The Quantifinder Unveiled

Have you ever found an edge I’ve discussed on the blog to be helpful, but wished you could be notified to next time it set up? For example on February 25, 2008 I showed how the S&P has performed following 2 consecutive days where it has risen 0.75% or more. The results were quite bearish over the next 1-10 days. Most traders may have seen that and factored it in to their thinking at the time and then forgotten about it.

Those who instead incorporated it into their bag of tricks benefitted greatly. On March 27, 2009 I did another post which updated the results of the 1st study. It also showed how the setup had performed since 2008 study was published. Being aware of when the setup is occurring can benefit traders in numerous ways. You could use it to enter short positions, or exit longs, or tighten stops, or adjust position sizes, or whatever suits your trading style.

The problem has been that tracking so many edges can be an arduous task. Not anymore. Now being aware of Quantifiable Edges studies is as easy as pulling up a web page.

It’s Quantifiable Edges quantum leap in quantitative research…the Quantifinder!

The Quantifinder is designed to automatically search through Quantifiable Edges database of published research and extract anything that is applicable to the current day's market action. This includes studies based on price, breadth, volume, leadership, and sector rotation. It looks at both daily and weekly data across a wide range of indices. All applicable studies are then published on the Quantifinder page, where you can easily see their bullish/bearish tendencies and a description of the research. From there it is just a click on the study and the publication (blog, Subscriber Letter, or Weekly Research Letter) is automatically pulled up. This allows you to read what I've written about similar setups in the past. A screenshot of the Quantifinder is below.

Detailed information on the Quantifinder can be found here.

There are 2 versions of the Quantifinder.  The intraday version notifies Gold subscribers of potential edges as the market close is approaching. Then the end-of-day version shows what studies actually did trigger.

If you’d like to trial Quantifiable Edges and the new Quantifinder, then you may sign up for a free 1-week trial here.

So perhaps you’re wondering why I used the above study as an example? You’ll notice the Quantifinder is showing it has now set up again as of Friday’s close - “Blog 3/27/09” showing up in red (meaning bearish).

SOX Strength A Potential Bullish Sign

I’ve discussed a few times in the past that when the SOX rises in the face of a selloff it is often a good thing. In the 8/13/08 blog I looked at performance following times wherer the SPX dropped 1% and the SOX rose on the day. Below is a slight twist on that study that looks at returns following an SPX drop of 1% with an SOX rise of 1%.

(click table to enlarge)


Three to four weeks out you’re looking at 90% winners. The average S&P gain over the next 4 weeks was over 4%. Even the instances over the last year were followed by positive numbers over the next 3 weeks or so. They were 7/15/08 (+5.75% over the next 15 trading days), 8/7/08 (+2.73%), 12/9/08 (+1.64%), and 2/25/09 (+3.85%). Meanwhile, if you bought the leading SOX instead of the SPX the average 4-week trade across the entire sample set rose from 4% to 8.2%.

Score one for the bulls. (Although I’m still seeing several bearish studies as well.)

From a 5-day low to a 10-day high in 1 day

The market moved from the low end of its recent range to the high end on Tuesday. It’s quite rare for the S&P to close at a 5-day low one day and a 10-day high the next. Below is a table summarizing all such instances since 1960:



A negative bias seems to follow such occurrences over the 1-5 days.

A Simple & Powerful Timing Indicator

Today I am going to discuss a slight twist on an intermediate-term indicator that I’ve discussed before. The idea comes from Gerald Appel’s book “Technical Analysis – Power Tools For Active Investors”. In it he discusses a relative strength measure of the NYSE vs. the Nasdaq looked at on a weekly chart. The premise behind the indicator is that the market tends to perform better when the appetite for Nasdaq stocks is greater than the appetite for NYSE stocks.Part of this is due to the higher volatility of the Nasdaq, and part of it is due to investors willingness to speculate more aggressively when their outlook is positive. Critics of the indicator suggest the reason it works is largely due to the higher beta of the Nasdaq. That may be part of it, but it doesn’t mean the indicator is without value. In fact, whatever the reasons behind it, the indicator has been an excellent barometer over the years. In the book, Mr. Appel suggests using a 10-week relative strength indicator to measure this phenomenon.

