Joined Nov 11, 2007
1,458 Blog Posts

ROC Indicator Closes Long, Goes Short

This thing is flip-flopping more than the GOP Presidential Candidates.

It closed its open long trade at the close on Tuesday, December 20th and opened a short position. The long position was closed for a miniscule loss.

The short trade is showing a small loss at this point.

The arrows show the short and long trades.

More information on this indicator can be found here.


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SPY Bumping Up Against the 50 Day Average

Last week, my tea leaf reading resulted in my call that the gap would fill and then a bounce would ensue. So far, so good. I also noted in my Santa Rally post that the rally would likely start in a few days. It appears that today may mark the start of the rally.

As I write this, SPY is a nickel or so above the 50 day moving average. Should the rally hold, I see no reason why Santa can’t ride us up to the 200 day moving average, or around $126.00. A close near $126.00 would find SPY just better than breakeven for 2011.

Volume looks low so far this morning, but that is somewhat normal for this time of year. Volatility continues to drift lower.

A low volume, lower volatility rally is the hallmark of Santa’s arrival. Indeud, I see SPY has now broken decisively above the 50 day average. Let’s watch for a strong close and re-evaluate volume this evening…


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Charting the Santa Claus Rally

While it seems ‘ole Santa has caught a case of the Bah Humbugs, charting December to date against previous Decembers shows that the  Santa Rally may just be getting started.

Let’s take a look at the S&P 500, starting in 1960, and SPY, starting in 1993, to chart the average December performance.

I’ve assumed that the $SPX and SPY was bought on the open on the first trading day of December and sold at the close on the last trading day of December.

As shown above, Santa really gets flying about halfway through December. In fact Santa rarely disappoints. We can see how true this is above.

While current December action (white line) is more volatile due to not being smoothed by the averaging process, it is easy to see that so far, the month seems to be following a typical December pattern.

Note that SPY, which represents more recent data, shows that the Santa Rally has been losing steam over the past decade or so.

December Statistics (using $SPX)

  • Average Monthly Profit/Loss = 1.50%
  • Winning Months= 71.15%
  • Worst December = 1968 loss of -4.2%
  • Best December = 1991 gain of +11.1%

Profit Distributions: (using $SPX)

Equity Curve: (using $SPX)

Let’s hope that Santa will soon be firing up his sleigh! If history is any guide, the rally should start within a few days…

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Exploring the $VIX: Looking at Stretch and a Bollinger Band Setup

Tonight while looking at charts I noticed that $VIX traded beneath its lower Bollinger Band. I thought that this might predict a bounce in $VIX and therefore some weakness in the markets. Let’s take a look at the results of this Bollinger Band setup as well as another $VIX stretch setup.

My gut feeling, after seeing $VIX trade beneath the lower Bollinger Band (50,2) in the face of a weak market, was that volatility was too low and should strengthen to match the weakness in the broader market. I created a simple test to model yesterday’s $VIX trade in order to see what has happened in the past.

The $VIX Bollinger Band Setup:

Buy SPY at the Close if $VIX

  • Trades beneath the lower Bollinger Band (50,2)
  • AND Closes above the lower Bollinger Band (50,2)

This “setup” matches yesterday’s $VIX trade. However, I did also include a test that did not require $VIX to close above the upper BB. No commissions or slippage were included, and all SPY history was included.

The Results:

The blue line is the setup as described above. The green line did not require a close above the lower BB. The green line only needs the $VIX low of the day to be beneath the lower BB to trigger a SPY buy. There were over a hundred samples of both of these setups, and over 50 if each trade was held for the full 20 days.

Apparently, based on the weakness of the 5-6 days following the setup, there is a tendency for $VIX to bounce a bit. However, I was surprised to see SPY begin a steady climb once the $VIX bounce was over. I’m guessing this is due to $VIX continuing a slide down the lower BB. I have mentioned this before in other posts. It seems that once price starts trading beneath or very close to the lower BB, it can begin sliding down the lower band, for a lot longer than we would think, before bouncing. This phenomenon can also observed with the upper BB. Note that this setup has performed almost twice as well as the average SPY buy and hold over a period of 20 trading days.

Based on these results, I’m not confident that we’ll see a strong $VIX bounce here.

There are other ways to explore $VIX. Another way is to measure the amount of stretch, or distance from a moving average. Let’s take look at this and compare it to the Bollinger Band setup.

Yesterday, 12.13.12, $VIX closed 15.69% beneath the 20 day moving average and 7.74% beneath the 10 day moving average.

The %VIX Stretch Setup

Buy SPY at the Close if:

  • %VIX is more than 15% beneath its 20 day moving average OR
  • %VIX is more than 7% beneath its 10 day moving average

As always, no commissions or slippage included, and all SPY history was used.

