Wednesday, March 31, 2010

Lowest Volume In Over A Month Suggesting a Pullback

I’ve noted before how extremely low volume during an upmove can lead to a pullback. Below is a study the Quantifinder identified from the 11/16/09 weekly subscriber letter.

Implications seems to be that there is a downside edge over the next few days – especially days 1 and 2. Below is an equity curve using a 2-day exit strategy.

Monday, March 29, 2010

An Old Reliable SPY Setup

SPY pulled back for the 3rd day in a row on Friday. The action also qualified it for the below study which was was published in the 10/28/09 blog.

"Rate of decline" simply refers to the fact that the losses have been smaller each of the last 2 days on a percentage basis.

Unfortunately the study is not being confirmed by the SPX, which closed up slightly on Friday. It will be interesting to see how it turns out, but I've discounted the study in this instance due to the SPX non-confirmation.

Tuesday, March 23, 2010

Back To Back Outside Days In QQQQ

On Monday QQQQ posted a higher high and a lower low than Friday. This is often referred to as an “outside day”. Interestingly, Friday was also an outside day. Two outside days in a row is quite rare. This was only the 19th time it’s been done since 2000. Looking at performance following the other 18 times shows some compelling results.

These appear to be quite positive implications. They also confirm the December study where I looked at back to back outside days in SPY.

Monday, March 22, 2010

After Down Fridays Over The Past Year...

One place there has been an edge over the last year is in buying Fridays that closed down. Below is a study that illustrates this.

These are some fairly incredible results for just looking to buy a down Friday. Even if you eliminate the 7% winner, which was actually the 1st instance from 3/20/09, results are still very strong. The average trade would be 0.7% instead of 0.9%.

I also looked at how the market has performed over the same time period when Friday has closed up.

It appears the edge has only been on down Fridays.

It is important to understand that this is what I often refer to as an “environmental edge”. In other words, it is something that has worked in the recent past and seems to be a result of the current market environment. It is not an edge that has persisted over a long period of time nor do I expect it to continue to persist for a long period of time from now. That doesn’t mean it isn’t a useful observation, though. In such cases where I believe a setup contains an environmental edge I will look to use it to my advantage until it appears to be losing its effectiveness. Of course I do this with all edges, but environmental edges are on a tighter leash than others.

Friday, March 19, 2010

Mild Pullbacks From Strongly Overbought Conditions

I’ve shown many times before how strong selloffs rarely end when the 1st day of the bounce is meek. Most of the time to get a strong multi-day move off a low, you need a convincing day-1 bounce. Tonight I decided to flip this concept on its head a little bit and examine what happens after a small pullback day during a strong upmove. For this study I used the 2-day RSI. The 2-day RSI is a very sensitive indicator so it would take a very small decline from a very overbought position in order for it to remain above 90 on a down day. This is what happened on Thursday and what I examined below.

There appears to be a fairly strong upside tendency over the last 13 years based on these results. The edge pretty much plays itself out within the first two days though. Looking further out in time did not showing significant results.

Tuesday, March 16, 2010

Fed Day Readings

Today is a Fed Day. I’ve shown in the past how Fed Days have had a substantial upside bias. This was illustrated most clearly in my September 23, 2009 post showing a chart of all Fed Days. Of course at this point in time the market is strongly overbought. For those wondering whether this negatively impacts the chances of a positive Fed Day, it doesn’t appear to based on this post from March 18, 2009.

With trading conditions likely to be slow mid-day as the announcement approaches, traders may want to review some of my other Fed Day studies as well.

I’d also like to point out some recent work by others on the subject. This past Friday Tom McClellan reproduced my September 23rd Fed Day chart for his “Chart In Focus” and added his own observations and commentary. Tom’s chart actually went back a bit further than mine and he breaks it down by fed chairman, which I found interesting. You can see Tom’s take on it here:

And last night in his “Gap Wrap” video, Scott Andrews of Master the Gap showed some interesting research that discussed the probabilities associated with gaps filling on Fed Days. He showed both gaps up and gaps down statistics, and the results were quite interesting. You may view his video here:

Monday, March 15, 2010

Options Expiration Week Performance By Month

Some readers may recall that I’ve previously labeled December op-ex week “The Most Wonderful Time of the Year”. Op-ex week in general is normally pretty good. And while December has been the most reliable month, both March and April have produced more profits going back to 1984. Below is a table that breaks down op-ex week performance by month. It assumes buying the close on the Friday prior to op-ex and selling the close of op-ex Friday. If there was a holiday on that Friday, then the Thursday before the weekend was bought. I excluded op-ex week of September 2001 due to the extreme (and horrific) circumstances.

