Best of Quantifiable Edges 2009

So the other day I ran a “Greatest Hits” of 2009. They were the most popular posts I wrote each month of the year. When going through them I realized I would have chosen very few to make any kind of top list myself. So now I present to you MY picks for the “Best of Quantifiable Edges 2009”. (Note while there are only 1 or 2 on the other list that would have had a chance to make this one, I didn’t allow for repeats. These are all less popular than those.) In countdown reverse order…

15) Equity Put/Call Ratio Suggests Down Day
14) The 2009 Rally - Breadth Without Compare
13) 3 Lower Closes - A Largely Misunderstood Edge
12) My Take On Optimal Position Sizing
11) Turnaround Tuesdays (A myth that actually confirmed!)
10) Stops Part 2 - When to Use Them
9) Gaps Up From 10-day Highs
8) Intermediate-term Consequences of a 30’s-Like Market (I still believe the market will undergo several intermediate-term exaggerated overreactions in both directions over the next few years.)
7) Some simple shorting systems
6) A Long-term look at Put/Call Ratios
5) The Importance of Positioning In Analysis
4) Distribution Days Quantified (Tradestation code associated with this study is available on the Free Downloads page.)
3) A Long-Term Look At Fed Days
2) My Interview With The Kirk Report (More than just a post. This is long but Charles Kirk got more info out of me than the rest of these posts combined.)
1) The Quantifinder Unveiled & Quantifying The Value of Historical Research (These tools represent Quantifiable Edges biggest accomplishments this year – effectively semi-automating the application of historical research to trading.)

I’m very much looking forward to 2010. The Quantifiable Edges Big Time Swing System was just released and feedback so far has been great. I’m excited to monitor the progress of that in the upcoming year. Additionally, I’ll have more announcements in the coming weeks about improvements and new features for the website.

A safe and happy New Year to all. Thanks for reading, writing, and inspiring me throughout the year!

Quantifiable Edges Greatest Hits of 2009

So my son got Band Hero for Christmas and the Hannas now rock. Like a rock band, I decided Quantifiable Edges needed to release a “Greatest Hits”. The list below shows the most popular post (by number of hits) for each month of 2009. I’m calling it “Greatest Hits” because it is based on popularity. I don’t think it’s a “Best Of”. Many of my favorites were excluded and some of the ones below I didn’t think were all that great. So perhaps I’ll have some time to put together a “Best Of” later this week.

Jan – Stops Part 1 – When Not To Use Them (Somewhat controversial post here. One I should perhaps expand on at some point.)

Feb – 2% Gaps Down Revisted (We see here that large gaps down often fail to hold over the next few days.)

Mar – Why Tuesday’s 90% Up Day May Not Be Bullish (The implication of this popular study couldn’t have been more wrong.)

Apr – The Most Overbought Market In At Least 23 Years? (Based on a short/intermediate-term indicator.)

May – A Simple & Powerful Timing Indicator (Includes a heavily downloaded free spreadsheet available on the free downloads section of the website.)

Jun – From A High To A Low In 1 Day (A study that looks at a fast move from the high end of the market’s range to the low end.)

Jul – What Happens After A Sharp Contraction In Volatility (I now track this indicator each night on the members charts page. There are also a few studies associated with it that are tracked by the Quantifinder.)

Aug – Percent of Stock Above Their 200ma’s Hitting Extreme Levels

Sep – Never Have So Many Stocks Been So Stretched Above Their 200ma (I’m seeing a theme here. Everyone loves to hear how we’re hitting all-time extremes. It’s like when I was little and I would be excited when the weatherman said we made a record high or a record low on the day.)

Oct – Extreme Weakness Never Before Seen By This Measure (The measure was the McClellan Oscillator. The comparison was a little unfair since it used the standard McClellan Oscillator rather than the ratio adjusted version. I now track the ratio adjusted version on the members charts page. Traders not familiar with the McClellan Oscillator should familiarize themselves with it. And while the oscillator has been around a long time, the McClellan’s continue to do good work to this day. The “Learning Center” on their website is full of goodies. http://www.mcoscillator.com/learning_center/ )

Nov – What A Strong Early Tick Has Meant In The Past – Perhaps I’ll need to post more intraday edges in 2010.

Dec - Twill Be 3 Nights Before Christmas (A seasonal study. It was only posted about a week ago.)

Introducing The Quantifiable Edges Big Time Swing System

After much hard work I am pleased to announce the release of the Quantifiable Edges Big Time Swing System. The QE Big Time Swing System simply combines a few of my favorite edges into a powerful new swing trading system. The system was designed to trade the major indices. It looks to take advantage of high probability, high expectancy moves that generally occur about once per month. Using SPY over the last 16 years it has shown great consistency in both profits and frequency of opportunities. The system trades both long and short in both up and down markets.

It is not a black box. It is completely open sourced and Traders may even elect to purchase the open code in Tradestation and Excel formats. While it’s completely open it still comes with a supporting web page for purchasers as well as a 2010 alert service at no extra cost.

I’m extremely excited to be able to offer it at this time. I'm confident it will help some traders improve their results in 2010. For more information please visit the Quantifiable Edges Big Time Swing overview page.

