Wednesday, March 5, 2008

Back to Back Reversals and a Growing CBI

Reversal Bars
The market gapped down this morning, sold off to put in a 10-day low and then reversed and closed above the open. Both the open and close were in the upper half of the day’s range. I ran a test too see possible significance of this type of bar. Below are the results:



What’s amazing about today is that it is the 2nd day in a row we’ve had this same formation. I ran a test to see how the market has reacted to back to back reversal bars like this in the past and came up empty. This was the first time it has occurred for the SPY. It has never occurred for the NDX.

The above reversal bar on its own has shown a mildly bullish tendency. We'll see if the market can muster anything more than a late-day rumor-inspired pop.

Capitulative Breadth Indicator(CBI)
The CBI hit “5” today. This is the first level that I consider significant. Since 1995, buying the S&P 500 when the CBI closed at “5” or higher and selling when it was back to “3” would have results in 77% winning trades and gross profits outsizing gross losses by over 5:1. I generally don’t buy at this level but rather cease taking on new short positions. The cluster that is forming could easily rise to “7” or “10” in the next day or so if the market continues to drop. At those levels I may consider index longs.

5 comments:

DaveM said...

On your spreadsheet, what is the "profit factor" and why is it significant?

Rob Hanna said...

Dave,

Good question.

Profit Factor = Gross Gains divided by Gross Losses.

If 2 systems both show a net gain of $1,000 over a period of time, one way to compare them is Profit Factor.

System 1 makes $20,000 in gains and $19,000 in losses to reach $1000 profit. Profit Factor = 1.05.

System 2 shows $1,500 in gains and $500 in losses. Profit Factor = 1500/500 = 3.

All else being equal you'd prefer a higher Profit Factor. As a general rule of thumb a profit factor of 2 is pretty good.

Rob

Woodshedder said...

Rob, been enjoying your blog for some time. I know I asked you this one time before, but then I didn't check your blog out for a few days and didn't see your response.

What do you use for your backtesting?

What data provider?

Thanks.

Rob Hanna said...

Thanks Woodshedder! Most of the backtesting I do is in Tradestation. Most of the data also comes from them. Some data and some tests require other data providers or software, but 85%-90% of the tests you see here I conduct using Tradestation.

Rob

Woodshedder said...

Thanks. I'm going to have to open up a tradestation account. I use scottrade now.

I was hoping you used tradestation as being able to backtest with it is the main reason why I want an account.