This positive seasonality could provide a bit of a tailwind this week for the market.

Friday, March 12, 2010

Testing Common Knowledge About Volume On An SPX Breakout

In last night’s Subscriber Letter I looked at the breakout to a new closing high in the S&P 500. I defined a breakout to be a close at a 50-day high after having no closes at a 50-day high for at least 10 days. In general these breakouts showed positive momentum for about a week and then fizzled out. I broke down the breakouts a number of different ways. One way was by using volume. I wanted to test the common supposition that high volume was better when an index broke out. Those results were quite interesting and I’ve included them below. First instances like yesterday with lower NYSE volume.

Here we see a solid inclination for some upside follow through over the next week. But how does this compare to those times that the volume came in higher on the day of the breakout?

What was a decent edge over the first week is now essentially edgeless. Many times on this blog I’ve shown how common trading knowledge is often wrong. This serves as yet another example of why it is important to question common knowledge.

If you’d like to see more results related to my study of breakouts last night you may you may take a free 1-week trial of Quantifiable Edges by signing up here. If you’ve trialed in the past but not in a while, then you may email me at support @ quantifiable (no spaces).

Wednesday, March 10, 2010

A Put/Call Study With Intermediate-Term Bearish Implications

Tuesday’s Put/Call Ratio suggested some complacency among options traders. Below is a study I’ve shown a few times in the past in the Subscriber Letter that appeared in last night’s Quantifinder for gold subscribers.

This study gets off to a bit of a slow start, but then there appear to be solidly bearish implications for up to several weeks out. Even as much as 4-5 weeks out the % winners is exceptionally low, as are the win/loss ratio, the profit factor and the average trade.

Monday, March 8, 2010

Another Example Of Why I Prefer The 1% FTD Rule

On February 11th the market put in a Follow Through Day according to the original IBD definition requiring at least a 1% rise in one of the major indices on rising volume. I mentioned the Follow Through Day and dedicated a few posts to it in mid-February. The S&P is now less than 1% from new highs and very close to hitting a level that that would qualify the current rally as “successful” based on the rules I set up in the original Follow Through Day test a couple of years ago. This would mean the lesser of 1) a new high or 2) a rally twice as large as the distance from the close of the Follow Through Day to the bottom of the downmove. Meanwhile the Russell 2000 is already hitting new highs.

In the last few years IBD has changed their rules and stated that a 1.7% rally on higher volume should be required instead of a 1% rally. Ironically the first major index to actually put in a 1.7% rally on higher volume since the February bottom is the Russell 2000, which did it on Friday - as it was hitting new highs. Not a great bottom call when you’re already at new highs. Over the last few years I’ve suggested ignoring the new rule. In a study I did a little over 2 years ago I showed how waiting for a 1.7% FTD would have missed several rallies. The current instance now serves as yet another example. Not that I a see a huge value in the 1% FTD rule, but it has been at least marginally effective and can be used to set up a positive risk/reward scenario. Additionally, requiring a 1.7% FTD not only puts you at risk of missing the rally but it also hasn’t proven to be any more predictive than the original 1% requirement.

Thursday, March 4, 2010

A Two-Day Pattern With Strongly Bullish Implications

Yesterday I explored a pattern where the SPY made a gap up, a move higher and then closed poorly. It showed bullish inclinations. Wednesday’s bar shared a lot of matching characteristics with Tuesday’s. Below I looked at other times there were back to back bars with such similar traits.

Instances are a little low, but results don’t get much more bullish than this when looking out 1-5 days.

Wednesday, March 3, 2010

Does Tuesday's Weak Finsh Suggest A Pullback Is Coming?

