Tuesday, November 6, 2007

Week 10 - Wave Theory Already a Theory?

You're getting into my (limited) territory now - you're Wave Theory is already a stock market theory. Several times over.

What you're describing is sort of combination of Elliot Wave Theory and trend following modeling. Elliot basically says that people do things in rhythms, and those rhythms are measurable. I don't know much about it, but check this out for more basic info.

Trend following is pretty widely used in Managed Futures funds (though less so now then 10 or 20 years ago), and basically is a method of following the "wave" of the market as it breaks through historically boundaries. Ie, when a stock price moves above its 52 week average, it triggers an event (usually a buy) until the trend reverses. I think for handicaps, there is too little data to use this effectively, not to mention the team performance is often uncorrelated to movements in the spread. Though that may be worth looking at.

The most obvious "mass hysteria" trend will show up if you watch the lines come out on Tuesday and Wednesday mornings. For instance, last week, within hours of the NE/IND line being set at NE -4, it shot up to NE -5.5. This was a reaction almost entirely to the NE drubbings of lesser teams, and it totally neglected IND being an equal, if not even slightly better team statistically. But this doesn't necessarily indicate that a team is "overpriced", since you need to know how much the spread was worth to begin with.

This gets to the heart of the Box in a way, since I decided to ignore spread movements and mass hysteria and bet the team that statistically has the edge when compared to a league average (correcting for volatility in team performance).

One of my "real job" coworkers makes his picks based entirely on spread movements. His is a far less systematic approach, but he makes notes on the movements day to day and makes decisions based on that. I think more telling for the Capper Wave Theory will be movements in the lay, actually, when combined with the spread. The lay tells you much more about how bets are being placed - if bets are coming in, Vegas can make games less worth betting just by making them more expensive, but keeping the same spread. I bet if you measured movements in the lay to spread ratio, you'd get some interesting statistics that truly tell you how people bet.

Hmmm... am I a genius? The answer is: of course.

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