Since I normally trade the S&P 500 and not the NYSE Composite, I applied the indicator to the S&P 500. Doing so, I found the results to be even better. The indicator is shown in the chart below.



The two lines on the bottom panel are the relative strength indicator. When the solid line closes above the dotted line that means the Nasdaq is leading the S&P. When it closes below the dotted line, that means it is lagging the S&P. To make it even easier to view I’ve made the line green when the Nasdaq is leading and red when the Nasdaq is lagging. As you can see, the Nasdaq is currently lagging.

The performance can be evaluated a number of ways. This first equity graph (courtesy of Tradestation) shows the points gained in the S&P 500 since June 30, 1972 – May 15, 2009.



As you can see, over the time period measured the S&P gained 1,341.27 points when the Nasdaq was leading. Meanwhile, the total points gained by the S&P over the period was 775.74. The Nasdaq held a leadership position just slightly more than ½ the time during the period. So almost twice the gains (points-wise) were achieved in nearly half the time. Not bad.

What if you started with a $100,000 portfolio and compared buy and hold to only holding when the Nasdaq led?

I decided to show these results in Excel.

These results represent returns from 4/19/1971 – 5/22/2009. They do not include dividends. The pink line is the growth of $100k in the S&P 500. The blue line shows the results of investing in the S&P only when the Nasdaq is in a leadership position and earning 0% interest otherwise. The yellow line shows results if instead of earning 0% interest, you managed to earn a steady 2.5% interest on your cash balance while not in the market. While 2.5% isn’t easily doable today, over most of the time period it was extremely low.

It appears the only period where the Nasdaq/S&P Relative Strength Indicator didn’t provide an edge was during the 1995-2000 boom market when you would have wanted to be invested basically the whole time.

The ending value differences are striking. By sitting out of the market when the Nasdaq is lagging and earning a minimal interest rate on your cash, returns more than tripled. Nearly $2,000,000 more would have been earned on an investment of $100,000.

The Nasdaq/S&P relative strength indicator is well worth keeping and eye on and is a useful tool for measuring the health of the market. I’ve recently added it as one of the weekly charts I track on the Quantifiable Edges members charts page.

I’ve also posted a few files on the free downloads section of the website that may be downloaded.

1) The 1st file is the Excel worksheet that shows exactly how the model was built and the returns calculated. It also includes the chart shown above. Anyone interested in using Excel for historical backtesting or modeling, or who would like to see exactly how the relative strength indicator was calculated, may find it useful.

2) The 2nd file is a zip file for Tradestation users. In the zip file is an eld with the indicator that you may apply to your charts and a strategy that will allow you to run your own tests. Also included in the zip file is a worksheet that has everything all set up. It was created in Tradestation 8.5 (build 2289). My understanding is that if you are using an older version of Tradestation the .eld should import fine, but the worksheet may not open properly. Therefore, after importing the .eld file you’ll need to set up your own chart to apply the indicator and strategy.

Anyone who is a subscriber, or has taken a free trial of Quantifiable Edges in the past, or has registered prior to downloading the Daily Trading Coach Historical Patterns Sample Spreadsheet is already registered to access the free downloads section. If you don’t recall or don’t have a password, just enter your email address and click on the “Don’t know your password?” line below the login box and it will be immediately emailed to you.

Here’s a link to the free downloads page:

http://www.quantifiableedges.com/members/freedownload.php

3 Lower Closes - A Largely Misunderstood Edge

The S&P 500 closed lower for the 3rd day in a row yesterday. Three lower closes is often cited as having an upside edge. And it does – kind of. That edge is often misunderstood, though. The first place I saw 3 lower closes quantified was in Larry Connors book “How Markets Really Work”. One of the chapters in the book looked at consecutive days higher and lower. It basically found that after the market has moved in 1 direction for several days, there is a tendency for it to revert.

