A Rare Consolidation

On Tuesday I discussed the 3/10 Offset HV indicator.  I used it to measure when a market has become so coiled that is is likely to have a sharp move.  We have a very unusual situation right now in that the 3/10 Offset HV has closed at a very low level for 4 days in a row.  I decided to run a test last night to look at other times SPX’s 3/10 Offset HV closed below 0.3 for 4 days in a row. I also filtered using the short and long-term trend. Results are below.

These results would seem to suggest an upside edge. But I also looked deeper. Below is a listing of all 20 instances going back to 1960.

What I find most notable are the dates of the occurrences. As you can see most of the instances took place in the 60s and 70s. Also, this is the 1st instance in over 14 years. Personally, I’m not terribly comfortable using a study whose results are primarily achieved during the 60s and 70s and with no instances since ’96. Therefore I decided not to include it when formulating my outlook.

Many more studies lead to dead ends than lead to quantifiable edges.  When deciding what to include in your analysis, it is important to be intellectually honest with yourself.  Traders should look to trade aggressively when  edges strongly suggest a bias.  It is just as important to remain patient and conserve capital when evidence is mixed or lacking.

VIX and SPX Both Close Higher for the 2nd Day in a Row

The SPX and the VIX typically move in opposite directions. It is somewhat unusual to see them both move higher on the same day. It is especially unusual to see this happen 2 days in a row as we saw on Monday and Tuesday. Below is a study that looks SPX performance following such occurrences. It only considers those instances that occurred when the SPX was trading above its 200ma.

Instances are a bit low but the stats seem to suggest a possible downside edge over the next 1-3 days.

Volatility Contraction & A Study In Memory of Bruce Hanna

Notable about current action is that the 3/10 Offset HV Indicator has fallen into “extremely low” territory. I first introduced this indicator in the July 13, 2009 blog. It looks at the historical volatility over the last 3 days versus the historical volatility over the previous 10.  Low readings in this indicator occur when there has been a sharp contraction in volatility. In that blog post I showed that these sharp contractions are typically followed by volatility expansions.


About a year ago I wrote a detailed study that examined using the 3/10 Offset HV Indicator as a filter for daytrading Opening Range Breakouts. The study is 5 and a half pages in length. I’ve never offered it through the blog before. It is only available in the members section of the Quantifiable Edges site.

I took the last week off from blogging after my father passed away. He got dementia at a young age and it took him away from us much too soon. In his memory a fund has been set up with the Alzheimer’s Association.

If you use the link below to make a donation to the Alzheimer’s Association I will happily forward you a copy of the Quantifiable Edges Opening Range Breakout (ORB) Study. The donation may be in any amount. I would ask that if you have found the blog helpful in your trading over the years that you consider a generous (tax-deductable) donation.

http://act.alz.org/site/TR?pxfid=27370&pg=fund&fr_id=1060

I will receive notification from the Alzheimer’s Association when a donation has been made, along with the person’s email. With this information I will forward a link to the Quantifiable Edges Opening Range Breakouts Study along asap. If you do not get it within a few hours, please email me at ORBstudy @ quantifiableedges. Com (no spaces) and let me know.  I apologize for not being able to automate the entire process.

About the Alzheimer’s Association (from their website):

The Alzheimer's Association is the leading, global voluntary health organization in Alzheimer care and support, and the largest private, nonprofit funder of Alzheimer research.

More information may be found directly from their home page.

http://www.alz.org/index.asp

Thanks,
Rob

Blog Will Return On Or About October 25th.

No posts this week.

Modest Gaps Higher From High Levels

I've shown several times before that when the market is already at a high level and it gaps up large in the mornining there is a quantifiable downside edge for the rest of the day.  The large gap up incites profit taking.  See the link below for an example:

http://quantifiableedges.blogspot.com/2009/08/large-gaps-up-from-1-month-high.html

But what of times like now when the makret is at a new high, but the gap up is only modest?  Below is one way to look at it.

It appears when the gap up is of a moderate size a downside edge no longer exists.  And while a large gap up would have had me excited about shorting this morning, this study suggests no substantial edge at all. 

