Readers, here is a sneak into a study of PPT that I recently did and what it means to today’s market condition
Wait for the surprising conclusion at the end of this post to understand the impact on today’s market
This study helps identify when you can a PPT of 3.0 or greater can be accepted as an isolated high from where the market would go down from, instead of waiting it to flash “overbought”
Note that PPT has always been very good to spot close to the highs of the market. So this study is absolutely not about discounting the efficacy of PPT signal. This study is to build on PPT’s extremely solid foundations. Having said that, given so many close clusters of highs and lows, it is important for me and I suspect for many of you too, to further nail down the accuracy of O/B signal. Hence my definition of “spot-on” O/B signal is the one that occurs within 1 to 2 days of an isolated high.
I have posted a spreadsheet that lists each day’s S&P closing and The PPT values for 2010. Here is the link http://spreadsheets.google.com/ccc?key=0AgT5R-kSGy6kdHdLODZOa1NJSTF5RkhnNGQ3M0trRUE&hl=en&authkey=CMj9scUF (this needs to be updated with the last three weeks values)
I have added the following columns in addition to S&P values and PPT values, that really helped in my analysis and conclusions explained later in the post.
My guess is you can also use these columns to come up with your own analysis and conclusions.
(1) PPT reaching 3.0 or higher within 1 day of an actual isolated high – A value of “Yes” or “No” is populated for only those rows that show PPT reaching 3.0 or higher.
(2) PPT reaching 3.0 or higher within 2 days of an actual isolated high – Same content as (1)
(3) PPT reaching 2.25 or lower within 1 day of an actual isolated low – A value of “Yes” or “No” will be populated for only those rows that show PPT reaching 2.25 or lower
(4) PPT reaching 2.25 or lower within 2 days of an actual isolated low – same content as (3)
When I say “Isolated high”, I mean an obvious peak from which there is at least some meaningful or tradable downtrend. I define a meaningful or tradable downtrend as at least a couple of percent down move before the move finishes.
STUDY FINDINGS –
(1) There have been isolated highs when PPT has flashed 3.0 and not just over 3.1
(2) Signals hitting 3.0 and higher were reliable overbought within 1 or 2 days of an isolated high when either of the following conditions were met:
(a) the S&P RSI was 70 or greater the same day when PPT hit 3.0 or higher
(b) If the last actual trough/low was within 6 days of PPT hitting 3.0 or higher.
Please note that the criteria is (a) OR (b) or both, and not solely (a) AND (b)
Using the above criteria, I got 100% accuracy in identifying when the 3.0 signal was a “spot-on” O/B signal through back testing.
When neither of the above two conditions were satisfied, PPT hitting 3.0 did not result in an isolated high at least within 2 days. This meant, the market is going to go higher.
Caveat – the sample size is small since I did the above study only for this year to date. So take this study with a pinch of salt.
CONCLUSION ON CURRENT MARKET – So lets look at the latest 3.0 flashed yesterday. It satisfies condition (b), meaning it occured within six days of an isolated low (8/27). In other words, the market must start going down within 2 business days of yesterday.
Alvari (a reader from PPT) pointed out correctly that there is always a danger of mixing too many oscillator signals. So keep that in mind.
So keep an eye out today and tomorrow and lets see if this study passes the test. The jury is still out. Thoughts and feedback are welcome.
StocksRider
Be very careful, take a look at 2009 numbers during the protracted rally, there were numerous instances 3s being printed with the market continuing higher (certainly not falling by an appreciable amount in the next few days after the print). with the TNA/TZA trade i am much more confident about the TNA entry than I am about the TZA entry, you could get your face ripped off.
TZA is great for definite downturns. There is a better 3X inverse to use to be “safe” on the downside. It made it through the Feb – “Flash Crash” swing break even. All other inverse ETF’s got worked. You are a member of the PPT so you know which one I speak of.
Day-to-day TZA is better, but for the long haul mine is better. Worst case I’ve eeked out a minimal gain on mine. Never lost money.
BTW… I got all the respect in the world for Fly, but fuck VXX. I thought it was great when I made 20% in one day with it then made 10% in 2 days in it later. Next time I lost about 2%. So be it.
Despite my poor trading skills I’ve used the combination Po Pimp / Omen system to make ~35% in 3 months. We fuckin’ rule.
Seraphos1 let me check., since my data is only from 2010. Did you use both the criteria from the above study?
Per the above study and looking at slightly weakening internals with pretty pathetic volume, I am now starting to sell at least some of my sizable longs. Just sold remaining SPY calls back to close that position at 38% profits
Nice amount of work, ovah heah.
_______
Thank you Jake. Lets see how this pans out. Will know by tomorrow.
@stocksrider. if the jobs report tomorrow kicks the market generally downhill will you consider the sell-off due more to the PPT 3.0+ readings and past studies, or just a freak of nature occurrence that a market moving report come out in the same phase cycle that the PPT is flashing overbot?
Myke you raise a valid point. This is analogous to the boring, long standing debate between charting technicians and fundamental analysts. The statistical analysis provided here is kinda similar although its not in the same domain as charting. But like charting, it portends what could happen. The NFP could very well be the catalyst.
(p.s. not a big believer in charting as a primary tool. but was using it more as an example)
This study helps identify when you can a PPT of 3.0 or greater can be accepted as an isolated high from where the market would go down from, instead of waiting it to flash “overbought”
Eh?
Reality, yes. The reason this study holds importance is because often as Fly himself says, PPT can remain overbought for an extended period of time. So timing the market becomes tough at the top. By using this analysis I am trying to fine tune the ways to identify a turning point within 1-2 days instead of – betting on the markets the first time PPT flashes overbought and then risking exposure to further uptrend.
Just sold half of my DLTR position for mammoth gains. Letting the other half ride. Booking partial profits was part of discipline and not lack of confidence. Stock is extremely solid and bucking the negative volatile nature of the market since the last 3 weeks when I opened the position. Even if the market goes south, investors will find solace in DLTR because of its appeal to attract more consumers in a perceived economic downturn.
As always, all trades with actual details are stamped close to real time in Twitter – http://www.twitter.com/stocksrider
As Fly very correctly said in his post, fear is still palpable. This is why although I have sold and will continue to sell big chunk of my longs today, I am keeping a few to ride a gravy train tomorrow/Monday should it materialize. If not, then my study will prove correct and I will be happy about taking sizable profits when I had a chance. Always good to bank coin.
Unusual selling going on in CREE. This was one of my open long positions. I closed it at a loss but portfolio is hugely positive today due to sizable gains in SPY and DLTR longs. Coming back to CREE, some big boys seem to be either betting against it or transferring money to VECO.
New position – Sold KKD short. Overbought. According to PPT seasonality, September is down month. Also checking on the float – very small percentage. Fundamental looks not very good either.
This is the only short position I am taking. Few longs still remaining although I lightened up today.
what period are you using for your RSI test above? 5 period RSI?
HB, I am using the standard RSI wilder calculation and the default look-back period of 14. Of course this can be lowered to increase sensitivity or raised to decrease sensitivity. But I stayed with default for my analysis.