He measured 3 lower closes in that book from 1989 – 2003. (All tests were run over that period. It wasn’t specific to this particular setup.) When Larry measured 3 lower closes he looked at any time the market had pulled back for at least 3 days in a row and then showed performance statistics for the following days. What many traders fail to realize when they review his research is that there is a large historical difference between “at least” 3 days in a row and “exactly 3” days in a row. I decided to examine this in some detail tonight.

First let’s look at a chart of buying the S&P 500 any time is has closed lower for at LEAST 3 days in a row and then selling the next day. Keep in mind, if it is down again day 4 it will be bought again. Same with day 5, 6, 7 etc. until there is finally an up day.



There are a few things to note here. First, trying to buy all 3+ day pullbacks prior to 1987 was a losing strategy. After that it the market showed less tendency to trend and an increased tendency reverse. Buying 3+ day drops became profitable. The period covered by the blue arrow shows the period covered in “How Markets Really Work”.

Now let’s look at what happened if you bought the market after 3 and only 3 lower closes. In other words, the third day lower was bought. The position was exited the next day. If the market continued to head south it was ignored. There was no further buying on day 4, 5, or 6.


There is a striking difference between the two graphs. There does appear to be a recent upside edge, but most of it is concentrated on some outlier trades that occurred in the last year. Until very recently there was no advantage to buying the third close lower in a row.

Why the stark differences? I believe much of the reason is due to the strength of the eventual snapback. The more stretched the market gets to the downside, the greater the snapback typically is. The “3 or more” study guarantees a winning trade in every sequence. In other words, it will continue to buy each day until it has a winning day. Only after that will the count reset. The further the market drops, the more vicious the snapback is likely to be.

Below is a table that illustrates this concept covering the time period of 1989 – present. The left hand column is the number of days the market moved lower. The right hand column is the average up day the following day. (Down/losing days are not looked at here.)


As I stated above, the longer the pullback, the stronger the snapback.

Also consider when snapback is most vicious…during bear markets. Note the two time periods on the 2nd equity chart where buying three lower closes has actually provided an edge on the 4th day. Those 2 time periods were during the current and prior bear markets.

So is there really an edge to buying (exactly) three lower closes? Recently during bear market periods – yes. Historically, no. Of course if you understand the mean reversion will likely eventually take place, you can still take advantage of the pullback. You will need some patience, though. Below is a chart of buying day 3 and holding for 3 days (rather than 1).

This chart looks more like the 3 OR MORE chart shown above. In this case it is due to the longer holding period. The longer you hold the more likely you are to participate in the eventual snapback.

The bottom line is that 3 lower closes may indicate the market is getting stretched. The market will likely bounce some time soon. It doesn’t normally offer much of a day 4 edge on its own, though.

This Morning's Gap

Looks like the market is poised to gap lower by over 1% this morning. Having already been down two days in a row, risk/reward typically favors the long side from open to close in these situations. It's something I examined recently here.

And any time there's a large gap about to happen you can always review the gap-related studies by simply using the "Gaps" label on the right hand side of the blog.

Links

I have some sizable projects going on and some detailed studies that are taking longer than normal to construct. In the next few days or week I hope to have some exciting edges to share. In the meantime, below are some recent/current reads that I found worthwhile:

Mr. VIX (Bill Luby) with some detailed thinking on how low the VIX may be headed over the short and intermediate-term.

Ray Barros on the role of chance in trading.

Dr. Brett with links to 17 posts on intraday trading patterns that he wrote over the last month.

Corey Rosenbloom with his take on intraday tick divergences.

Of course if it is linkfests you're looking for, you don't normally come here. My favorite places to find worthwhile reading include Abnormal Returns, The Kirk Report, Phil's Favorites , Greenfaucet, Mr. Swing, and Newsflashr.

Large Nasdaq Price Moves On Weak Volume

Monday’s action was somewhat unusual in that the market rose by such a large amount while volume came in so low. I’ve looked a low-volume rises a number of ways. One set of studies that is popping up again is the 10/14/2008 blog post. There I looked at strong Nasdaq moves that were accompanied by the lowest volume in 5 days. I have updated those studies below:



Indications are for weakness in the days following such an occurrence. I also looked at 3% moves.

