Dip buying when the market is continuing to fall requires confidence. I would not continue to dip-buy into a multi-month market collapse. One of the things I like about PDS is that when the market gets weak enough, the system will quit giving signals. The reason for this is simple. Since the system only buys stocks in an uptrend, a market that falls long enough will eventually erase most if not all uptrends.
Currently, the number of stocks in an uptrend (as quantified by the system) is 131. This metric has not seen such low levels since the summer of 2010.
We are looking at the bottom pane of the chart. This metric has also been a fairly good at marking bottoms.
Notice that beginning in 2008, the number of PDS setups was fewer than 100. It does build up slowly to almost 500, but then as the market begins to fall away again in June, the number of setups get fewer and fewer until on October 10th, 2008, there were only 17 stocks in an uptrend. Keep in mind that just because it is in an uptrend doesn’t mean that the system will buy it. It has to dip first, and when it does, it must not violate other criteria in order to count as a true Power Dip.
If the market continues to slide here, PDS will be issuing very very few picks, and subscribers will be mostly in cash. If the market stabilizes or bounces, the number of picks will climb. Either way, knowing this gives me the confidence to keep buying dips, even as the market is falling.
good stuff – thanks
Wood,
For time periods like the one we are in right now, have you ever tested the power dip system using a dynamic hedge or some sorts? It could be pretty cool to have a 4th trade model, specifically for setups in volatile time frames.
David Varadi @ CSS posted up tests of his Livermore Index, hedged an equivalent position in SPY (or maybe it was QQQ), a while back with very impressive results relative to the long only model. Even those results left something to be desired; they weren’t dynamic at all, just a simple equivalent dollar SPY hedge.
Just curious. I’m very new to the systems trading world.
Steak, I never have. It is incredibly difficult, if not impossible to test such a thing using Amibroker while keeping the main system running. The way David tests things and the way I do are different in that he mainly uses Excel, which allows for him to run more complicated scenarios, like hedging (or at least he used to use Excel). What I could do is to design a system that uses an element of the Power Dip, like the number of setups, to issue a short index signal. The results would be for that system alone, meaning it would not be taking simultaneous trades with the Power Dip. It might be very instructive, but I do not think I could run both scenarios together to show the complex interaction. We could likely make some fairly safe assumptions though.