The Edges Are Dulling

There’s a fair amount of studies outstanding and the market has been putting in a decent bounce, so let’s see where we are at:

First off I found it interesting that the Nasdaq 100 /Russell 2000 Relationship remains disjointed. We are now at 8 days of at least a 1% differential in returns.

Time Stretch Study
This was the first study of the currently active bunch to be posted. The exit on this study was based on a close above the 10-day moving average. The S&P 500 accomplished that today, closing the study. The entry was officially at the close on Friday the 18th. Since I didn’t post it until Sunday the 20th, anyone who may have taken a trade based on this should have gotten a significantly better entry price due to the massive gap down on the 22nd. Even assuming the lousy Friday the 18th entry this study would have been good for about a 2.2% gain.

Capitulative Breadth Indicator
On January 22nd the CBI jumped from 5 to 13. I discussed in detail how moves as high as ten or more have led to strong market bounces in the past. (Click on the “CBI” label at the bottom of this post to see all posts related to this topic.) The standard exit I discussed was exiting when the CBI fell back to 3 or lower. On Thursday I discussed the “profitable 8” exit strategy. This entailed selling on drop in the CBI to 3 or lower or the first profitable close of 8 or lower. This strategy, while consistently profitable, would have shaved about 0.6% per trade off affected trades.

With the drop in the CBI to 5 today I decided to look at a similar exit - selling the first profitable close of 5 or lower or selling when the CBI hit 3. A “profitable 5” exit would have affected only 4 instances. Two of them it hurt the return. The other two it helped the return. The net effect using a “profitable 5” strategy was slightly positive. An exit at today’s close would have netted about 3.3% from the 1/22 entry trigger. If the alternate entry on 1/23 was taken it would be a 1.1% gain. I will continue to update the CBI until it triggers the standard exit reading of 3 or less.

Reversal Bars Studies
The Large Reversal Bar Study which was originally published on the 9th, triggered again on the 23rd. After pulling back below the close of the reversal bar (1/23/08) it has now closed back above it. On the 15th I posted a trade management follow up to the January 9th study. Based on the trade management outlined then, a stop should now be placed below today’s low (1/28).

The Large Bars Down and Up Study is on track so far. That study showed a pullback was likely within the first 5 days following the reversal up (1/23). After that the market was likely to rally – probably after retesting the lows. It’s too soon to draw any real conclusions here, yet.

Summary Thoughts
Oversold conditions are being worked off in most of the outstanding studies. Even with less than ideal entries, profits should be available. Profit taking seems prudent. While certain studies like Reversal Bars and Nasdaq/Russell indicate more upside is likely to come, they also indicate extremely high volatility is likely. Wednesday will almost certainly see volatility with the Fed decision due. There is nothing wrong with letting some profits ride, but I’d suggest traders consider taking at least a portion of their holdings off the table now to protect gains. Preserve capital and wait for a better edge.

Rob Hanna