The Results:

There were hundreds of samples of these setups.

The MA10 is a shorter period moving average, and it seems that $VIX can stretch farther beneath it than where it is now before reversion to the mean kicks in. I say this because we still see positive SPY performance (the blue line) which means $VIX has likely weakened, stretching farther beneath its moving average.

However, the longer term MA20 stretch does suggest that $VIX may be stretched far enough beneath the MA20 that we can predict a $VIX bounce and subsequently some weakness in SPY (the red line).

So there you have it: $VIX studies that are somewhat contradictory. The bottom line is that $VIX has been weak and is stretched beneath its moving averages. It is also trading very close to its lower Bollinger Band. SPY has also been weak. These conditions will not persist. My guess is that SPY will weaken further and we’ll begin to see some of this fear creep into $VIX in the form of higher closes.

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Reading the Tea Leaves

A little old fashioned reading of price, volume, and lines…Sometimes it is refreshing to use technical analysis, coupled with educated guesses and intuition, to analyze the market.

The support and resistance lines were drawn many months ago, yet they still appear to be working as turning points in this market.

Today’s action pierced the 50 day average, but SPY was able to rally slightly into the close and close above it. SPY has two kinds of support just beneath it: the moving average and the support/resistance line at $122.21.

  • Volume closed near its 50 day average, logging the most shares traded in the past 9 days.
  • The falling 200 day average is working well as major resistance.
  • The 11.30.12 gap still needs filling.
  • SPY has retraced less than half of the late November/early December surge.
  • Positive seasonality should be considered.
  • $VIX closed higher than its open, but still lower than yesterday. I believe volatility will soon increase.

It appears that SPY may have made a lower high last week. I’m not at all confident that support will hold here. One characteristic of the market this year is its ability to travel over a large range before reversing. Therefore, I think it is more likely to see volatility build and the large gap get filled. After a gap fill, I would look for SPY to bounce and begin the next leg of the coil that appears to be developing. Positive seasonality may kick in, reducing volatility, which may allow SPY to close slightly positive for the year.

Bad news out of Europe or increasing tensions in the Middle East may see SPY fill the 11.28.12 gap.

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ROC Indicator is Long Again

This indicator is really not geared to be used for short-term trading, but it has done really well this year.

I missed writing about the cross on Thursday evening due to the Sewing Machine Installation. The indicator would have had you long at Thursday’s close. The short trade was closed for a quick profit of +0.82%

The first cross of 2011 was on 9.30.11. Trading that cross and every cross since then produces an annualized return of 9.95%. Five out of the six trades in 2011 have been winners. SPY, year to date is down -0.79%.

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Real Men Know How to Sew

I’ve been quiet the last few days, not by choice, but by necessity. See, my wife has had this little sewing and boutique clothing design business for several years, but over the last year, it has really taken off. Couple exponential growth with rocketing holiday sales and becoming more efficient has become a top priority. So the time arrived last week to purchase a new sewing machine. A fast one. A really fast, noisy, commercial model. Think sweatshop, but with a beautiful strawberry blonde running the machine and a flatscreen teevee mounted on the wall above it. Plus, her work room is climate controlled.

These commercial model machines are nothing like a domestic model. They have a 1/2 h.p. motor that is separate from the machine and require a table specially fitted to the model. Of course there are local shops that will set all this up for you, at almost double the cost of doing it yourself. I’m not the type of guy that would pay someone to work on my lawnmower, so I’m damn sure not gonna pay to have someone set up a new commercial sewing machine. Or that was my thinking when we decided not to use a local shop and instead to find the best price possible and have it shipped. By the way, that was my idea. My wife wanted to pay up for the shop.

So I’ve spent the last few days setting it up. Believe me, it wasn’t easy. Without a doubt, Singer has produced absolutely the WORST users manual I have ever laid eyes on. The schematics are tiny, and the print quality is piss poor. Beyond that, it is almost like they expect you to have been born knowing how to service and repair a precision, complicated machine, with only a few sentences of instruction in case you were born lacking.

But it is now up and running.

Since I was writing this post, I asked the wife if she would like to offer a discount to any of you Distinguished Gentlemen of iBankCoin. I thought you might mention iBC when ordering your wives a fantastically priced, hand-made-in-America scarf. Her response was, “Screw them. I can barely keep up with the orders coming in at full price.”

So there you have it. Hopefully I’ll soon be released from my duties as sweat-shop repairman/mechanic and I can get back to blogging and trading.

In the mean time, you cheap, procrastinating bastards who have yet to buy your wife a gift need to check out the online shop. Trust me, she won’t be disappointed, and you’ll love the price!

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