Tuesday, January 22, 2008

CBI Closes At 13 - Some Alternate Entry Techniques

The Capitulative Breadth Indicator (CBI) officially closed at 13 this afternoon. The number is now significant.

Some people asked me to look at a few different entry techniques to see how they may have fared over the years. I used SPY instead of the index for these tests so that gaps would be accounted for using stop orders.

The entry techniques tested all looked for confirmation that the market was bouncing rather than simply looking to enter on a spike in the CBI. The exit remained selling on the close when the CBI closed at 3 or lower as I've previously described.

The first and second tests looked to buy following a CBI reading of 10 or greater at 1) A move above the prior day’s high or 2) A move above the prior day’s close.

Of these two options, a move above the prior day’s high worked better at avoiding drawdown. Both options saw two of the trades move from winners to losers – though the losses were quite small (0.05% and 0.64%).

The third entry tested looked at buying at the first close that was higher than the previous day’s close (after the CBI hit at least 10). This seemed to work the best (good suggestion Tim). All 16 trades remained positive. The average gain was 2.2%. The maximum drawdown was 4.3% and the average drawdown was only 1.9%. For those who prefer to wait for confirmation rather than scaling in on the way down, a close higher than the previous day’s close seems to have worked quite well in the past.

Today’s action put the market squarely into capitulation territory. The CBI broke 10 as expected. Price is now more stretched and some of the measures I use there (RSI, Bollinger Bands, etc.) are now giving extreme readings. Time was already stretched. I’m expecting a significant multi-day bounce to materialize within the next few days. If it materializes, I expect the most beaten down areas to bounce the most.

Stay tuned…


High Plains Trader said...


Great stuff.

Thanks for sharing these ideas.


Tim said...

Thanks for testing my suggestion. Great stuff as always.

I always remember your article on Tradingmarkets about the double support sell signal. That one influenced my trading.


James said...

I think you're wrong

Unknown said...

Hey rob $weet trade. I need your addre$$ $o I can $end you a commi$$sion check.

BTW, this is Eric from the Boucher Yahoo Group.

My signals, like everyone elses buy signals were going nuts today too after the gap down this AM.


Tim said...

Time to test my entry method with the SSO tomorrow.

Rob Hanna said...

Tim -

That's funny you remember my Double Support Stop. That was the first column I ever wrote. I hope it's worked for you. I still use it for all my intermediate-term stops.


Eric -
I take no credit and I take no blame. Great trade on your part. Congrats.