The larger % gains showed even worse performance.

Of course Monday wasn’t just a 5-day low in Nasdaq volume, it was the lowest level in over a month. This has only happened 4 other times. Below I list all the occurrences of a 20-day low in volume accompanying a 3% Nasdaq index rise. The exits shown below are simply a 5-day exit.

Price and Breadth Weakness for the 1st Time Since March

A couple of weeks ago I noted the weakness in the Quantifiable Edges Nasdaq Volume Spyx indicator that suggested the market may be nearing a multi-week pullback. While volume issued a warning, price and breadth remained strong and showed no sign of rolling over.

I’m now seeing some hints via price and breadth that there may be a change in character occurring. The uptrend appears to be weakening at the least.

Wednesday marked the 3rd lower close in a row for the S&P 500. This is the 1st time the market has pulled back for more than 2 days since the March bottom. A move below 882.52 on Friday would mark the 5th consecutive lower low. Coming off a 50-day high that would not be a good thing. Strong markets shouldn't make 5 consecutive lower lows. That will often lead to even lower prices over the next few weeks.

One chart I show on the website is a 10-day ema of the Up Issues / ( Up Issues + Down Issues). The chart below shows the 1-day readings via the thin red line and the 10-day ema of those readings via the thick blue line. The area circled in red represents the breadth activity during the April/March selloff. As you can see, the readings were consistently below 50%.

(click chart to enlarge)


After the March bottom the 10 ema moved up sharply. Except for one day, April 30th, is has remained above the 50% line. On Wednesday that line was again breached. It did barely recover 50% on Thursday. I will be watching to see if the 50% level can hold over the next several days. Failure to do so would be another indication of a change in market character.

The market is starting to show some weakness in ways it hasn’t since the March bottom. This doesn’t necessarily mean a sharp or sustained pullback will ensue (although there are some clues that it could). It does suggest caution is warranted and traders may need to examine long positions with a more discerning eye than has been necessary in the last 2 months.

Sharp Drop In 2 of 3 Days Revistited

The market dropped hard on Wednesday for the 2nd time in the last 3 days. Two hard selloffs in three days is something I looked at in July of last year. Below is an updated table of that same study.

The results seem to suggest the market is getting a bit overdone and could be ready for a bounce. While there have been a fair amount of occurences in the last 10 months, the results have stayed fairly consistent.

Extremely Small Range and a Down Close

So here’s a little something that came out of the Wayback Machine last night based on yesterday's action:

This test suggests the setup has somewhat bearish implications. There are a few things to note here that aren’t evident in the above table. First, 24 of 29 instances (86%) saw the SPY close below its trigger day close at some point in the next 4 days. This is quite a high number. Interestingly, the last 2 times it has occurred, 4/7/09 and 5/5/09, it has led to swift rises and there was no lower close. That speaks to the power of the recent up move from the March lows.

Below is an equity chart from Tradestaion that shows the results using a simple 5-day holding period. You can see the sharp spike that occurred with the last 2 instances.

Mythbusting Some 2-day Volume Patterns

On Thursday the market dropped on rising volume. On Friday it rose on lower volume. I can’t tell you the number of times I’ve read that this pattern is bearish. The classic line of thinking suggests that you want the market to rise on higher volume and drop on lower volume. Therefore many technicians have a habit of looking at any 2-day period such as Thursday & Friday and automatically determining good or bad based on what day the volume rose and what day it dropped. If it had fallen on lower volume and risen on higher volume you’d undoubtedly be able to find someone writing about how that was a bullish volume pattern. Let’s take a look at some 2-day volume patterns to assess the validity of such analysis.

There are 4 simple patterns I looked at for this study:
1) Up day on up volume followed by down day on down volume.
2) Up day on down volume followed by down day on up volume.
3) Down day on down volume followed by up day on up volume.
4) Down day on up volume followed by up day on down volume.

Before viewing the results, to give you some context, the average day over the test period gained about 0.03%, or $30. Now let’s look at the 1st scenario first.