Rob

If you have questions after viewing the information page, feel free to email them to BigTimeSwing @ QuantifiableEdges(dot)com

Index Put/Call Closes Below Equity Put/Call

Due primarily to some massive trading in index calls in the last ½ hour of the day on Tuesday, the CBOE index put/call ratio actually finished lower than the CBOE equity put/call ratio. This has only ever happened 4 other times since they began tracking the data in 2003. It’s dangerous to try and draw conclusions from only 4 instances, but I found the results below interesting enough to share. I’ll continue to monitor this setup in the future to see if the early indications hold true.

As you can see, indications so far seem to suggest a downside edge both short and intermediate-term.

Twill Be 3 Nights Before Christmas

At Tuesday’s close we will enter the next strongly bullish seasonal period. Last year I showed the “Twas 3 Night’s Before Christmas” study. I have updated that study below.

High Vol Rise on Op-ex Day - Good or Bad?

Option expiration on Friday saw the market rise on exceptionally high volume. Over the last 13 years high volume rises on an up op-ex day have often led to a selloff.



Could it be different this time? If it opens here then it already is. In no instance over the last 11 years did the market gap higher by as much as 0.5%. It did manage to do so on 12/21/98 – exactly 11 years ago. It also added to the gains and closed above the open that day. Overall implications appear short-term bearish though.

BKX Drops Ahead of the Fed

The banks got hit hard on Tuesday with the BKX falling nearly 3%. Below are results of the last 10 times the BKX dropped on the day before a Fed Day. Gains of 5% or more are highlighted in yellow.

Nasdaq Confirms S&P New High - Does It Matter?

Below is some research from last night's Subscriber Letter...

The S&P and Nasdaq set new closing highs Monday. They were the 1st closing highs since late November. Typically when the SPX breaks out to a new closing high after not making one for at least a couple of weeks, it leads to short-term follow through. I looked at this a few different ways – using both SPY and SPX and considering 50 and 200 day highs. All the results came out very similar. Below is one example.

I find it interesting that the while the breakout typically is accompanied by short-term follow through, it doesn’t carry over to the intermediate-term.

One thing I’m neglecting to look at in the above test is the fact that the Nasdaq also broke to a new closing high. Many traders might see this as “confirmation” of the S&P’s closing breakout. I decided to check and see how much difference the Nasdaq confirmation made.

These results are almost identical to the first test, though with a reduced sample size. I compared several ways and kept coming up with the same answer. The confirmation seems to be worthless. It neither greatly enhances nor greatly detracts from results. This holds true both short and intermediate-term. Frankly this was a bit surprising to me since we know a leading Nasdaq has been a good sign historically.

The Most Wonderful Tiiiiime Of The Yearrrrrrr

This week is options expiration. Over the last 25 years December options expiration week has been the most consistently positive week of the year for the SPX. Below I’ve updated and expanded the study from last December that looked at this phenomenon.



The bullish tendencies over the last 25 years have been exceptionally strong. And as we now see above, not only do you have strong indications that this upcoming week carries an upside edge, but also out as far as 3 weeks.

Poor Nasdaq Breadth A Bit Of A Downer

Below is one study that appeared in the Quantifinder last night. It suggests a bearish edge thanks primarily to the poor Nasdaq breadth on Thursday. I’ve updated the table from the 4/29/09 blog below.



I should note that while there appears to be a bit of a bearish edge, this study is faced with some conflicting bullish ones that I’ve discussed over the last few days in the Subscriber Letter. The outlook isn’t completely cut and dry. I did think the study was worth noting and updating though.

Does An Inside Day After An Outside Day Provide a Directional Edge?

After posting an outside day on Friday, the SPY followed up with an inside day on Monday. This was also noted by Scott Andrews of Masterthegap.com last night. I’ve recently become acquainted with Scott’s work and find his application of statistical analysis to trade gap fills very interesting. I ran some tests to see if the outside day / inside day combination provided any edge over the next few days.

The initial results looked like there was a possibility of a mild upside edge. Further investigation suggested the edge more likely is non-existent. Below is a profit curve that shows a 4-day exit strategy which should explain why I say this.

From this chart is appears that an edge MAY have been in place during the raging bull of the 1990’s. At that time just about any consolidation was followed by a strong move up. Since the end of 1999, though, the profit curve is a complete flatline. It appears that whatever edge there may have been back then is no longer in effect.

Back To Back Outside Days

Friday was the 2nd outside day in a row. Looking back to the inception of the SPY, other times there have been back to back outside days have typically been followed by rallies over the next few days. The study below illustrates this.

My Take On Optimal Position Sizing

A subscriber recently asked me about my take on position sizing, and more specifically using Optimal f. For those unfamiliar, Optimal f is a calculation derived by Ralph Vince which computes the optimal position size that would lead to a portfolio’s fastest growth rate. Mr. Vince has written several books on the subject and I do recommend his work.

Here's my take on using Optimal f (or any other position sizing formula for that matter).

Optimal f may be the mathematically optimal size for a position IF the trades are managed in an optimal manner. For many people, positions of "optimal" size feel aggressive. While our perception is often that we have a large edge on a particular trade or strategy, the edge often isn't THAT great. In order to maintain your edge you need to be able to trade the strategy in an "optimal" manner. Whether the strategy is automated or discretionary doesn't matter. You need to be able to take entries when they trigger. You need to be able to take exits when they trigger. But just as important and sometimes most difficult is you also need to be able to SIT when there is neither an entry nor an exit triggering.

