Technical Analysis of the S&P 500 SPDRs

When I look at the last 11 months of downtrend on the [[SPY]] , it looks like a down trend that is not even thinking about putting in a bottom.

Notice the Death Cross, which occurred back in December. Two great posts I wrote about the event are Bulls Get Banded, and The Death Cross. Both of these posts have comments sections that are rich, with my favorite featuring the triumph of my Technical Analysis Machine over Fly’s time macheene. Its all there, from 8 months ago. Check it out.

Anyway, so yeah, the SPY is in a long downtrend, with what looks like another triangle consolidation forming. I guess the easy bet is that it breaks down from this pattern for new lows. Back in February, I wrote an article about the triangles that were forming then: Triangles Developing: Nasdaq, Dow, and SPY. Be sure to read the last paragraph of the article for yet another triumph of the Technical Analysis Machine.

In the above chart, a couple of items to note:

The volume has been higher on moves up and lower on pullbacks, since July’s low. Also, the SPY is still above a near-term uptrend line, and has not yet made a lower high, or lower low.

Also, I’ve never tested the Chaikin Money Flow, so I don’t really know if it works or not, but I’ve been sort of watching it, as it might be a good complement to the RSI indicator. Read more about Chaikin Money Flow here: Chaikin Money Flow. What amazed me about the index between December and February was that the CMF was barely negative. Of course, in June, the CMF shows the bottom falling out. Also, I want to highlight the positive divergence between the CMF and price. The CMF bottoms a couple weeks before the SPY.

I’m still leaning long. I am looking for a trip to 130.00 on the SPY, or the 50 day average before re-evaluating. The market may have other plans, and if it does break down here, I will stop out of most of my breakout positions.

I apologize for the egregious use of the bold function. What can I say? I’ve been reading too much of Alpha.

Above are the results since inception of May 19, 2008, from the mean reversion strategy (RSI2).

The strategy is holding one position, which is marked to market, in the above results.

I have still not had the entire equity allotted to this strategy in the market. The cash is available for positions at least 2x larger than what these results reflect. I am getting more and more comfortable with the system with every new trade, and it is getting to be more automatic. Before 2008 ends, I want to go a little bigger with my positions. Common sense tells me that my returns will be twice what is reflected above, but that will remain to be seen, as changes in position size affect psychology. The hardest part of system trading is managing my psychology.

The circled area on the equity curve reflects the last days of June and the first half of July, when the indexes were moving downward, with very few spikes up or down.

This system likes trending conditions, if they have regular counter-trend moves. As long as there are swings, it is happy.

The green dot means that the account closed today at a new high. I’m hoping this means the near-term market conditions are changing to be more favorable for this type of strategy. Months like January and June will result in drawdowns or flat results.