So you have a strong move higher followed by a light volume pullback. Based on the overly-simple classic analysis this would seem to be a very positive pattern. In fact over the following three days there has had a negative implication, and looking out 1 week there is still a strong underperformance vs. a typical 5-day period.

Keeping the same price pattern and flipping the volume pattern we get scenario #2 above. This would often be looked at as a negative volume pattern. Let’s look and compare it to #1.



The price pattern still underperforms over the 1st 2 days, but it’s made up for by the end of the week. All of the expectations are net positive and the results are much stronger than scenario #1. This may come as quite a surprise to most people.

So now let’s move on to scenario #3. Here we have a down day followed by and up day with a “classically bullish” volume pattern.

Not seen above is that while net expectations do turn positive again starting on day 6, they still are the worst of the 4 scenarios even looking 2 weeks out.

Lastly, let’s look and compare the 4th scenario to the 3rd. This last scenario is the one we saw on Thursday and Friday – a down move on higher volume followed by rebound on lighter volume. Traditional analysis would suggest this is worse than scenario #3…



Traditional analysis would again fail here. In fact this was the most bullish 2-day pattern of the bunch.

Of further note I actually ran the tests out as far as 2 weeks. The end results were all the same as above so I didn't feel the need to show that much data.

While I didn’t take much stock in this kind of simple volume analysis before the study, I was quite surprised to find the results were so strongly in opposition to what is commonly believed.

A couple of quick parting thoughts:

1) Don’t be sucked in to believing that up volume on up days and down volume on down days is necessarily a bullish pattern. Also down volume on up days and up volume on down days aren’t necessarily bearish. There’s a lot of misinformation out there and the real answer may be much more complex.

2) This doesn’t mean volume isn’t a useful tool. I’ve found it especially useful at extremes. Traders who would like to sample some ways in which volume can be used to create an edge can check out the past volume studies by clicking here or using the volume label on the right hand side of the blog.

Daily Trading Coach Review & Historical Data Spreadsheet

My trading books can basically be categorized in three ways.

The first are books I read (or read part of), and when I’m done I put them down and never open them again. They don’t inspire ideas. They don’t contain information that requires reviewing. They don’t provoke me to explore new methods or strategies. These books are a waste of time.

The second group do get me excited about a new indicator, method, or technique. They are written well and with an heir of authority that leads me to explore their ideas further. Unfortunately, the ideas are either over-hyped, misleading, or too difficult to implement. Eventually, these too collect dust. On some level, these are worse than the 1st group since they take up even more of my time. Of course there is always some value in learning what doesn’t work, and at least these books provide me with that.

Unfortunately most trading books I’ve read fall into categories 1 and 2.

The last group are books that I refer to over and over throughout the years. They are sometimes inspirational, sometimes instructional, and sometimes both. I’ve just finished Dr. Steenbarger’s “Daily Trading Coach” and I now have a new book to add to my elite shelf.

Like the Traderfeed blog, it’s completely packed with inspiring information and ideas. Most books have 1 or 2 great ideas in them. This has too many to count. One thing I particularly like is that it is broken up into 101 short “lessons”. Personally, I find long chapters difficult to get through when reading a book. The average lesson is only about 3 pages long – perfect for someone with a short attention span or little time for reading.

It’s basically a mix of psychology, common sense, and actionable ideas to help traders of all kinds improve their trading. One section that may be of particular interest to readers of this blog is the last chapter that serves as an instruction manual on how to use Excel to download and test historical patterns. Dr. Steenbarger provides step by step instructions on building, filtering, and sorting the data to frame market hypotheses. He describes how to use the data to help generate ideas – not to just test already existing ideas. Most readers will find this one chapter contains more valuable information than most books.

With Dr. Brett’s permission, I reproduced the sample spreadsheets he described in Lessons 95 through 99. Anyone who would like to download a copy of the spreadsheets may do so on the main Quantifiable Edges site. You may link to the download page by clicking here.

Of course some of you may be aware that I am one of the bloggers that was interviewed in the book (Lesson 87 – The Power of Research). After reading the book, I can say I’m truly honored to be associated with it in my small way. I’m sure I will be reading and referring back to the Daily Trading Coach over and over throughout the years.