The sitting can often be difficult when traders have what they perceive as a large position that they are managing. Many traders have a tendency to want to manage the trade more carefully with large positions. This may mean tightening stops sooner or taking partial profits a little quicker. Doing this "feels" good and it may get the trader to a breakeven level faster, but in the long run it will almost always either reduce or destroy the edge of the strategy. Tighter stops and quicker profit taking effectively means more losers and smaller winners. Few strategies can withstand more losers and smaller winners and still look good.

Optimal f may be the mathematical optimal size, but in my view the optimal size is the closest you can get to Optimal f and still execute your strategies as they were designed - while keeping your sanity.

Thoughts On Recent Gap Activity

A trader I know pointed out the unusually large gap activity lately. I track the 10-day absolute average gap over the 100-day absolute average gap on the charts page in the members section of the site. Meanwhile I observed the average true range is still below normal. I’ve copied the two charts from the website to illustrate.






The real odd behavior here is with the average gap size. Such gappy behavior is unusual with the market near new highs. It’s also unusual when there isn’t also a substantial increase in the intraday range. I looked at this a number of different ways last night. The 10/100 Absolute Avg Gap is 1.38 (meaning the 10ma is 38% larger than the 100ma of the overnight gap size). I looked at other instances where similar levels were approached and the market was near a new high. It’s been fairly unusual over the last 15 years and results were inconclusive.

I then look at comparing the size of the average gap to the size of the average intraday range (not the true range as shown above). Here again I found we are at very high levels but past history was choppy and inconclusive.

Lastly I looked at times where the 10-day average gap was well above normal and the 10-day average intraday range was well below normal. Again I could find nothing suggesting a significant directional edge.

So is this activity suggestive of anything? Perhaps. While the readings themselves don’t seem to help greatly in predicting direction, they do indicate some unusual behavior. My take is that the market is being influenced more by outside forces than is customary. It’s been noted by many that the dollar has been leading everything by the nose lately. Outside influences like Dubai debt have also had an overnight influence lately. This would seem to explain why such a large percentage of action is occurring overnight.

So what should we do about it as traders? Two things come to mind – 1) Be more cognizant of dollar and other intramarket action. 2) Perhaps don’t put quite as much weight on standard price, volume and breadth indicators as usual. The studies have done quite well as of late. Still, it may be worth trading with a bit more caution than usual until the stock market manages to decouple from the dollar a little bit.

Friday's Breadth Was SO Negative...It Could Be Positive

Friday’s selloff was marked by extremely negative breadth. Around 97% of the volume was to the downside on the NYSE. In the past, days that have been SO negative have often led to bounces over the short-term. This can be seen in the study below.

The “% Profitable” is positive but not overwhelming. Risk/reward is pretty solidly bullish, though with the"Avg Trade" showing some strong numbers.

My Interview From The Kirk Report Is Now Available

In September as part of his trader interview series, Charles Kirk of The Kirk Report interviewed me. Charles has been kind enough to allow me to republish the interview, which previously was only available on the members section of The Kirk Report.

If you’ve ever had questions about my approach, then be sure to check it out. Charles probably got the answer out of me. Even those who are very familiar with my work will find new material in the interview. Charles got me to discuss ideas and methods that I’ve never discussed on the blog or in the Subscriber Letter before. The interview is lengthy, but with the slow trading and extra time off over the next few days I thought some readers might find it interesting. There is a link below, and I have also posted a permanent link on the Quantifiable Edges home page.

http://www.quantifiableedges.com/kirk-hanna.html

Happy Thanksgiving!

Vegas Traders Expo Wrapup & Links

I wanted to briefly discuss the Vegas Traders Expo I attended last week. I enjoyed the Expo greatly. While there was a good number of unsubstantiated claims by certain speakers, I was pleased to see that several speakers took the time to quantify their methods. Two that come to mind were Larry Connors and Buff Dormeier.

Larry discussed some of his TradingMarkets work.

Buff discussed his Volume Price Confirmation Index (VPCI), which he won the Charles H. Dow award for in 2007. For those who may not have read Mr. Dormeier’s paper I would suggest it. It may be found using the link below:

http://www.mta.org/eweb/docs/2007DowAward.pdf

In fact, all past Dow Award winning papers back to 1994 may be found here:

http://www.mta.org/EWEB/dynamicpage.aspx?webcode=charlesdowaward

Other traders whose work I respect greatly and had a chance to meet and talk with at the expo include:

Scott Andrews of Master the Gap. Scott’s focus is trading the opening gap – primarily in the S&P futures. He uses statistics and backtesting to develop his techniques.

Tim Bourquin of TraderInterviews.com - a unique site that interviews traders to provide insights into how they make money.

Dave Mabe of Stocktickr. The Stocktickr product helps traders to track, segment and journal their trades. I strongly believe it’s important to understand what’s working and what isn’t among a traders strategies and this product seems to do a nice job of assisting with that.

Corey Rosenbloom of Afraid to Trade. Corey focuses on intraday trading and technical analysis. He looks for trade confirmation using several techniques including Fibonacci, Eliot Wave, and tick analysis.

I also enjoyed meeting and speaking with several Quantifiable Edges readers and subscribers.

