Monday, June 27, 2011

When Follow-Through Days are Followed by 3 Down Days

After posting a Follow-Through Day (FTD) on Tuesday, the market has now pulled back for 3 days in a row. Using the database of Follow-Through days from the original FTD study, I took a close look at short-term performance after other such post-FTD pullbacks. Of the 74 previous FTDs identified using the standard parameters from the original FTD study, 11 were immediately followed by three down days. Results following those instances can be found below.

We see here some extremely positive stats and what appears to be a strong inclination for an immediate move higher. I'll also note though, that only 3 of these 11 instances resulted in successful intermediate-term rallies from the FTD of 3 days prior.

Wednesday, June 22, 2011

The Impact of Breadth on Follow-Through Day Effectiveness

The higher volume and the strong gains on the 4th day of an attempted rally means Tuesday qualified as a Follow-Through Day (FTD) under the Investors Business Daily rules. Most striking to me was not the price gains or the volume but the exceptionally strong breadth on Tuesday. I ran several tests that examined how strong breadth on a FTD might affect its chances of success.

Before I show some of those tests I thought I would point you to the rules of FTDs and some of the assumptions I used in testing them. I basically followed all of the rules as IBD laid them out. Two rules that IBD has never clearly defined are what entails “success” or “failure”. I defined “failure” to be a close below the intraday low of the bottom prior to the FTD. I defined “success” as a move either 1) twice as large as the distance from the low of the potential bottom to the close of the FTD, or 2) a new 52-week high. More detailed explanations of the rules may be found using the link below:

Whether a FTD successfully predicts a rally is not an indication of whether someone trading individual stocks using IBD’s techniques would make money or not. What it does measure is the usefulness of FTDs as a market timing indicator. I believe this is a fair way to test them since IBD claims they are valuable in identifying when downtrends are ending and new uptrends are emerging.

Using the original parameters as described in the post I linked to above there have been 74 FTDs since 1971. Thirty-eight of them (53%) led to successful rallies. This is an interesting stat but it doesn’t tell the whole story. Below is an equity curve that I don’t believe I’ve ever shown prior to last night's subscriber letter. It shows how someone trading the SPX would have performed using FTDs as a buy trigger and then exiting the trade when the rally either “succeeded” or “failed”.

As you can see FTDs worked very well during the long bull market of the 80s and 90s. But in the 70s, and again since 2000, FTDs have struggled as a market timing tool.

As I mentioned earlier, breadth was also very strong on Tuesday. When compared to the past year the Up Issues % on the NYSE was higher than 98.4% of all days. I used the Up Issues % Rank to normalize breadth over the long test period, and broke down FTD results based on those times the 1-yr % Rank was > 95% and those times it was < 95%. First let’s look at times like now where the NYSE Up Issues % Rank was > 95%. (An Up Issues % Rank > 95% means that a higher % of issues traded up today than in 95% of all days over the past year.)

In this case 22 of 35 FTDs (63%) have been followed by successful rallies and gains have been fairly steady over the years.

Now let’s look at FTDs that came without very strong relative breadth.

Results here were never strong and they’ve turned quite negative in recent years. Rather than a 63% success rate as happened with strong breadth, only 44% of instances here succeeded.

So for those who may not have considered it in the past, examining breadth strength on FTDs seems a worthwhile endeavor.

Tuesday, June 21, 2011

Traders On Alert for a Follow Through Day Should Review Quantifiable Edges FTD Research

From the 5/2 peak down to the low on 6/16 the SPX declined 8.2%. After such a decline, Investors Business Daily followers will be eagerly awaiting a follow-though day (FTD) before looking to aggressively allocate intermediate-term trend following positions to their portfolios. I conducted and published to the blog extensive research into IBD Follow-Through-Days (FTD) over the last few years.

I’ll be updating some of it and showing some new information in the next several days, but I would suggest readers that are interested in FTDs may want check out the links below.

This first one is a summary post with links to different areas of the research.

This second link will bring up all blog posts with an “IBD Follow Through Day” label. There have been a few since the summary post above was published.

I’d strongly encourage traders who use FTDs to learn the real facts about them. And keep an eye out for some new FTD research coming soon!

Friday, June 17, 2011

VIX Spikes While SPX Also Rises

While the major indices finished Thursday with mixed moderate moves, the VIX jumped quite a bit higher. It finished 6.7% above Wednesday’s close. It’s very unusual to see the VIX spike up on a day the SPX also closes higher. This is especially true on a day other than Monday, since Mondays show a tendency for a rising VIX. The study below addresses this.