Low VIX:VXV Ratio At A 50-day High

I've found in the past that a very low VIX:VXV ratio can often be a bearish indication for the market.  Monday we saw the ration drop sharply and the SPX close at a 50-day high.  Below is a study that examines a low VIX:VXV ratio and market at a new high.

Implications appear to be mildly bearish, but are mostly exhausted after just 2 days.

Happy Columbus Day?

While the stock market is open on Monday, banks, schools, government offices, and the bond market are closed. In past years with the bond market closed, the stock market has done quite well on Columbus Day. Of course the most famous Columbus Day rally was in 2008 when the market gained over 11% after having crashed the week before. This year circumstances are much different and the market has put in some nice gains this week. In the Subscriber Letter last year I showed research that suggested an up week prior to Columbus Day typically made for a good Columbus Day. Below I have updated some of that research.

I’ve circled some of the more impressive stats here. With more than 7 out 0f 10 trades profitable and winners nearly twice the size of losers risk/reward has been very favorable. It appears positive momentum from the prior week has shown a fairly strong tendency to follow through on Columbus Day. Below is the profit curve.

We see a fairly steady upslope here. Combined with the stats above I’d say Columbus Day does appear to provide a solid seasonal edge. Happy Columbus Day!

Quantifiying how Market Analysis can Enhance Individual Stock and ETF Trading Methods

Stock traders are aware that it is generally beneficial to have the market on your side. Whether the market moves up or down will often have an influence on an individual stock or ETFs movement. As they say, a rising tide will lift all boats. Yet too often traders (especially short-term traders) either ignore the general market action or underemphasize it in their decision making. They’ll look for a trigger without carefully considering the likely direction of the market.

I have found trading with the general market on my side to be of great importance. In August I conducted a study for my gold subscribers that demonstrated and quantified this concept.


As part of their gold subscription, traders have access to 11 different swing trading systems. On the system pages they are able to see the rules, Tradestation code, and backtest results across 2 lists of securities. One list is the S&P 100 and the other is a list of about 100 ETFs. The ETF list looks just at equity ETFs. It does not include any inverse or leveraged ETFs and there are no duplicates in coverage (like SPY & IVV). Most of the systems were first published within a few months of the subscriber letter first being published over 2 ½ years ago. When updating all the original backtests in late August I decided to see how the system performed when there was a perceived market edge versus times there wasn’t.


Many readers are aware of my Aggregator tool. The Aggregator utilizes the market studies I publish in the subscriber letter (and sometimes in the blog). It uses them to generate short-term market projections. Aggregator configurations can produce a long, short, or flat bias. A more detailed description of the Aggregator can be found here. A post describing how the Aggregator has been used as a system can be found here. The bottom line is that the Aggregator is my #1 tool for setting my short-term market bias. It also has a history dating back to the inception of the subscriber letter so I can easily see what my bias was going in to any given day.


So to quantify the value of trading with the market on my side, I ran tests on all 11 numbered systems to show their performance over the last 2 ½ years. I filtered the results to show trades that were accompanied by a confirming Aggregator signal versus trades with a neutral or offsetting Aggregator signal. In general I found results to strongly favor entering trades at times when there was also a perceived market edge (confirming Aggregator signal). Below is a partial example of the results that are shown on the website. This is “System 80509”.  It looks to enter long trades in strongly oversold securities.

The discrepancy here is more substantial than was seen in many of the results. Still, the general results suggested you are much better off trading with the market winds at your back.


The lesson here is not that you need to utilize Quantifiable Edges systems or the Aggregator tool to enhance your results. It does mean that whatever trading methodologies you are using, you will likely stand a much better chance of success if you also incorporate some solid market analysis as a filter.


One last note for advanced system developers and testers. Complete historical Aggregator values are available with a QE subscription. You could easily download and apply them as a filter to test the effect on any of your own systems.

Two Days Down to Finish a Quarter

It's a bit unusual to see the market decline the last 2 days of a quarter.  Below is a study that looks at other times this has happened.

In the past the market has frequently seen a rally following a weak finish to a quarter.