A Daily Breakdown Of Thanksgiving Week History

Seasonal influences are often cited around the Thanksgiving holiday. Therefore I decided I would examine returns during Thanksgiving week as well as the Monday following. Below is how the SPX has performed around Thanksgiving over the last 48 years.

Monday and Tuesday don’t seem to carry a sizable edge. Monday’s total return was actually negative prior to 2008 when it posted a gain of over 6%. Also notable is that the Monday AFTER Thanksgiving’s stats were skewed a bit by the 2008 results. Last year saw a drop of over 8% on that day. Even excluding 2008 there is a bit of a bearish edge apparent on the Monday following Thanksgiving.

Wednesday and Friday surrounding Thanksgiving have been the most consistent and bullish days of the period.

What A Strong Early Tick Has Meant In The Past

The market is off to a strong start today. The NYSE Tick did not post a negative reading for the 1st half hour of trading. This is fairly unusual, having happened only 64 times since the beginning of 2005. Below are stats showing how the SPY has performed the rest of the day after the TICK got off to such a strong start.



Nearly 2/3 of the time the market has managed to follow through with more gains from 10am until the close. Stats are a little skewed by the huge 7.5% gain that occurred on 10/13/08. The average loss was fairly small at around 0.5%. Overall, a very positive start like we’re seeing this morning has often been good news for the rest of the day.

Of course there is a little speech today from Chairmen Ben…

Vegas This Week / SPY Volume Low Again Friday

Research posting may be light this week as I travel to the Las Vegas Traders Expo. My presentation will be Thursday at 1:15pm. As well as discussing some concepts and edges I’ve covered here or in the Subscriber Letter over the last few years, I’ll also be unveiling some new research. I’m looking forward to meeting readers and subscribers at the show.

I may act more as a reporter/blogger later this week and provide some thoughts about the show and my experience there.

Notable about Friday’s action was that volume was again light on the rally. This has often led to a short-term pullback in the past. Below is a link to an April 2009 post that looked at SPY action as was seen on Friday. The study was one of several identified by the Quantifinder on Friday.

http://quantifiableedges.blogspot.com/2009/04/is-buying-drying-upagain.html

VIX Rises As SPX Hits New High

In a somewhat unusual move, while the SPX was closing at a 50-day high yesterday, the VIX actually closed higher. Below is a look at other times this has happened during the middle of the week.



These stats suggest a downside edge. Apparently the VIX should not be on the rise when the SPX is hitting new highs. The fact that it rose Wednesday implies a short-term pullback.

Low SPY Volume Could Signal A Pullback

The last couple of days I’ve published some bullish studies that showed Nasdaq breadth data and VIX action were indicating further rises. The market followed up by meeting the objectives of these studies very quickly. Today I’ll mention what’s NOT so great about this rally – volume. On Friday NYSE volume came in low. While it rose some Monday, SPY volume faltered. It triggered a couple of bearish studies that were identified by the Quantifinder. I’ve linked to those studies below.

This first one looked at declining volume on a streak of higher closes.
http://quantifiableedges.blogspot.com/2009/09/spy-rising-while-spy-volume-declines.html

The second one looked at 20-day volume lows when the market is in the upper end of its range.
http://quantifiableedges.blogspot.com/2009/04/is-buying-drying-upagain.html

So while other indicators have been positive, volume is currently the squeaky wheel.

VIX Goes From Overbought To Oversold In 5 Days

The VIX has moved from overbought to oversold quite quickly this past week (based on its stretch above and below the 10-day average). This brings up the question of whether the now “oversold” VIX is suggesting a selloff for the S&P. I took a look at similar past situations.

Results have been inconsistent but risk/reward has generally favored more upside over the coming weeks. This would seem to make sense since what you’re typically looking at in the SPX with the above setup is a strong rebound from a sharp decline during a long-term uptrend.

I am seeing some signs the market is nearing a pullback. The VIX action is not one of those signs.

Extreme Nasdaq Breadth Suggests Higher Prices

While most everything did well on Thursday, much of the excitement was directed towards smallcaps and Nasdaq stocks. Below is a little study that shows how the market has performed in the past following such buying interest in the Nasdaq while the S&P 500 was in a long-term uptrend.

Instances are lower than I’d typically like to see, but with all 7 closing higher in the next day or 2, this study appears worth noting. Extremely strong volume breadth going into riskier Nasdaq stocks has often led to some follow through when the market is in a long-term uptrend.

Of course the jobs report may have a little something to say about today's action as well...

Fed Studies

I am off this morning to go get a root canal, so no time for anything new. With the Fed announcement coming later today, you may want to review some of the old Fed Studies.

What's Been Happening With The CBI

So I’ve been asked a few times, “what has been happening with the Capitulative Breadth Indicator (CBI)?” No I haven’t stopped tracking it. There just hasn’t been a significant reading since the March bottom. Below is a chart I post to the members section of the website every night.



As long-time readers may recall, I don’t normally view CBI readings below 5 as any kind of warning sign. It’s not until readings reach 10 or more that they become highly indicative of an upcoming oversold bounce. We haven’t seen a reading above 4 in almost 8 months now. Even the current selloff has only seen the number move up to 3. It also appears unlikely to move substantially higher in the very near term. While other breadth readings like the McClellan Oscillator have been reaching extreme levels, the CBI requires more intense selling among individual issues – not just a broad decline. I’ll discuss the CBI again when more significant readings arrive.

