Daily Commentary - Posted on Wednesday, January 27, 2010, 1:58 PM GMT +1

4 Comments


Jan Wednesday 27

SPY and MA Envelope

On January 17, 2010, I mentioned that although since 01/01/2009 the SPY always posted a higher close (than the trigger day’s close) 4 and 5 sessions later (after the SPY’s 2-day RSI closed above 96), it was the first occurrence (since 01/01/2009) that the SPY was trading below the trigger day’s close 4 and 5 sessions later  which could be an early indication that upside momentum is waning and and the market could’ve reached a short- or intermedium term top (see my posting Weakness and Calender Effects). Not the worst call …

With Tuesday’s session the SPY now closed at least 2 standard deviations below it’s 20-day SMA (the well-known Bollinger Bands) on three consecutive sessions.

Table I below shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following five sessions after the SPY had closed at least 2 standard deviations below it’s 20-day SMA on three (or more) consecutive sessions in the past.

Interesting to note that historically three or more consecutive closes at least 2 standard deviations below it’s 20-day SMA represented a favorable intermediate-term (one-week time frame) opportunity on the long side, especially in the event of some intraday weakness and/or a lower close on the following session (like today’s session) after the signal had been triggered.

The SPY was trading lower at least -1.0% below the trigger day’s close (in this event Tuesday’s close) four sessions later on only one out of 32 occurrences (limited downside potential), and posted at least one higher close (than the trigger day’s close) over the course of the then following four sessions on 31 out of those 32 occurrences (96.88%), significantly better than the at-any-time probability of at least one higher close over the course of the then following four sessions (76.64%). And the SPY already posted at least one higher close over the course of the then following three sessions on 29 out of those 32 occurrences.

In addition, with the Distribution of Returns (see stats above) above 70% four and five sessions later (and a Profit Factor of 6.64 four sessions later), the median trade ranks significantly better (means shows a significantly higher rate of return / positive magnitude of change) than the median trade (=50%) within the at-any-time distribution of returns four and five session later (low risk and high odds/reward).

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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Comments (4)

 

  1. Toptick says:

    Excellent work, as always. Thanks!

  2. CarlosR says:

    Hi Frank,

    Good work, as usual, thank you.

    I have a question about terminology. Could you define the following terms:

    Distribution of Returns (in %)

    Efficiency Long

    Growth rate -longs-

    My apologies if these were covered earlier, I may have missed them.

    Thanks.

    • Carlos,

      no problem:

      Distribution of Returns (in %): at-any-time returns are sorted (‘ranked’) from best (equals 100%) to worst (equals 0%), and than I determine where the median (not the average) trade with respect to a specific setup is ranked in comparison to the at-any-time distribution of returns. e.g. a rank of 70% means that 50% of all setup specific returns are ranked in the top 30% of at-any-time returns, means the setup-specific distribution of returns is significantly positively skewed. It more a less a direct comparison between the distribution of setup specific returns and at-any-time returns.

      Efficiency Long: Represents the sum of all positive returns (in order to check to what extend of the total sum of at-any-time gains were the setup able to catch).

      Growth rate -longs-: It’s simply the geometric growth rate of all winnig trades in order to check if -and what extend- the setup were able to catch the top at-any-time winnig trades (those with the maximum rate of change).

      Best,
      Frank

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