Some people asked me to look at a few different entry techniques to see how they may have fared over the years. I used SPY instead of the index for these tests so that gaps would be accounted for using stop orders.
The entry techniques tested all looked for confirmation that the market was bouncing rather than simply looking to enter on a spike in the CBI. The exit remained selling on the close when the CBI closed at 3 or lower as I've previously described.
The first and second tests looked to buy following a CBI reading of 10 or greater at 1) A move above the prior day’s high or 2) A move above the prior day’s close.
Of these two options, a move above the prior day’s high worked better at avoiding drawdown. Both options saw two of the trades move from winners to losers – though the losses were quite small (0.05% and 0.64%).
The third entry tested looked at buying at the first close that was higher than the previous day’s close (after the CBI hit at least 10). This seemed to work the best (good suggestion Tim). All 16 trades remained positive. The average gain was 2.2%. The maximum drawdown was 4.3% and the average drawdown was only 1.9%. For those who prefer to wait for confirmation rather than scaling in on the way down, a close higher than the previous day’s close seems to have worked quite well in the past.
Today’s action put the market squarely into capitulation territory. The CBI broke 10 as expected. Price is now more stretched and some of the measures I use there (RSI, Bollinger Bands, etc.) are now giving extreme readings. Time was already stretched. I’m expecting a significant multi-day bounce to materialize within the next few days. If it materializes, I expect the most beaten down areas to bounce the most.