we’re seeing some respite in TNX now, it’s not enough. For an early-year rally to gain traction, we’ll need a significant pullback in yields. Without that, equities could remain under pressure, and the path to recovery might be slower than expected. Let’s keep an eye on those yields—they’re the key to unlocking a sustained rally.
DIVERGENCE INDICATORS – $DXY
The U.S. Dollar Index (DXY) is another major culprit that could prevent the markets from rallying—and it’s not looking pretty. The dollar has been rising steadily for months, and in my book, that’s a bad sign for equity markets.
A stronger dollar typically pressures multinational companies, reduces global liquidity, and weighs on risk assets. Until we see a reversal or at least a slowdown in the dollar’s ascent, the equity markets could face significant headwinds. Keep a close watch—DXY remains a critical factor in the broader market picture.
DIVERGENCE INDICATORS – VIX
Although the markets have seen a sizable rally, we’re not in the clear just yet. The VIX remains in pullback territory, signaling that volatility hasn’t fully subsided.
If NFLX delivers strong earnings along with upbeat forward guidance, it could provide the catalyst needed for the Nasdaq to surge. A positive reaction from Nasdaq would likely help the VIX finally settle down, giving markets the stability they need to sustain the rally.Â
EARNINGS: A ton of them. But only 1 matters!
Things are getting busy as earnings season heats up, but there’s really only one event that matters for the markets right now—NFLX earnings.
It’s incredible how much a single stock can move the S&P 500 and Nasdaq, but it all comes down to sentiment and tone. Just like the big banks set the general tone for the overall earnings season, NFLX is the stock that sets the mood for the tech sector.
Fingers crossed—let’s hope it doesn’t disappoint. The market could use a solid boost right about now.
Thanks for the informative analysis Nishant