Instances are a little low but appear overwhelmingly bullish.

Monday, June 13, 2011

TICK Tomoscillator Hitting An Extreme

In the May 13th blog post I introduced the TICK Tomoscillator. I named it the TICK Tomoscillator because it is the brainchild of Tom McClellan of McClellan Financial Publications. It uses the NYSE closing TICK readings to measure recent end-of-day sentiment. Extremely oversold readings have typically provided a short-term bullish edge. Below is the current chart of the TICK Tomoscillator from the subscriber site.

As you can see the TICK Tomoscillator posted an extremely low reading of -252.33, which put the Tomoscillator % Rank down below 1%. This triggered a few studies that I showed in last night’s letter. One of the more compelling ones is below. It was last found in the April 19, 2011 letter and looks at TICK Tomoscillator readings below -250 that occur in conjunction with a 5-day low in the SPX.

Instances here are very low, but the results couldn't be any more bullish. The market has recently managed to ignore most bullish inclinations and continue to selloff. We’ll see if such readings can lead to a bounce as they have in the past or whether the market continues to act in a historically abnormal way.

Tuesday, June 7, 2011

A Breadth Measure That Hit an Extreme Monday

To examine breadth one measure I use looks at the % rank of the % of up volume on a certain day over the last year. This reading is shown on the charts page every night. It is also part of the Tradestation package available for purchase (or free to subscribers). Monday’s Up Volume % breadth was among the lowest 2% of the last year. With the market also being down for the 4th day in a row, that triggered this study from the 11/17/10 subscriber letter.

I’m seeing lots of evidence suggesting a bounce is imminent. The last couple of days the market has not complied. I suspect it will fairly soon.

Monday, June 6, 2011

A SPY Gap Study from Master the Gap

I spoke with my friend Scott Andrews from the other day and learned that he is currently offering a detailed study on SPY gaps on his website. The study is free and available for the next few days. When I last saw Scott in February at the New York Traders Expo he presented some of the information in this study at his seminar. I saw that seminar, and I've reviewed the study that is currently being offered, and there is a lot of information that quant-oriented traders may find useful. Therefore I have posted a link below to Scott's site where you can download this SPY study. If you're interested at all in trading gaps then I would suggest checking it out. It does contain a lot of good information.  It's about 30-pages of tables and bullet points looking at SPY gaps from many different angles.  I believe he often charges for similar studies.  Anyway, here's the link:

Full disclosure: 1) Scott is a friend of mine. 2) When you go to download the study it will ask you where you heard about it. Quantifiable Edges is one of the drop-down choices. I'm simply letting you know this so you're not surprised. I am not receiving any compensation from Scott for doing this and have no formal business relationship with him (though he did contribute a section to the Quantifiable Edges Guide to Fed Days book). I'm doing it both because I feel the study is good, and that Quantifiable Edges readers may find value in it. Of course if enough people choose the Quantifiable Edges drop-down then I will definitely bully him into buying me a beer next time I see him.

Re-Examining A Spiking CBI & A Moderate VXO

The Quantifiable Edges Capitulative Breadth Indicator (CBI) jumped up to 8 on Friday. While I generally consider 10 or higher to be strongly suggestive of an upside edge, we’re getting very close, and even readings of this level have suggested bounces. As sometimes happens, while the CBI is suggesting the selloff may be getting exhausted, the VIX (and VXO) are showing very moderate readings. Moderate VIX readings on sharp SPX drops can often mean more selling to come.

But back in July of 2008 I looked at similar scenarios where the CBI spiked without the VXO. The VXO is currently 7% above its 10ma. I have updated some of the studies from that blog below.

First let’s look at times the CBI rose to a high level along with the VXO.

Results here seem to strongly suggest an upside edge. Now let’s look at times where the VXO did NOT spike.

See the big difference? Neither do I. It appears the odds favor a bounce soon with or without a higher VXO.

Saturday, June 4, 2011

Recent & Long-Term Subscriber Letter Trade Idea Results

I don't often discuss trade idea results from the subscriber letter here on the blog. In fact, I checked and it looks like the last time I did so was a little over two years ago. I used to do it more often, but I fell out of the habit. Also while I've always posted and tracked trade ideas in the subscriber letter, it isn't the main focus of the service. I don't consider Quantifiable Edges to be a stock picking service. I consider it one where traders can gain market and trading knowledge through the published research, systems, and tools. The objective is to provide tools and instruction to help traders improve their own trading and results.