Very Narrow Range

Tuesday’s SPY range was the lowest in over 3 months. Since 1999 there has been a bit of a downside bias following narrow range days. The narrower the range in relation to recent ranges, the more bearish the inclination has been. Below is a table showing the 10-day returns following a day that was the narrowest range in X days:



Of course this morning the excitement over the jobs report seems to be trumping any narrow-range tendencies so far.

Subscriber Letter Trade Idea Results For April

April was a very quiet month as far as tracked trade ideas for the Quantifiable Edges Subscriber Letter. In fact it was the quietest. There were only 5 trade ideas that were filled. Four of them were index trades and the other one was a system trade plucked from our nightly “systems triggers” sheet. There was one Catapult that triggered but did not receive a fill due to a gap up the next morning that never closed. A big part of why April was so quiet, in fact, was that the market had several unfilled gaps in the direction of our trade ideas. So while only 5 trade ideas filled and were tracked in the Letter, at least 8 others went unfilled. While this occasionally happens, it’s unusual to see it to the extent that occurred in April. More active or aggressive traders could also have plucked ideas from the systems triggers sheet, which typically has at least a few triggers listed each night. Since there were only 5 filled trade ideas, I’ve listed them all below along with the summary stats. (I typically only post the summary stats in the blog and reserve the full list for the Letter.) First, of course, the usual caveats and explanations.

I don’t suggest position sizes. The primary reason for this is I’m not acting as a financial advisor. I don’t feel it is appropriate to suggest allocation sizes without understanding someone’s financial situation and risk tolerance. Even for my own trading I run different portfolios with different levels of aggressiveness. For instance, my most aggressive portfolio is my IRA. Here I may use options to sometimes get 400-500% leveraged. Other portfolios on the other hand normally take much more conservative stances and some rarely reach or exceed 100% exposure.

Since I don’t suggest position sizes this is should not be considered a performance report, but rather a trade idea scorecard. Therefore, no matter how objective I try to be the reporting of the results is always going to be skewed depending on how you approach the trades. For instance, I always recommend scaling into the Catapult positions in 3 parts, whereas the “System” trades (whatever system I unveil other than Catapult) are normally one entry. The “Index” trades I normally recommend scaling into as well. For my own trading I trade much larger size with the index trades than any of the individuals. I also control my exposure by limiting the total amount invested per day. As I mentioned, this will vary depending on the account I’m trading. My most aggressive account I may put in up to 100%/day and get heavily leveraged using options. A more conservative account may max out at 15%-20% per day.


It’s unlikely anyone would have taken all of the trades with equal amounts, so personal results would vary greatly depending on the trader’s approach. Simply adding up the results of the individual triggers as I do below is an admittedly poor representation of returns. A net positive or negative does not necessarily mean a person following the ideas would have made or lost money during the period measured. And the sum total is certainly not representative of what a portfolio would return. All that aside, below are April’s results (click table to enlarge):

And the individual trades (click table to enlarge):

If you haven’t checked out the gold membership area yet, then click here to sign up for a free trial (only a name and email address required). It’s not just trade ideas. It contains research far beyond the blog as well as members-only charts, systems (with code included), and custom indicators.

Breadth Measures Hitting Historical Highs

I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday - and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.



This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.

How The Long-term Trend Can Influence Results

We continue to see light volume dominate the indices and the ETF’s as the market is hitting new highs here. QQQQ triggered a study that was shown on the blog a little over a year ago on 4/22/08. Below is an updated results table of that study, which looks at very low volume while the market is in a short-term uptrend.

While I didn’t look specifically at the longer-term trend in that post, it is often helpful to put studies into their longer-term context. The last couple of days QQQQ has closed above its 200-day moving. Below I broke down the results of the original test into those times it triggered below and above its 200-day moving average.

Filtering by the long-term trend can have a dramatic effect on certain studies. QQQQ is the first major index to cross its 200-day moving average. Should the rally continue and the other major indices follow it will be important for traders to keep the long-term trend in mind when considering trades.