Today I will try and assert whether Follow Through Days are more reliable after small or large declines. As you may recall, in the standard test I set up initially, I chose a decline of 8% to be required before a FTD would be looked for. To my knowledge, how deep or long a decline must be before someone can begin looking for a FTD has never clearly been defined. In September of 2005 IBD suggested that FTD’s can be useful even after pullbacks as small as 5%. I decided to look at how FTD’s performed after pullbacks of varying degrees of market declines. Below are the results from December of 1971 through today. Success parameters are laid out exactly as they were in Part 1.
After a decline of 5% or more – 115 FTD’s, 63.5% successful.
After a decline of 8% or more – 64 FTD’s, 54.7% successful.**
After a decline of 10% or more – 48 FTD’s, 48% successful.
After a decline of 12% or more – 36 FTD’s, 44.4% successful.
Generally, the deeper the decline, the less likely it is that a FTD is going to be successful. It is reasonable that more serious selloffs have more difficulty reversing. It is a bit disappointing though that a tool which is billed to signal the end of a market decline seems to fair worse when it’s needed most.
** This was the base test looked at previously.
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3 comments:
Rob,
Thanks for your interesting study.
And O'neill claimed that his FTD has a 80% success rate!
One thing of interest is their recent FTD call. They didn't call it on 1/31 (day 7 of the rally, when it met all the criteria), but called it on 2/13 (day 16 of the rally). Day 16 is outside of his criteria, if I remember it correctly.
Since you are the FTD Jedi, I am wondering if you might look at something like, is a FTD on the 16th day has a lower/higher success rate than a 4th day, etc?
Good question. I am planning on looking at that. It will likely be my next post on FTD's
Since this idea has been discussed for such a long time I can't remember if failure/success of the FTD has been taken out past 10-20 days time. Since O'Neil's method tends to be of an intermediate term time frame then 3-6 month may be a good time frame to judge the failure/success of FTD's.
Also, I came across some info from IBD/O'Neil that states a distribution day 1-3 days after a FTD has a very high failure rate (say 70-90%), distribution day on day 4 or 5 after a FTD has a failure rate of approx 50% and distribution day on day 6+ have a much lower failure rate. Maybe this can be tested along with the intermediate term time frame to determine if a FTD provides edge to a trader holding positions for months instead of days.
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