For those who would like to learn more about this inidicator, you may check out the CBI label on the right hand side of the page.

Do Very Bad Fridays Set Up Crash Mondays?

Many traders who are aware of the history of the ’87 crash may often think after a bad Friday, “Will this get substantially worse on Monday? Are we setting up for a crash like ’87?” It’s an interesting question. Was 1987 an anomaly or does a really bad Friday often carry through into the next week? Below I looked at all Fridays since 1960 that closed down at least 2.5%.



The “Average Trade” column on the far right is skewed thanks to the ’87 crash which saw the market drop 20% on Monday. It appears in the almost all of the cases that the market was set up for a bounce based on Friday’s action rather than a crash. Of course while the last week has been bad, the market does remains in a long-term uptrend. I decided to filter the above results again to examine the bad Friday’s that appeared in long-term uptrends.



Instances are low here, but for the short-term they really couldn’t be more bullish. Again they also suggest the bounce should basically come immediately.

Extreme Weakness Never Before Seen By This Measure

The McClellan Oscillator uses advance/decline data to calculate the strength or weakness of a move from a breadth standpoint. The value will vary from provider to provider as there are often slight differences in advance/decline data. Worden Bros. is one data provider I use. Their measure of the McClellan Oscillator hit -381.49 on Wednesday. This is the lowest reading since they began tracking advance/decline data in 1986. (Others I look at are low but not quite all-time lows.) Below is a chart of the McClellan Oscillator over the entire data period.

One notable about this chart is that breadth readings have become more extreme over time. Whereas moves above 100 and below -100 were rare from ’86 – ’93, they are fairly ordinary today.

For more information on the McClellan Oscillator you may visit the link below:

http://www.mcoscillator.com/learning_center/kb/mcclellan_oscillator/the_mcclellan_oscillator_summation_index/

Based On This Setup SPY Has Always Bounced In The Past

I’ve shown before how a deceleration in selling often suggests a bullish edge. A study from the Quantifinder last night illustrated this concept. It first appeared in the June 18, 2009 blog. I’ve updated the results below.



Most impressive about this one is the 100% consistency of the bounce. That’s an impressive feat with a sample size so ample.

Weak Closes Since The March Bottom

Monday’s selloff saw the market close poorly and near its lows for the day. Below is a study that examines weak closes since the March bottom.

I consider this particular study to be environmental. It is indicative of the strength of the rally of the last 7 months and not necessarily an all-weather setup. While I wouldn’t base a trade on this study I do think it will be important to see how it plays out over the next few days. An all out failure to bounce could suggest a change of character for the market.

QQQQ Closes at 5-day Low for the 1st Time in a While

One notable study that appeared in the Quantifnder Friday evening looked at the fact that the QQQQ closed at a 5-day low for the 1st time in at least 10 days. I’ve updated those results below:

This study appears to provide a mild upside edge. Much of the edge occurs within the 1st two days.

Back to back 7-day reversals - a rare setup

More of an oddity than a quantified edge this morning…

The last two days we’ve seen opposing reversals. Wednesday the market made a new high but closed down on the day. Thursday it hit a 7-day low before reversing to close up on the day. A reversal off a 7-day high followed by a reversal off a 7-day low would seem a bit unusual. I looked back to 1978 and found out just how unusual it was. Below is what I found.



It’d be dangerous to trade based off of just a sample set of 5, but I was still fairly amazed that there wasn’t a single instance of a profitable close within the next 4 days.

The Day After Last Hour Smackdowns

So what happens for SPX after last hour breakdowns that are especially large compared to the size of the average daily range? I took a look. The most substantial results came on the day following the late-day selloff. Here they are:



Last night’s Subscriber Letter contained more details and observations about this study. Click here for a free trial.

What Happens In Vegas...

The International Traders Expo takes place at Mandalay Bay in Las Vegas on November 18-21, 2009.

I’m pleased to announce I’ll be speaking on Thursday, November 19th at 1:15pm. The topic of my presentation will be “Quantifiable Edges for Swing Trading”. I’ll be discussing some of my favorite edges and most interesting research.

Registration for the event is free, and you may do so by clicking here.

I hope to get the opportunity to meet many readers and subscribers at the Expo.

The Last 4 Days Price/Volume Pattern

Price/volume the last 4 days has done the following. Thursday the SPX closed at a 50-day high on lower NYSE volume. Friday SPX closed lower and NYSE volume rose. Monday we got another 50-day closing high on lower NYSE volume. Tuesday another market drop with rising volume. That certainly sounds like a bearish price/volume pattern. I took a look.

Going back to 1970 I was only able to find two other instances with the same 4 day pattern where 50-day highs were being made. The 1st was 3/26/81 and it was followed by a decline of nearly a year and a half. The 2nd instance was 6/6/95 and that was followed by a 3-day consolidation and then a continuation of a massive bull market. Nothing to learn there.

But what if we look at the 4-day price/volume pattern on its own and not require new highs be made? Based on common knowledge it would still seem to be bearish. Below are stats going back to 1970:



It could be argued that the above results suggest bullish tendencies, especially over the 4-7 day period. I don’t see any evidence that suggests the current 4-day price/volume pattern is bearish.

