Monday, November 17, 2008

A Past Study That's Struggling In The Current Environment

An astute reader of the blog pointed out a study from March that suggested a bullish bias when there was two 3.5% up days within a 10-day period. The bullish bias did play out in March as the market rallied over the ensuing weeks. Since then the setup has triggered on 9/19, 10/13, and 10/28 – all of which have been miserable failures. One issue when considering this study in the current environment is that 3.5% isn’t a substantial move.

As I discussed in Thursday’s blog, the average true range percent in the Dow over the last 30 trading days has been over 6%. That’s not to say that Thursday’s reversal bar isn’t a positive one. Things to look for generally include a strong move higher, strong volume, and strong breadth. Thursday qualified in all areas. Against the current backdrop I've been looking for a bit more confirmation. Tests have been mixed.


Johan Lindén said...

Another thing to be learnt is that from now on (well actuelly ALWAYS) is that it is better to use relative moves for all studies.

So instead of ie 3% move, one could use a ratio of the 20 day ATR or something like that

Rob Hanna said...


ATR is a nice tool, but I don't completely agree. In periods of low volatility you can get signals when you don't want them.

Needless to say, the volatility of the last two months is a going to skew results for many systems for years to come.

I have some more detailed thoughts on how I plan to make some adjustments going forward which I'll post in the near future. Last week's volatility studies were posted as a lead-up to these ideas.