When the market puts in a bar like SPY did on Tuesday I always hear people suggest that the weak finish indicates the bulls are losing control and a pullback is likely to follow. These claims sound reasonable but are generally way off base. To demonstrate I ran a test of performance following unfilled upside gaps that make a 20-day high. Below I’ve broken out the results by times the SPY closed above the open versus times it closed below the open.

First let’s look at those times where the finish was relatively strong:

There doesn’t appear to be any edge in either direction here. Now let’s examine times like the present where SPY closed below the open. Other than that – all the rules are the same.

These results are substantially better than earlier where the finish was above the open. Rather than worrying about the weak finishes like Tuesday, bulls should be excited by it.

I should note that this is one of several studies I am looking at currently and that my overall bias for the next few days is not bullish.

Monday, March 1, 2010

First Day of March Is Weak Compared To Most 1st Days

A quick reminder rather than a new study this morning…

Typically we see the 1st day of the month provide a bit of a bullish tendency. This tendency really began to take hold in the late 80’s when 401k plans started to become more popular and regular stock inflows began to occur at the beginning of the month. Last July I broke this edge out by month. Below is a copy of that chart (not updated).

(click chart to enlarge)

I’ve circled the March stats. You can see that over the last 23 years March has been the 3rd worst both in terms of “% profitable” and in terms of “net profits”. There have been 11 winners and 12 losers and the total profits have been right in line with long term drift. So while April – July show a bit of an upside edge at the beginning of the month, March hasn’t had the same past results.

Happy 2nd Birthday Quantifiable Edges Subscriber Letter

The Quantifiable Edges Subscriber Letter turned 2 a few days ago.

Since the Letter began 2 years ago it has undergone a huge amount of improvement- much of it driven by subscribers.

In the beginning the Subscriber Letter was not accompanied by a website. While I’ve made several changes to the format of the letter, the biggest changes have come in the form of website functionality. Some of the major improvements over the last 2 years include (but are not limited to):

1) 2008 - The Charts page which tracks a fair amount of indicators discussed in some of the studies – several of which are unique to Quantifiable Edges.

2) 2008 - The Systems page with numbered systems. Originally when I had a system that would trigger a signal in a stock or ETF I would just publish the rules in that night’s Letter. Subscribers wanted a database of the published systems along with their rules. I also threw in Tradestation code for any Tradestation subscribers.

3) 2008 - The triggers spreadsheet. Shortly after the Systems Page was created I decided to create a spreadsheet that showed any S&P 500 stock or liquid ETF (non-inverse, non-leveraged) that triggered one of the systems that day. This spreadsheet is updated each night and is a frequent source of trading ideas for many subscribers.

4) 2009 - The Archives. The archives pages allow subscribers to pull up any subscriber letter back to the 1st one on 2/25/08 and see what was written. This came in handy for subscribers who felt the current environment was similar to one I had discussed previously and wanted to see what I’d written then.

5) 2009 – The Quantifinder. With this addition searching the archives became obsolete. If a study was published that provided an edge and would qualify under the current market conditions, the Quantifinder finds it for you and provides a link right to the publication or blog post.

6) 2009 – The Aggregator System. The intraday version of the Quantifinder made it possible to sort through hundreds of published studies as the market was still trading and anticipate which ones were setting up to trigger. With this information subscribers can now get a nice preview of tonight’s letter even before the market closes. And the Aggregator System semi-automates the index trading principles I’ve discussed since the inception of the Letter and lets subscribers trade on that nights research information before the market even closes for the day. Over the 2 year period of the Subscriber Letter the Aggregator System has returned a hypothetical 122% on the SPX.

7) 2010 – The QE Aggressive NDX Trend Timer – Released February 1st this system uses trend, momentum, and relative strength to trade the NDX. I’ll post more details in an upcoming post, but this system is currently free for all gold subscribers.

These are just the major improvements. There have also been several minor ones along the way. There is always more in the works, and I already have several additional projects in development. And while the gold subscription price will go up someday, at this point it is the same $75/month or $750/yr that it was two years ago without any of the above functionality.

If you haven’t taken a trial in a while, feel free to send an email requesting one to support@ (no spaces) and I’ll set you up with a free week to check out the new functionality.

Now back to your regularly scheduled programming…