Quantifying the Value of Historical Research

The most common type of post here on the blog is one where I’ll show a setup along with a statistics table examining how the market has performed based on similar setups in the past. On the blog, most studies are examined independently. In the Subscriber Letter I’ll take a holistic approach to viewing the studies. The tool I use to do this is the Quantifiable Edges Aggregator.

The Aggregator takes a measurement each evening that estimates what all of the currently active studies are projecting over the next few days. This number is plotted and used on the Aggregator chart, which is published each night in the Subscriber Letter. Along with the estimates the Aggregator chart also shows how the market has performed relative to expectations over the last few days. This is helpful in establishing whether the market is overbought or oversold. I have claimed substantial upside edges typically exist when expectations are positive and the market is oversold versus recent expectations. Also, substantial downside edges typically exist when expectations are negative and the market is overbought versus recent expectations.

While many of the index-oriented trade ideas in the Subscriber Letter were based on the Aggregator chart, I’d never quantified the Aggregator nor used it as a mechanical entry…until recently.

Now that we have nearly two years of historical values I decided it was time to take the concepts above and show exactly how a mechanical strategy based on the Aggregator would have performed. The results were even better than I expected.

Since 2/25/08 (about 20 months), the reinvested return (not inclusive of commissions, slippage, or interest on cash) of trading the SPX based on the Aggregator System signals would have been 106.34%. The system has struggled more recently and is currently experiencing a 3.94% drawdown. Over the full time period it has been invested a little over 60% of the time, with the remaining 40% of the time spent in cash. Both long and short trades have contributed fairly equally.

In my mind, the success of the Aggregator as a tool and as a predictive indicator has cemented the value of historical quantitative research. It demonstrates that incorporating quantifiable edges does indeed provide a quantifiable edge!

More details about the Aggregator System may be found on the systems page of the Quantifiable Edges website. Details include an 11-page working document that reviews the results, discusses recent performance and evaluates alternate entry and exit techniques. Additionally there is a spreadsheet available to all trial users that shows summary statistics, an equity curve and details of every single trigger since 2/25/08 (when the Subscriber Letter began).

Gold level subscribers are able to download the full history of the Aggregator and Differential values in a .csv file. This allows them to more easily integrate the tool into existing strategies or to build their own strategies based on it.

Anyone who wishes to trial the Quantifiable Edges subscriber services may do by clicking here. If you have previously trialed or subscribed to Quantifiable Edges, but would like the opportunity to trial again and see details of the Aggregator System, feel free to drop an email to support @ quantifiableedges.com (no spaces) and you will be set up with a new 1-week trial.

Strong Drops From Highs

When strong moves down occur from high levels as happened on Friday, there is often a bit more downside follow through. Below is a study that exemplifies this.



Certainly not an overwhelming edge, but a hint that there could be more selling before a bounce occurs.

BTW, watch out this week for a few exciting announcements from Quantifiable Edges!

Large Gap & Go's To Intermediate-term Highs

Wednesday’s move may look especially strong on a chart. Historically when large gaps continue higher intraday and make new intermediate-term highs it has most often led to a pullback over the next few days. Below is a study that examines this.



Instances are a bit low but notable nonetheless. Below is a list of all the instances using the 3-day exit criteria.



This would appear to suggest a bit of a downside edge over the next few days.

A Look At This Morning's Gap

Big gap up this morning on the heels of solid earnings. I looked at other times we saw a gap up to new highs in the SPY and found the following results:

This would suggest a bit of a downside edge from open to close today.

Columbus Day Performance

While the markets are open on Monday, banks, schools, and government offices are closed. In past years, with the bond market closed, the stock market has done quite well on Columbus Day. Last year Columbus Day saw a gain in the S&P of over 11%. Many traders will likely recall it was the week prior that the market suffered its multi-day crash. Stats associated with Columbus Day are now a bit skewed thanks to 2008. Below is a chart from 1961 – present that shows Columbus Day performance.

As you can see it has generally been a positive holiday for the market.

Considering This Morning's Gap

The SPY is looking to gap up over 1% as I write this. It has also closed higher 3 days in a row. Back in April I looked at large gaps up after the market ha already risen. This study suggests risk/reward favors the downside should SPY gap more than 1% this morning. The fact that the SPY closed within a range rather than at a 10-day high makes it a little less encouraging.. Overall, should this gap hold until the open, I would estimate a mild edge to the downside from open to close.

What's Happened To "2 Days Up In Chop"?

A few weeks ago I discussed the performance of the “2 Days In Chop” systems. After doing extremely well through June, I noted the systems had faltered a bit lately. The primary reason for the struggle over the last few months has been that the “2 Days Up In Chop” system has done poorly.

Below is an equity curve of “2 Days Up In Chop”.

The poor performance of “2 Days Up In Chop” can be attributed the strongly trending rally that has taken place. “2 Days Up In Chop” triggered again on Tuesday afternoon. I effectively suspended use of it as an indicator a while back. Should the market top out or enter a period of consolidation, or even simply undergo a deceleration in its uptrend, then “2 Days Up In Chop” may begin working again. I’ll continue to monitor the equity curve as a gauge of market behavior. Equity curves of simple systems such as this are a nice way to look under the hood of the market and understand what’s working and what isn’t in the current environment.

