Rules:
- Buy the SPY after 4 consecutive higher closes
- Last close must be above the 200 day simple moving average
- Volume on all 4 days is less than the 50 day average volume
The above rules describe the current market environment.
All buys and sells made at the close. No commissions or slippage. All SPY history was tested.
Results:
Not so good. The trades (there were 34) have a hard time going green, even after 20 days. The % of Winners is low until the trade is held for 8 days (% of Winners metric is on the right axis).
Now, lets remove the volume requirement.
Results Without Volume Requirement:
Much better, no? The average trade over 130 instances of this setup only dips into the red on the 4th day, and is solidly green by the 19th day. The % of Winners is also much higher.
What can we learn from this?
Even though volume increased today, I don’t have a lot of faith that the market can rally much further here without a pullback.
If you enjoy this type of study, be sure to visit Rob Hanna at Quantifiable Edges.
Wood,
How does this tie into the PD system. Wondering if I should take another pick for the open tomorrow.
Hawaii, note that while results aren’t good, they also aren’t awful. There just isn’t a great edge here, on either side of the trade.
That being said, I’ll take tomorrow’s pick, but I’m considering hedging the portfolio with a SPY short or equivalent amount of SDS.
Also, don’t forget the win rate of the PDS.
Consider, also, hedging using VXX.
Thanks Damian. Good suggestion.
Good stuff
Ahh..Le Docteur makes an appearance…
4 days up = >85% chance of next day closing lower.
Currently, we have 4 days up, 3 weeks up, so there definitely a historical precedent (from that perspective) for a move lower.
Lastly, my modified TSI is near a place that has in the past suggested trend exhaustion.
My official position is still bullish, per my post today.
But I did get rid of some longs into the strength (part of my trading plan) and bec of the above facts
This kind of study is helpful to me, thanks for running it and posting.
btw- at my piker account size a one half percent gain is not productive.
hmm- looks like I have a system-generated amoeba gravatar!