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
