This simple indicator, which has better than doubled the buy-and-hold performance of SPY with 1/3rd of the drawdown, is near to issuing a short signal.
I developed an indicator some time ago that I use to gauge the long-term health of the market. The indicator has been catching my attention lately because it is near flipping to a short signal. Before I get into the specifics of the indicator, let’s first look at its performance vs. buying and holding SPY.
Using all SPY history, buying the ETF on 1.23.93 and holding it until 8.26.11 (no commissions or slippage included) yields the following results:
- Compound Annual Growth Rate of 5.47%
- Maximum Drawdown of -56.45%.
- Total Profit of 169.11%
This simple indicator (to be revealed below) yields the following results over the same time period:
- Compound Annual Growth Rate of 11.78%
- Maximum Drawdown of -20.27%
- Total Profit of 692.27%
While the performance is impressive for the buy and hold investor, what is more important to me right now is that the indicator is near to issuing a short signal. How has it performed, on the short side?
Remember that a negative %chg means a profit for a short sell.
On the short side, this indicator has a win/loss percentage of 66.67%. If we are entering another extended bear market, there is a substantial likelihood that a short trade will result in double-digit gains. In the past, when the indicator has gone short and the market does not enter into a sustained bear market, it has closed the trade for a small loss.
What Is The Indicator?
It is very simple. Calculate the 5 day rate of change (ROC5) and the 252 day rate of change (ROC252).
- Buy (or cover short) at the close if yesterday the ROC252 crossed above the ROC5 and today the ROC252 is still above the ROC5.
- Sell (or open short) at the close if yesterday the ROC5 crossed above the ROC252 and today the ROC5 is still above the ROC252.
How Close Are We to a Short Signal?
The blue line needs to cross beneath the red line.
As I’ve said many times before, simple is often better than complex. With that in mind, I’ll finish this post by showing the equity curve generated from the long and short signals.
Sorry people, for some reason the new blog is not showing bullets or bolding correctly. Hopefully we’ll get it fixed soon and this post will read a little easier.
Your indicator looks great, Woodshedder. Great work there in developing it.
Thanks for stopping by Frog!
WOW, REally impressive!
do you think it’s profitable to go with a 3 -5 month option ?
OR
Just buy fewer spy/dow Short shares outright?
Pitbull, I’m the wrong person to ask about options. They are definitely not my forte. I have no way to figure how the decay, premium, etc. would effect the trade.
Oh, shit, I thought you were going to post a picture of me.
😉
_________
Add the bad news is that the bears will have history on their side.
September is the worst month for stocks, with the Standard & Poor’s 500 down 1.3 percent since 1928. And October is often, as describes it, “between a hurricane and a root canal.”
What fascinates me about this, are the time gaps between trades. Interesting signal here, Wood
It is interesting. What I like about it is that the short side can get triggered by a market that has fallen fast over the year but has risen quickly over the short term. In other words, it should be triggering around some sort of bear market rally.
HI, very interesting indeed but is ROC(5) really necessary. if you use ROC(252) and zero you should get similar results no? relatively to ROC(252), ROC(5) is just hovering around 0.
Results are likely similar. However, using ROC5 theoretically should allow for a short after an up spike. Could be wrong. Would have to look at the trade by trades.
Thanks for sharing this, very generous of you.
Woodshitter, Adjusted for Inflation, you didn’t make any money.
Where do you all come from? Which idiot hires you to post here? The other day another idiot posted chart of 98 vs 2011, 1998 had good moving average support, 2011 didn’t.
You guys have some eyesight problem, you stupid pumpers!
Adjusted for inflation, you’re an idiot.
Has inflation compounded annually at a rate of 11.78% or greater?
Of course it hasn’t.
Also, you seemed to have missed this is a SHORT signal. I’m not pumping anything. And you accuse us of having eyesight problems? Sheesh.
looks like someone has a case of the Monday’s… That and an account that has blown up.
Like the indicator, like you stated good for long term and it is simple. Something I’m going to add for timing and confirmation of other metrics I look at. Thanks for sharing.
I tried to re-build the Woodshedder-indicator with NinjaTrader 7 but somehow the ROC-indicators at the bottom look different than on the screenshot presented by Woodshedder – anyone has an idea why? the screenshot is to be found on https://plus.google.com/u/0/104144963915585261916/posts/D8eYf8Dkpx5
Systematic, something is definitely wrong there. Your ROC252 is moving very quickly, so I doubt it is actually a 252 day ROC. If that is true, then your ROC5 is probably not correct either. If you want, I’ll look at your code, although I’ve never used NinjaTrader.
Thanks for your effort, maybe the ROC is calculated somehow different in NinjaTrader – the code can be seen here https://plus.google.com/u/0/104144963915585261916/posts/jQJuaMHPtmr