The Trend vs. Chop equity curve is one I update weekly on the subscriber site. It shows the effect of buying all up days and shorting all down days. In a choppy environment the line will fall. A rising line suggests a more trendy environment. For more discussion on this chart you may see this post from a little over a year ago. A current chart is below.

As you might suspect, the strong move up has been accompanied by unusually trendy behavior.

Deceleration of Decline Suggests Bounce

When there is a rapid deceleration in what was once a sharp selloff that often indicates a bounce is near. I’ve shown some examples of this concept over time. One way to look at deceleration would be by looking the size of the bars. Friday’s Quantifinder found the following study from the 6/24/08 blog. This study uses WR7 and NR7 days. A WR7 is a day whose range is the widest in the last 7 days. An NR7 is a day whose range is the narrowest in the last 7 days. All stats are updated.



This study suggests a decent upside edge over the next week-plus. One aspect of this study that I find particular appealing is that it has been consistent over time. Below is a profit curve using a 5-day exit strategy.


The consistent upward slope shown here is preferable to a jagged equity curve or one where most of the profits were made in a small number of trades.

Bad Ends To The Quarter

Below is an excerpt from a special report that was sent to subscribers yesterday around noon. This study examined performance after the SPX declined the last 2 days of a quarter.



86% of instances were trading higher 2 days later and the average trade was 1.2%. This suggests a decent upside edge for the next couple of days.

A more detailed look at this study may be found in last night’s Subscriber Letter. To view it in full you may take a free trial. If you have trialed Quantifiable Edges before but not since 6/1/09 you may send a request to support @ quantifiableedges.com (no spaces).

Low Volume When The Market Rises Strongly

I showed yesterday how a very-low volume day during a decline can often lead to a short-term reversal. Today I will review a study that first appeared in the blog on 5/13/2008. It looks at extremely low volume on strong up days - like Monday. (Volume studies typically use the symbol $TVOL in Tradestation, which is their measure of NYSE volume. This is what is being used in the below study.)




We’ve seen several studies like this over time and many of them were identified by the Quantifinder on Monday. With so many studies confirming each other, it seems the downside edge in these very low volume rises is for real. One caveat with Monday’s action though is that it was Yom Kippur, meaning a lot of traders were out of action and somewhat lower volume could be expected. Still, it’s been a steady enough edge that I decided to it was worth review.

Friday's Very Low Volume Provides An Upside Edge

One hint from Friday that suggests a bounce is likely is the fact that volume came in very low. It was the lowest volume in over 2 weeks. Below are some tests which demonstrate the potential importance of this.

First, let’s look at 3 day pullbacks that don’t occur on extremely low volume.

(click table to enlarge)


As you can see there is a slight upside edge. The % winners were between 57% and 60% and the average gains days 1-3 were between 0.1% and 0.275%.

Now let’s look at times were the volume was extremely low:

(click table to enlarge)


Here the upside edge is significantly stronger over the next few days. The % winners were between 68% and 76% and the average gains days 1-3 were between 0.59% and 0.94%. The reliability of a bounce occurring at some point in the 3 day period increased from 75% to 87%.

Volume can often provide some valuable clues. For more volume-related analysis, you can check out the volume label on the right hand side of the blog.

Fed Day Selloffs

Wednesday’s Fed day reversal acted much like the one that appeared on April 30, 2008. The May 1, 2008 blog featured a couple of studies that were relevant again today. They were just some of what the Quantifinder identified as relevant last night. I re-ran those studies below. This 1st one looks at times the SPX made a 20-day high and then closed in the bottom 10% of its daily range.

(click table to enlarge)


There appears to be an upside edge here. Although it isn’t the most powerful edge we’ve seen it still appears to suggest bullish inclinations over the next few days and weeks.

Also in that May 1, 2008 blog I looked specifically at Fed days that closed in the bottom 10% of their daily range. I re-ran that study as well tonight.

(click table to enlarge)


Much of the edge here appears in the first day. Poor closes on Fed days have rarely seen significant follow through in the coming days. More often the selling is viewed as an overreaction and the market is able to rebound a bit.

It appears Wednesday's action suggests bullish implications over the short-term.

If you’d like to trial Quantifiable Edges premium services including the Quantifinder and the Subscriber Letter you may sign up for a free trial here. (Those that have trialed before but not since the Quantifnder was released in June may email support @ quantifiableedges.com (no spaces) and I’ll be happy to set you up with a new trial.)

A Long-Term Look At Fed Days

Below is a long term chart of market performance on scheduled Fed days. I didn’t include non-scheduled meetings. Those are generally surprise rate cuts that are aimed at boosting the market. They’re inherently bullish yet unpredictable since the meetings aren’t scheduled. Therefore there is no point in including them in this study.

(click chart to enlarge)


Over the last 27 years there’s been a persistent upside edge. The average Fed day has ourperformed the average day by about 7.5 times.

For more studies on Fed days make sure to check out the Fed day link.

Last Week's Equity Put/Call Ratios Suggest A Pullback

The CBOE Equity put/call ratio was consistently low last week. The 5-day average is 0.53, which is nearly 22% below the 200-day average of 0.68. When the 5-day average gets extremely low as it is now that can lead to a short-term market pullback. Below is a study that exemplifies this.