But the published trade ideas have done quite well. In fact, May marked the 8th month in a row where the trade ideas added up to positive gains. I've had several letters from subscribers lately telling me they've done quite well either following certain ideas or trading the systems, and explaining to me how they approach the trades.

I don't suggest position sizes, and I would never suggest that the trade ideas represent any kind of complete portfolio strategy. They are what they are -ideas about certain stocks or ETFs that have historically provided a statistical edge.

All of the trade ideas are in either highly liquid ETFs or in highly liquid large cap stocks (almost exclusively S&P 100 components). I do this so that executing trades and getting fills at reasonable prices is not an issue. I think the most frustrating aspect of following trade ideas offered by another person (not that I'm encouraging that, but I know it happens) is not being able to get into or out of the trades that they suggest at a similar price. I’ve addressed this problem with limit prices and highly liquid securities.

With a subscription to Quantifiable Edges I try and provide traders with ideas and instruction to improve their trading. These ideas may come in the form of previously published studies identified by the Quantifinder, or they may be something I discuss in the current subscriber letter, or perhaps it's a webinar focused on a certain trading approach or indicator, or any other number of tools that I've designed and made available.  (For a more complete list of tools, see the "Using Quantifiable Edges" series of posts.) The trade ideas found in the subscriber letter are examples of how I put these tools and ideas to work. While past performance is not necessarily indicative of future results, over the long run they’ve performed well enough that many subscribers have utilized them and easily paid for their subscriptions with the profits.

The blog is free. But what I post here is only the tip of the iceberg.

My goal with a gold subscription has always been to help people improve their trading through the use of quantified research, and while doing so to help them offset the costs of the subscription by offering easy-to-execute trade ideas with a long-term positive profit expectancy. To date I believe Quantifiable Edges has succeeded in doing this. I’d encourage anyone who enjoys the blog but hasn’t yet tried a subscription to do so.

Today I broke the results down by year. I also listed all of May’s trade below so that traders could see some examples. And of course with the full archive of subscriber letters available on the subscriber site, you can go back and see what I wrote about any trade and my reasons for entry and exit when it happened.  First lets look at the results by year:

Now May’s trade ideas:

For those that are interested, the complete list of trade ideas from 2008 - 2011 can be downloaded from the systems page of the members’ section of Quantifiable Edges. (Available to paid and trial subscribers.)

For more information on a gold subscription, or to subscribe, click here.

Lastly, below is the explanations and disclaimer from the Trade Ideas Results Spreadsheet.

All trade ideas ever tracked in the Quantifiable Edges Subscriber Letter may be found on this spreadsheet. 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 may use options to sometimes get 300-400% 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 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.

Feel free to contact me at if you have any questions.

As required by the NFA: Except where otherwise specifically stated, all trades are based on hypothetical or simulated trading. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under-or-over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Commissions, fees, and slippage have not been included. This is neither a solicitation to buy/sell securities or listed options.

Friday, June 3, 2011

A Rare Setup That Has Been Followed By Returns of 6%-12% Over The Next 2-Week Period

Positive seasonality has been run over the past 2 days by strong selling. To see such a weak start to a month is rare. There have only been 5 other times since its inception where the SPY lost over 2% on the 1st day of the month and then closed lower again on the 2nd day of the month. That’s a very low sample size but over the next couple of weeks returns have been outstanding. Below I have listed all 5 instances.

The average return over the 2-week period has been close to 9%, and the worst trade gained 6%! I’d be surprised to see the market repeat returns this strong over the next couple of weeks, but the results and consistency are impressive enough that it seems worth considering the pattern of the last 2 days may suggest a bullish influence over the next 2 weeks.

Wednesday, June 1, 2011

Overbought Going in to the 1st of the Month

There was a lot of research to consider for me to discuss today, but I decided to stick with the theme we’ve been examining over the last few days, which is seasonality. In my last post I discussed the combination of the bullish Memorial week edge and the 1st of the month edge. I showed that together they appeared even more powerful than in isolation.

But how do bullish seasonal tendencies hold up when the market is short-term overbought as it is now? Perhaps the move simply came earlier than usual. One way to measure short-term overbought is to see if the market has already closed higher for at least 2 days in a row. The study below has been shown in the subscriber letter a number of times. It looks at just that scenario.

If you can spot a consistent and tradable edge here then your eyesight is much better than mine. Under these circumstances “1st of the month” no longer appears bullish. At the least this would appear to dampen Wednesday’s seasonally bullish inclinations.

So perhaps today action isn’t as black and white as it appeared in yesterday’s study. But then again – it never is. And isn't that what makes the market so interesting?