High Tight Flag Scan

After reading Hattery’s piece in the Peanut Gallery, I was reminded of some recent requests to work on a High Tight Flag scan. I followed a link provided in Hattery’s piece to this site, which has some great information about the pattern and some possible ways to trade it.

Using Bulkowski’s research and pattern specifics, I began to work on some code to identify High Tight Flags.

The code will require some more work in order to find HTFs that are near perfect, and then I’ll need to add more code to be able to backtest a system to test the pattern. Right now it is a work-in-progress.

Here are the two stocks the HTF code has identified tonight.

Note that COOL has already broken out from two HTFs this year.

VRUS is less than .20 cents from breaking out from a HTF.

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Over the past several days, SPY has fallen while VIX has flat-lined. Is there any significance to this?

Looking at the past few days performance, I find it odd that SPY has fallen from near 52 week highs, while VIX has not done much of anything. I would have thought that a pullback from near 52 week highs (forming a possible double top) would have caused more fear in the marketplace. Let’s see what has happened after this has occurred in the past.

Buy Rules:

• Buy SPY at the close when it loses more than -1.5% over a 4 day period AND VIX gains less than 2% over the same 4 day period.
• Sell at the close X days later.
• No commissions or slippage included.
• All SPY history used.

Results:

Summary:

There were 76 instances of this setup, (31 if held for the full 50 days) so sample size is pretty decent.

To make a better comparison, I also ran the test with just the SPY setup and without the VIX setup. Those results are shown by the green line.

It does appear there is a slight bullish edge because of VIX flat-lining.

I find it noteworthy that SPY doesn’t do much of anything for the next 20 days or so after the setup occurs, and then the returns show some increased volatility. In fact, I think this is the most important implication from this study. I’m guessing that a flat-lining VIX must also experience some mean-reversion and this is reflected in the increased volatility 20+ days after the setup.

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The number of stocks above their 5 day moving average and the Decliners Indicator are near levels associated with a bounce.

We are looking at the red line and the green line.

The red line shows the number of stocks above their 5 day moving average and the green line is a measure of the number of stocks that are declining.

I would prefer the red line to be beneath 700; anything near 500 would be excellent, but it is getting close at 832. The Decliners Indicator works well on a cross above 70. At 81, we have that cross, but it would be nice to see it cross 90.

With the futures down -0.50% as I write, perhaps a morning gap down will be just what the market needs to achieve breadth levels that are extreme enough to get a bounce.

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After reading Fly’s Post, Myth or Fact: Sell Refiners in the Spring? my curiosity was piqued by The PPT seasonality runs and I wanted to see exactly how the Refiners traded from the Spring in the Summer. In order to dig deeper, I needed a refiners index to test. My search for a refiners index led me to this article: Oil’s March Madness A Boost for Refiners. The article contains a nifty little seasonality graph (really, the best part of the article). Keep in mind the author of the article is using tools which are similar to the tools offered by The PPT.

I decided to use $SPXENRM, which is the S&P 500 Oil & Gas Refining & Marketing Sub Index. Unfortunately the index only goes back until 2006, but I think it works for a preliminary exploration of Refiners seasonality.

Buy Rules:

• Buy the index on the open the 1st day of April
• Sell the index at the close the last day of June
• No commissions or slippage
• All $SPXENRM history used

Results:

With approximately 22 trading days in a month, it appears the optimum time to sell this index as been at the end of April or the end of May. As Fly noted, “The results say sell in June, if you are interested in taking profits.”

I have watched Fly trade the refiners seasonality for about 5 years, and he nails the trade every time. Seasonality can be a powerful tool to add to any trader’s toolbox.

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All models are still under-performing SPY (+4.85%) and IWM (+6.38%).

The system got stuck long in two large losing trades and subsequently did not have the capital to take good advantage of last month’s bounce. Also, the market’s ability to go straight up and straight down with very few pauses in between has made it hard for the system to catch the swings on which it depends.

Shameless Plug Alert: If you have been considering trying out this system, the best time to start trading it is when it is in a drawdown. Most people want to start trading a system when it is killing it… On The Power Dip System site, there is a tab labeled “Models” where graphs are housed showing previous drawdowns. The current drawdown from the last equity high is ~13% and looks like a very typical drawdown for the system. I do expect the system to bounce back as it always has. In fact, their are dozens of picks for Monday’s open. When the system generates many picks, it typically does very well the following week.

Year-to-Date Results:

20% of Equity per Trade

Net % Profit: -3.56%

Annualized: -12.99%

Average Trade: -0.27%

Winning %: 58.00%

———————————————

10% of Equity per Trade

Net % Profit: -5.47%

Annualized: -19.43%

Average Trade: -0.56%

Winning %: 57.14%

———————————————

ATR Position Sizing

Net % Profit: -4.56%

Annualized: -16.42%

Average Trade: -0.91%

Winning %: 57.58%

.01/share was included for commissions.

A free The Power Dip System trial is available.

YTD Equity Curve for the 20% of Equity per Trade Model

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The SPY has had an open to close range of less than 0.2% the last seven trading days in a row. What does this portend for the future?

7 is an interesting number, and I find it especially interesting that the last 7 days of market action has seen each day trade in a very tight open to close range. In fact, the past 7 days is the ONLY time in all of SPY history that this has happened.

In order to get a large enough sample size, I had to loosen the criteria to a daily open to close range of less than 0.4% There were about 30 samples for the SPY and almost 500 for $SPX.

Buy Rules

• Buy the close if each of the last 7 days has traded within an open to close range of less than 0.4% (0.5% for $SPX)
• Sell the close X days later
• No commissions or slippage included
• All SPY history used. For the $SPX, tests start in 1960

Results Using SPY:

Results Using $SPX:

Summary:

• Appears to work significantly better when trading beneath the 50 day simple moving average.
• SPY results show that we might expect some weakness over the next 10 trading days.
• Odds favor a lower close the day following the setup.

I’m brain dead and having trouble with any more in depth analysis of these results. I may update the post tomorrow when I’m fresh. Feel free to leave your thoughts on the results in the comments section.

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Short-term breadth is slightly extended to neutral, while longer term breadth is still presenting a slightly bearish divergence.

Top pane is of course SPY with various moving averages and Bollinger Bands.

Middle pane shows two measures of breadth: The red line shows the number of stocks trading above their 5 day moving averages while the gray histogram shows the number of stocks in an uptrend.

The 2nd pane from the bottom (green line) is a decliners indicator. This indicator is bounded between 0 and 100. Higher readings mean many stocks declined, creating a buy signal. Today’s reading of 50 is perfectly neutral. This indicator is a great short-term indicator.

The bottom pane is the number of stocks making a new 52 week high or low. Note that this indicator is not showing much of a divergence, BUT, it doesn’t get much higher than where it is now, yet the indices are very near recent highs.

Bottom Line:

The breadth picture is slightly bearish to neutral over the short-term while intermediate term breadth is showing a slight bearish divergence.

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