Most notable and also most compelling about this study is the fact that all instances have occurred after the March bottom. Prior to that the 5-day ratio had never stretched 20% below the 200-day. This is another example of just how extreme the current bull move has become. It also makes the results that much more impressive from a negative standpoint since they were achieved during a 60% run-up in the market.

The 2009 Rally - Breadth Without Compare

Yesterday I looked at Worden Bros. T21111, which measures the number of stocks trading at least 2 standard deviations above their 200ma. As you’ll recall, it was hitting an all-time high. (Data goes back to 1986.)

With Wednesday’s big rally, we are now seeing even more extraordinary numbers. Not only is T2111 up to 58.51%, but T2112, which measures the % of stocks trade at least 2 standard deviation above their 40-DAY moving average, is also in record territory. It is showing that a remarkable 57.19% of stocks are now stretched far above their 40-ma’s.

The action in T2112 truly exemplifies the uniqueness of the rally since March. Below is a long-term look at the indicator. Note that from 1986 through 2008 the highest reading this indicator ever registered was 37.22% in November of 2004. That record has been blown away repeatedly over the last 6 months.

Let’s now zoom in on this year to better see what I’m saying.

There simply is no comparison over the last 23 years to what we are seeing in this recent rally. There have now 5 distinct periods in the last 6 months where T2112 has rallied through the old high. And now we’re seeing the most extreme breadth numbers of all.

Never Have So Many Stocks Been So Stretched Above Their 200ma.

Near the end of August I discussed that some of the breadth measures tracked by Worden were near all-time highs. This situation corrected itself as the market embarked on a brief selloff. Tonight two of their indicators actually registered their highest readings ever. These are T2109 and T21111 which track the number of stocks 1 and 2 standard deviations above their 200-day moving averages. Below is a long-term chart of T21111 with full history of the indicator going back to 1986.

I marked on the chart the 4 other instances that came close to the current reading. What you may notice is that these spikes were generally brief. Every case was followed by at least a mild selloff that worked off the severely overbought conditions. In no case did the extreme spike mark the end to the bull market that created it. It’s dangerous to read too much into only 4 instances, but a short-term pullback does seem reasonable. The current reading does not suggest a long-term top, though.

The 1st Profitable Close Exit Strategy - When It's Appropriate

Today I just want to touch briefly on the exit parameters for the “2 Days In Chop” systems that I discussed yesterday. The exit strategy is basically a time stop married with a “first profitable close” exit. For many traders, a “first profitable close” exit may seem like nothing more than a ploy to inflate the winning % of the system and not an appropriate exit technique to put into practice.

Sometimes this is true. In other cases though, the 1st Profitable Close exit is appropriate and effective. “2 Days In Chop” is one of those cases. Recall the premise of the system was based on taking advantage of the extremely choppy market conditions that had been identified. It’s those choppy conditions that make the 1st Profitable Close strategy viable.

When conditions are especially choppy and the market is constantly swinging back and forth, the expectation is for that chop to persist. This would suggest a move in the direction of the trade is more likely to be reversed than to follow through. So with a system like “2 Days in Chop”, the expectation flips as soon as the trade becomes profitable. Since a reversal is more likely than continued follow through the correct play is to take the quick profit.

Obviously an exit strategy like this only works well when trading a reversal / mean reverting system in a choppy environment. In a different environment, or if trading a breakout system, an exit strategy that looks for quick profits would be a disaster.

Other techniques that work well when trading overbought/oversold conditions would include using a short term oscillator and waiting for that oscillator to revert back to a neutral state, or using a short-term moving average (such as a 5-day) and then exiting the trade on a cross of the moving average.

2 Days In Chop Systems - 1 Year Later

About a year ago I showed 2 systems that looked to take advantage of the market’s choppy nature. Since that time I have tracked the performance of these two incredibly simple systems in the Quantifiable Edges Subscriber Letter. I’ve referred to them as the “2 Days In Chop” systems. As a quick refresher the rules for each are below:

Long System (2 Days Down In Chop):
1) Buy the SPX any time it closes lower 2 days in a row.
2) Sell the 1st profitable close up to 3 days later.
3) Sell on the 3rd day regardless of profitability.

Short System (2 Days Up In Chop):
1) Short the SPX any time it closes higher 2 days in a row.
2) Cover the 1st profitable close up to 4 days later.
3) Cover on the 4th day regardless of profitability.

A few quick notes:
At the time the market was locked in a downtrend which is why I gave the shorts an extra day.
I noted the systems were very raw and were not something I would trade “as is”.

Below I will show the combined performance of the 2 systems since I introduced them. In upcoming posts I’ll discuss how I use the systems and also discuss some thoughts on them and some ideas in which the basic systems could be improved.

Here is the performance over the last year +.



A 73% return would seem very impressive for something so simple. It has had a bit of a drawdown lately, though. Below is a profit curve.

The system peaked on 6/22 and has had a few rough trades as of late. Still, the recent drawdown is very small compared to the overall gains of the system.

So why haven’t I simply traded the system “as is” for the last year? I guess you could say that I’m just not smart enough to blindly trade a system this dumb.

I’m getting a little smarter, though. And I’ll have more in upcoming posts.