Tuesday, March 3, 2009

CBI of 12 Suggests Bounce is Near

I’m beginning to see some indicators hit truly extreme readings – most of them breadth indicators. One indicator I track that finally spiked up to an extreme reading Monday is the Capitulative Breadth Indicator (CBI). It now stands at 12 and could spike quite a bit higher on Tuesday if the market fails to rally. I’ve discussed in the past that there is a strong bullish edge when the CBI moves over 10. A “system” I’ve discussed in the past is buying the S&P when the CBI reaches 10 or above and then selling when it returns to 3 or lower. This system was perfect from 1995 until July 2008. In July it suffered its 1st loss and in October it suffered its 2nd loss. November spike above 10 nailed the bottom and turned into the a 19% gain - the biggest ever for the system. Some detailed statistics are below ($100k/trade, 1995-present):



The CBI is one indicator suggesting a bounce is near.

For more detail on the CBI, click the label below or click here to read the intro post.

10 comments:

pdmoney said...

is that something I can add to tradestation also?

maximus said...

Just want to be sure I understand the set up....

Are you saying this trade has incurred losses twice in the past when you made your buy with the CBI over 10 and sold it the next time your CBI was at 3?

Or was it held for a certain number of days....

Really appreciate your site and the work you do....

Maximus
http://4best4worst.wordpress.com/

Anonymous said...

Rob

Thanks for this. Very interesting. I am curious as to what the CBI says at the end of today (Tuesday).

Do you have something that is an indicator of an opposite extreme to the CBI? The reason why I ask is that in my own system if I get an extreme reading one way (e.g. bearish) then I expect that to have to be countered by an extreme reading in the other direction.

This helps me in 'extreme', sorry to overuse the word, conditions. For example - the two fails that you mention on this trade were times when my own instruments required a bounce to an opposite extreme.

I have the same situation now. I am actually not expecting to see a bottom to this drop for quite a way down.

However, yesterday (Monday night) I got the impression that there might be a short term bounce. Intra-day (Tuesday) the S&P went up about 1% or something before falling again - and I was thinking that that was it because all that led me to think that there would be a bounce has dissipated.

Would be very interested if your CBI has dropped as well. If it has not, then that would concern me slightly as I am in the market in a bearish position.

Very interesting stuff.

PS I am not a subscriber because I only trade in very small amounts (peanuts) with UK spread-betting and it takes me so long to study and develop my own work that I don't have time to study what other people are doing.

However, your blog is inspiring me to hopefully start looking at breadth some time in the future when I can make the time.

James said...

You fail to mention how massive the failure of the CBI was in October. Stop misleading people.

Anonymous said...

James

If you read the post you see that the failure in October is mentioned. It seems to be an indicator that usually works.

Rob Hanna said...

Wow - lots of comments...

pd - The calculation is proprietary so you wouldn't be able to calculate it in Tradestation. I do update the historical data file each night in the members area of the website, and some subscribers pull it down and import it for their own research. You could import it as a security or as raw data using ADE.

Maximus - Yes. Buy on the day it closes at 10 or higher and sell when it drops back to 3 or lower. No time limit. It hit 10 on Monday so it's underwater so far, which isn't unusual.

Anon - It's an end-of-day indicator. On Tuesday it hit 18. On the right hand side of the blog you can find it updated each day/evening when there are changes (and it's active).

James - I would suggest your comment is the misleading one - unless you consider a 4.2% loss to be a "massive failure". The October CBI spike was both mentioned in my comments and shown in the results. A CBI spike isn't a perfect timing device (nothing is). It does suggest there is a significant amount of capitualtion in the market and there will likely be a sharp reversal. In October the CBI moved over 10 on the 7th - 3 days before the bottom. You should go back and read the Jan 22, 2008 post showing the previous scariest declines after a spike of 10 or higher (July 02 and Sep 01) Both bottomed three days after the 10 reading - just like October 2008.

http://quantifiableedges.blogspot.com/2008/01/cbi-spiking-how-bad-can-it-get.html


- Rob

maximus said...

Rob

is 18 the highest the CBI has been or if not, what was and when did it occur?

thanks

Maximus
http://4best4worst.wordpress.com/

Anonymous said...

Thanks Rob

Very interesting.

Anonymous said...

Maximus
See the link that Rob has in his comment.

Anonymous said...

Rob,

I was wondering how the good ole CBI was doing. Just a quick question. Without knowing how the CBI is calculated I wonder if there could be some sort of filter that would make the buy signal (I know 10 is just a suggestion) higher based upon what the market is currently doing. I know that you are buying a falling knife anyway but an example would be if the high of the past 5 days minus the current close is greater than 8 ATR then filter to buy should be 12 or something similar.

Hey having just two losses since 1995 is kick a$$ but it seems that we are in a totally different market environment than we have ever witnessed before. Another question is if for example this turns out to be a losing trade will you go back and reevaluate your rules/tweak them/or scrap it altogether. I am just curious what your thought process on this.