Despite the small sample size of 28 trades, there appears to be a significant edge here. From a sentiment perspective, the bulls seemed somewhat incredulous that the markets closed higher for a fourth day. Perhaps they will be more willing to sell tomorrow, sensing that the market has gotten ahead of itself.
This study will short the [SPY] at the close if the following two conditions are met:
1. The ETF will make four consecutive higher closes, AND
2. The four 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 28 trades generated from all of the available SPY data.
Net Profit stays positive even when holding short position for 20 days. I interpret this mean to that these setups often mark intermediate tops.
Almost 80% of trades are profitable on the next close. Note how the measure drops off smoothly through the 6 day exit and then becomes volatile.
Win/Loss Ratio is volatile but gives a rough average of 2.00 This means the average winning trade is twice the size of the average losing trade. Also, it never drops below 1.00 which means the losing trades were never larger than the winning trades.
The average trade is profitable from day one (this is what my partner and I call an “entry edge”). Note that a $1900.00 average trade shows the market has moved down, on average 1.9% from the entry by the close of the 2nd day (day zero equals day of entry).
A Little More Information:
Using all of the same parameters (exit on close of bar 2) except removing the Rate of Change requirement yields a total of 164 trades, with 51.22% profitable, a win/loss ratio of 1.73, and an average trade of $286.00. I present this information to show that at the very least winners will remain almost twice as large as losers. Introducing the Rate of Change improves the chances of winning as well as increasing the size of the winners, presumably because a market that has made a large gain has farther to fall.
Be careful jumping on the short bandwagon if the markets gap down on Friday. Further testing shows that this edge is often eroded in the overnight futures market. If you are already short, great. However, if our best average exit yields 1.9% and the market gaps down 0.9%, half the average return may be lost.
Its your money.
I’m not expert but for what its worth what I noticed today:
I believe SPY and QQQQ both printed bearish shooting stars though without gap ups
TNA is up 5 days in a row and has not been up 6 in a row in the past 8 months
BGU is up 4 days in a row on declining volume, and only made it to 5 in a row twice in the past 8 months
DJT is at resistance, BKX did not participate today
SPX futures did not confirm the Nasdaq futures highs
Also its interesting that today SPY filled a gap today from all the way back to June 12th which might mean something
You may already know this, but Larry Conners wrote a book on these same kind of edges.
As for me, I almost shorted $SPY today, but decided to wait for the dip to go long.
Thanks for the backtesting Shed. I went long SDS at the close for a short term trade. It looks like the edge drops significantly after 2 days. I will look to book profits quickly on a winning trade.
Someone needs to point this out to KD and his merry band of sock puppets:
Wooder, I am glad you are following Karl’s call as well and go short. You can learn more from him tonight:
Lambo, I do not follow Karl.
I do not trade the fundamentals. Pure technicals. And as he says, I trade them “out of context.” Curious where the Zombies are, considering the Golden Cross is looking purty Golden, and especially since my site and email were bombarded with Zombies when the SPX closed beneath the 200dsma?
Will you attempt to improve the results on this or is this more or less an idea that you wanted to try without further research..
Thanks for posting your work…… I have been learning much from your ideas…..
DaveM, I think this type of setup does not happen often enough to really make it into a system. It could be improved on I guess but as I think about how to improve it it starts to feel like I’m curve fitting.
Honestly, it is a great setup, and when you get these types of setups, you trade the odds. Odds here are better chances of winning than losing, and if you do lose, your loser is likely to be small relative to the wins, and the edge appears to persist for several weeks.
Did you have any ideas about improving it? If so, let me know.