Last week I wrote about the edge that develops when the market makes consecutively lower closes. Excessive bearishness was the soup du jour, and yet the study showed a bullish edge.
Today (Wednesday) marks three consecutive higher closes, and the soup du jour is clover (bulls love clover), so I want to take a look for any edge that might exist.
This study will short the [[SPY]] at the close if the following two conditions are met:
1. The ETF will make three consecutive higher closes, AND
2. The three day rate-of-change will be greater than 5%.
The exit is a simple time-based exit.
100K per trade was used, with no compounding of gains. No commissions or slippage was added.
There were 22 trades generated from all of the available SPY data.
The numbers running across the bottom of the graphs are the day on which the trade was exited.
Net Profit ramps up for the first three days and then begins to fade away.
The win/loss ratio is very volatile. This may be a consequence of the small data set.
While the results do suggest that there is an edge, there were too few trades to convince me that it is robust.
I want to highlight the spikes in the graphs. Ideally these graphs would show a smooth fall-off starting from day three on. The volatility in the graphs point to the possibility that the best day to exit may change quickly and often. Again, if there were more samples, these graphs may be smoother, and I’d be more likely to trust the results.
Something that is odd is that this study also shows a spike around the 12 to 13th day, similarly to the 3 consecutive lower closes study. Maybe it is just a coincidence.
Disclosure: Short the SPY as of Wednesday’s open.
Danny also mentions the 3 consecutive up closes. His custom buy/sell strength indicators are one of the few indicators that I check nightly.