What effect, if any, does a falling 50 day moving average have on a MA20/MA50 cross?
In the comments section of my recent post, Obligatory Post: MA20 Crossing Beneath MA50, JB wrote:
I would maybe start with some simple qualifier like ‘when the 20 crosses below the 50 AND the 50 is lower than 10 bars ago’, i’m sure you could experiment. I would expect in those instances it would more likely result in a successful sell signal, ie, the market would presumably already be downtrending and the 20 crossing below would suggest a short-term acceleration of that. Bottom line, the 20 crossing the 50 part is fairly moot, it’s what the 50 is doing when the 20 crosses. Just what I believe.
Okay, I’m a sucker for a simple moving average cross, and although I’ve tested crosses using dozens of different configurations, I haven’t tried this exact setup…so what the heck. For what its worth, here was my response:
You might be right. I can say with certainty that most MA crosses should be faded. I might run the test tonight for fun.
Plus, I’ve always found competition, even if it is competing intuitions, to be healthy.
Here are the results from running the same test as before but with the added criteria of downtrending 50 day moving average.
Results:
Absolutely, over the short term, as JB suspected, the 20/50 cross with a downtrending MA50 is a better short setup than long setup. Over the long term, it appears that the setup can be faded. In essence, we were both correct.
A word about QQQQ. The QQQQ caught some really really bad trades using this setup.
Because SPY and IWM show quite different results, I’m tempted to write these trades off as a string of outliers. Perhaps readers have a different take on why the QQQQ has performed so badly with this setup. Also, sample size for both QQQQ and IWM (10 samples) were small.
Congratulations to JB for discovering a setup that appears to have a decent edge on the short side. Those types of setups are hard to come by.
Thanks for following up, plenty to work on there for anyone who wants to explore further.