The Gravitational 15 gained another +1.7% last week, and it did so against a backdrop of FG4 price action across all four asset classes in the U.S. and beyond. Last week’s profits push our YTD gains to +14.7%, our trailing 12-month return to +19.1%, says Landon Whaley.

If you’ve ever been deep sea scuba diving, you know that once you breach 75 feet, it’s easy to get disoriented and confused as to which direction is up. The solution to this disorientation is to watch the direction of the bubbles because they always rise toward the surface. In a similar way, we know it’s easy to get disoriented and confused in our 24/7/365 news and social media cycle world with stock market tipsters at every cocktail party.

We liken our research to the “bubbles” telling you which way is up and safely guiding you back to the surface. Each week in Gravitational Edge, we distill the most critical economic and financial market developments and then provide you with clearly articulated game plan for the week ahead, we call this section “The Playbook.”

What had happened was..

We’ve been playing with a hot hand over the last two months, with a current streak of 13 winning trades in a row and 17 winners out of the last 18 trades we’ve initiated.

There are a lot of new people reading our research these days, so let’s take a look at the inner workings of this process of ours that has led to our extraordinary returns this year and our hot streak of the last two months.

An investing process with any chance of being successful has at least two core components: idea generation and market timing (entry and exit parameters).

What’s the Big Idea?

We spend a ton of time talking about our Gravitational Framework, and rightfully so. This framework, which has been developed over my almost two decades of professionally managing money, is the reason we consistently and repeatedly see developments in markets well before most other market participants.

The Framework generates the ideas by telling us which markets to be long, which ones to short and which ones to avoid entirely. Idea generation is critical in investing (as in life) because everything in this world begins with an idea.

However, as any entrepreneur will tell you, an idea is only as good as your ability to execute it … enter The Mongoose.

The Mongoose

If you’ve been reading our research for a while, you know that we don’t sound like other financial market research firms. We use non-mainstream names for aspects of our process, but we don’t do it just to be cute or different. We choose our labels purposefully to achieve two objectives.

First, we need to differentiate what we are talking about from what you’ve heard elsewhere, because just about every aspect of what we do and the tools we use is proprietary and unique to us. Our approaches don’t exist anywhere else.

Second, we want to summarize each aspect of our process in order to help familiarize you with how we evaluate markets and how we turn that evaluation into asset management calls.

We’ve named the market timing part of our investment process “The Mongoose” because the market behaves like a cobra, and in order to consistently and repeatedly be successful, we must trade like its opposition: a mongoose.

The mongoose provokes the cobra to attack, then rapidly dodges and follows up with another distracting motion. It tirelessly darts and nips, completely focused on its opponent. Finally, precisely when the cobra is fully extended and about to strike, the mongoose clinches the attack with a deadly bite.

We let the market make its repeated strikes, moving from price to price. When it’s at last over-extended and at a point of exhaustion (to the upside or the downside) like the cobra, we position ourselves opportunistically for the market to reverse course, thus clinching the attack, like the mongoose.

Wildlife aside, we generate our specific Mongoose-like market timing signals using algorithms based on Chaos Theory and fractal geometry, and we are one of the few firms I know of that do so. In contrast, most investors, professional or otherwise, attempt to evaluate the quantitative aspects of markets using tools built on the belief that markets are linear and rational.

But in fact, financial markets behave more like weather; they are a nonlinear and turbulent system, which means traditional quantitative methods and indicators are not only ineffective but also misleading. Chaos Theory and fractal geometry-based algorithms provide better insights into the underlying market structure that can’t be seen on a price chart.

The Mongoose has a great track record of identifying these turning points in markets, which is a key reason that we’ve booked profits on 80.8% of our trades this year.

However, The Mongoose is just one part of our process that helps us be successful. No conversation about our process would be complete without discussing our Alpine and Abyss lines.

Alpine and Abyss say what?

Our proprietary Alpine and Abyss lines are not “support” and “resistance.” Rather, they are the price areas above and below the most recent closing price where price is likely to stall, experience an acceleration in its current trajectory, or possibly reverse its current course. As with The Mongoose, we calculate these critical prices utilizing fractal geometry and Chaos Theory, which means these Alpine and Abyss lines take into account the nonlinear reality of financial markets.

An Alpine area above the current price is where it’s highly likely that any upside price momentum will stall and possibly pull back lower. However, if the market (or stock) closes decisively above that area, price is likely to accelerate higher from there.

On the flipside, an Abyss area below the current price is where it’s highly likely that any downside price momentum will stall and possibly bounce higher. Here again, if the market manages to close decisively below that area, price is likely to accelerate lower from there.

The importance of the Alpine and Abyss lines cannot be overstated, because:

1. They help us identify price levels where price is likely to behave in a predictable manner.

2. No one else has them. These two facts give us a distinct advantage over other investors, and combining the A-A lines with our Gravitational Framework and the Mongoose heavily skews the odds of trading success in our favor.

The Case Study

The long trade in the iShares 20+ Year Treasury Bond ETF (TLT) that we closed last week is a perfect example of how our process works from idea generation to ringing the register.

Our Gravitational Framework, which is the idea generation component of our process, has been signaling bullish for long-dated Treasuries since mid-July. On November 2, The Mongoose and the Alpine-Abyss components of our process aligned with this bullish Gravitational perspective and told us to initiate the position.

This is how it went: The Mongoose told us that TLT was overextended to the downside and that a price rally was highly likely. During that same trading session, TLT broke down below its Abyss line at $111.95 but closed back above it. This “rejection” of an Abyss line comes with its own statistical data that says a price rally is highly likely. From a market timing perspective, the odds of a successful trade don’t get better than when the Mongoose and the A-A lines simultaneously give the thumbs-up to the same thing on the same trading day.

The result was a trade that moved +5.9% in our favor over the next 22 trading days.

We closed the trade and booked the gains last Thursday because the Mongoose told us TLT was overextended to the upside, indicating a likely pullback. At the same time, TLT traded up through its Alpine line at $119.21, but closed back below it, also confirming the likelihood of a pullback.

No process is foolproof and there is certainly no such thing as a holy grail. We definitely have our share of trades that go against us, but our risk-conscious approach ensures we vigilantly manage drawdown risks.

In the investing game, your goal should be to build a process that:

1. Puts you on the right side of markets more often than not, and

2. Positions you before the market moves, not after.

The time-tested and proven process that I’ve developed does exactly that, and it’s grown out of the lessons I’ve learned from my successes and mistakes over the years.

No investing process is ever complete or finalized; it’s iterative and it changes as both you and financial markets dynamically evolve.

Please click here and sign up if you’d like to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358 and The Weekender.

Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.

Watch Landon Whaley discuss When Markets Cycle  in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:51.

Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.

Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:14.

Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.