Setting Up for One Helluva Bounce

Everything I’m seeing in my screens leads me to believe the conditions are ripe for a bounce here. We’ve got multiple leaders and indices above their major moving averages, but in short-term oversold conditions. That is a recipe for some trampoline action.

Remember when I went short the SPY on the open? Some traders here (ack, cough, Fly, cough) questioned the move. I will cover my short on the open tomorrow. I’m showing unrealized gains of 1.75% on that trade.

After covering my short, I will go long the SPY, with a position size 2x larger than normal.

HRL was sold on the open. The arrow in the chart above shows the date of purchase.

Selling HRL leaves one space available in the portfolio.

GRO was purchased on the open to fill the available spot.

The Power Dip portfolio is long [[AEO]], [[CAKE]], [[CNK]], [[GRO]], [[EQIX]], [[NKTR]], [[PII]], and [[VRX]].

There are more signals than can be taken by the system. These will be posted in the PPT for our distinguished gentlemen and gentlewomen.

Nothing too scientific here. I simply used the trendline tool to project the 50 day and 200 day simple moving averages out a couple of weeks. Of course this is merely a projection, and a strong move in either direction will affect the actual cross date.

When the cross actually occurs, I will run the Golden Cross test adding the short trade to the mix. (Sell Short when the 50 day sma crosses below the 200 day sma and cover when it crosses above it). Since the system would be short right now, I will just wait for the trade to close so that we have the actual figures to work with. I can say that playing the Golden Cross long only is going to outperform playing from both the long and short sides.

CAR was just sold, for egregious gains north of 12%.

Another beautiful Power Dip trade. The arrow shows the entry on the open of the bar.

This sale leaves room in the portfolio for one more stock. PII has been added on today’s open.

This system is designed to be traded by the working stiff who needs an edge, but can’t babysit positions while at work. On Tuesday, VIT was sold for a gain of over 15%. Yesterday, VM was sold for an 8% gain.

Keep in mind that I am using percent-risk position sizing on these trades. For example, If I am trading 100K, and I want to risk 1%, then I buy 10K worth of shares, and use a 10% stop. In fact that is exactly how I trade this system. This limits risk, during a worst case scenario, to 8% of total equity.  To lose 8%, all 8 positions would have to stop out.

I am traveling this weekend, but as soon as I have time, I will post a spreadsheet updating the Power Dip trades for June.

Current portfolio: AEO, CAKE, CNK, EQIX, HRL, NKTR, PII, and VRX.

VM is being sold this morning for an egregious gain of 10%+. This trade represents the spirit of the Power Dip. The arrow shows the entry.

HRL is being added to the portfolio this morning, along with CAKE, which will make a full portfolio of 8 stocks.

All eight stocks are AEO, CAKE, CAR, CNK, EQIX, HRL, NKTR, and VRX.

After this morning’s purchases, the Power Dip portfolio will be holding seven stocks, which is one position short of a full portfolio.

The seven stocks are AEO, CAR, CNK, EQIX, NKTR, VM, and VRX.

I’m using a 10% stop on these.

Within a few days, there will likely be much ado about the 50 day simple moving average crossing back above the 200 day simple moving average on the SPX. This is a well-known technical signal and many pundits are likely to begin mentioning it.

I decided to test its past effectiveness, if for no other reason than to be able to have an intelligent discussion about the event, should it present itself for discussion. Secondly, my bias has been intermediate term bearish, and I want to be prepared to shift towards a more neutral or even bullish bias, if warranted.

The Results:

100K Starting Equity; No Commissions or Slippage; Returns are Re-invested.

Rules, buy the next open after the 50 day sma closes above the 200 day sma. If a long position is held, sell the next open after the 50 day sma closes below the 200 day sma.

I boxed in the metrics that I think are more interesting.

Of most importance is the fact that it beat buy-and-hold. Secondly, a Golden Cross on the SPX often marks the beginning of a very long trend as the average winning trade is held 5x longer than the average loser. The high win % is notable, too.

Not to over-simplify, but this is a juicy setup for the buy-and-hope crowd.

The Equity Curve:

More Research on Trading With the 200 Day Average:

From the MarketSci Blog

Mebane Faber’s World Beta (This is fantastic research; a MUST read)