Price
I looked at shorting the S&P 500 under the following conditions:
1) The S&P closed below its 200-day moving average
2) The S&P rose at least 1.5% the last two days in a row.
Results below ($100,000 per trade):
Based on the price action it appears a pullback is likely to begin soon. A modest edge is apparent to the downside after day 2.
Sentiment
I then looked at the position of the VXO – as a gauge of sentiment rather than price. I looked at the performance of the S&P 500 under the following conditions:
1) The S&P closed below its 200-day moving average
2) The VXO closed at least 10% below its 10-day moving average.
Shorting the market under these conditions and covering when the VXO closed back above its 10-day moving average would have produced the following results since 1987. 51 total trades. 31 (61%) winners. Average winning trade = 2.2%. Average losing trade = 2.6%. Expected value = 0.3% per trade. Profit factor = 1.3.
Not an overwhelming downside edge here, but more evidence that continued upside may not be in the making.
Based on price and sentiment measures, a pullback beginning in the next few days seems to be a likely scenario.
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