Last Week, Power Dip Surges; Dow, Naz, S&P Fall

PDS bucked the trend of the broader markets last week, racking up nice gains across all models…

From 5.13.11 close to 5.20.11 close:

• SPY -0.32%
• IWM -0.78%
• QQQQ -1.10%
• DIA -0.88%

PDS Models over last week:

• 10% Equity Per Trade +2.21%
• 20% Equity Per Trade +3.17%
• 3ATR Position Sizing  +2.90%

As posted a couple of weeks ago, PDS was stretched fairly significantly beneath its long-term averages in terms of its average trade and win percentage. Although I expected the system’s performance to bounce, it is still nice to see it bucking the trends of the broader markets.

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The following stocks represent over a month’s worth of High Tight Flags. I first started working on the screen on April 13th. The blue arrow identifies the evening they were screened. I have posted them for review in order to improve the screen and to start to think about exit strategies as well as stops. Comments/thoughts are welcome and encouraged.

In Part 2 I will post some thoughts and some statistics generated from a simple trading system built to trade the High Tight Flag setup.

Look for Part 2 soon…

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My just-turned 10 year old son has developed into quite the pitcher this year. Tonight he pitched 2 and 2/3rds innings and had 5 strikeouts, 1 walk, and 1 out when he caught a pop-fly to the mound. He threw a total of 44 pitches.

He doesn’t have much smoke yet, but we are working on his off-speed pitch and working on keeping the batters off-balance. The big boy (is he really in 5th grade?) got up to bat and my son started him off inside at belt level for a swing and a miss. I yelled out to him, “Keep him off balance JB!” He threw the next one low and it hit the dirt just behind the plate for a ball. I was proud of him for that pitch. That is just what we’ve been working on–moving the ball around. The next pitch was again low around the ankles and Big Joe swung and missed. I yelled out, “I see you 99! Keep him off balance!” I knew he was going to throw some heat since he was pumped and ahead in the count. I had no idea where he’d throw it, but I was hoping it would look different than the previous two pitches. Big Joe’s coach was reminding him he had two strikes on him- he had to swing at anything close. The big boy was visibly nervous when he stepped into the box. My son threw him a high fastball (it came across the plate around Big Joe’s shoulders. He was trying to throw it hard and his timing got off…) and he swung, his bat cutting underneath the ball by about six inches. WooHoo!!! Strike three! The inning was over…

We still lost 8 to 3, but my son gave up no runs.

I put him to bed tonight around 10:15, and he promptly brought out his 25 Greatest Baseball Players of All Time and tried to read about A-Rod by the sliver of light coming in from the hallway bathroom.

He’s got the fever. I’ve got the fever. Hell, even my wife had a t-shirt printed up with “JB’s Mom” across the front and “99” on the back.

Tonight’s a night for celebration and reflection. I’ll get back to the market in the morning.

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Some new ones made the screen yesterday evening…

Click on the symbols to bring up the charts.

AMRN

GLBC

ADAT

GENE

CT

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Today’s action was very positive, in my opinion. A very large gap from April 20 was partially filled, and the market opened down but reversed to close higher on good volume. As mentioned in last night’s post, the 50 day average held as support.

On the face of it, the market appears to be more normal, and seems to be trading more normally, than it has in many months. Keep in mind that a normal market does not trade in just one direction, day after day after day, for months at a time.

Sure, the market may be undergoing a topping process, but at least it is doing so in an orderly fashion. In my opinion, a topping market that is trading normally is better than an abnormally trading up-trending market.

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Again, short-term breadth measures are signaling that a bounce is imminent.

The two short-term breadth indicators are the red and green lines.

The red line is a measure of the number of stocks trading above their 5 day moving averages. Anything under 700 usually brings a bounce. It is currently at 492.

The green line is the Decliners Indicator. I recently put up some performance results and a summary of how this indicator works here. Those results used 90 as a trigger. The indicator is currently reading 86.9.

Combine these breadth readings with 50 day moving average support just beneath today’s close and we have a setup for another quick bounce.

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The exit is always the most important trade…Can a subscriber idea for an exit modification improve results?

PDS issues an exit signal in the evening to be acted on at the next close. One of the subscribers left a comment on the site wondering whether selling a stock when it gaps on the open is better than waiting to sell it at the close. It is an interesting idea, and I decided to backtest it, although caveats must be added to the results (found after the summary).

I am using the 10% Equity Per Trade model as the baseline model as it will make the most trades. When conditions are right, it will have 10 open trades at once. This should give plenty of samples over the short term.

Rules:

• Apply standard exit BUT close at open (instead of close) IF the open gaps more than X% above previous close.
• Commissions of .01/share included.
• De-listed data used (survivor free).

Results:

Summary:

• The exit modification of selling the open when the stock will gap up MAY improve results (see caveats) as over the long-term tests, it has beat both the baseline and baseline with selling the open.
• Just selling at the open instead of the close has done well since 1.1.2011. However, over the long-term, selling at the open has slightly under-performed the baseline.

I think this is an interesting exit modification, and I’m grateful to Rick for introducing it. If one is an experienced trader and understands how to properly place orders, monitoring liquidity and the bid-ask spread, I believe this modification could improve results. Of course it would have to be applied diligently and consistently or the trader would likely introduce biases which would probably negate any positive benefit.

Caveats:

Trying to backtest selling the open because of a gap-up introduces a “look-ahead” bias. In real life, there is absolutely no way to know exactly where a stock will open. Yet, when backtesting, we know exactly where it opened and can then place our sells according to the open AND get the open price. In real life, if a stock gaps +4%, the likelihood of getting the exact open price is very, very slim. There is no sure-fire way to know that your sell order will fill for more than 2%, or 1% above the previous close. Thus, one must take these results as a guide, and not as the gospel. Furthermore, the open is notoriously illiquid, which can exacerbate the problems highlighted above.

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