Honestly, I’m mildly bullish here as I’m looking for a strong test of the 50 day average…I could be wrong…and looking at the news from Japan and the Middle East, it makes sense to keep some short candidates handy.
This screen was adapted from William O’Neil’s classic short setup.
Comments »I wrote recently about two difficult trades PDS picked up: OPXT and TA.
In that post I also mentioned that there would undoubtedly be another winning trade to balance out the losers. Anyone who trades long enough and follows a disciplined methodology has witnessed the symmetry that develops…
Unfortunately, PDS was 100% long when BDCO came along, and thus, there was no cash to purchase the dip. Of course, this assumes one started trading the system the first trading day of January. If one started trading the system on a different day, his results may be different.
Anyone who wasn’t 100% long and took the top pick on that date has logged a 30% gain…
The Honey Hole is a setup coined by yours truly that has proven to be a good short setup for individual stocks. How well does it work on the indices?
To be clear, I’ve coded this setup to model the very recent S&P 500 action. It doesn’t exactly match the Honey Hole setup that I use for individual stocks.
The Honey Hole is a bearish setup where a stock rises X% over a long time (six months or more) and then falls beneath its 50 day moving average, bounces, and then comes to rest X% beneath the 50 day moving average. It is similar to the short setup popularized by William O’Neil in How to Make Money Selling Stocks Short.
To model recent action, here is the buy criteria:
I tried out requiring the index to be above the 50 day moving average 10 days ago, but it resulted in a small sample size.
Results:
Note: I added the QQQQ to this test but its recent action is similar but not exact to what was modeled for SPY.
Over the short term, results are neutral to mildly bearish. After an initial bounce, the intermediate term results are neutral to mildly bearish for QQQQ and neutral to mildly bullish for SPY.
While it is hard to fight the fact that markets tend to go up over time (as almost all of these tests show), once the market is trading beneath the 50 day moving average, the momentum has worn off, or is in the process of wearing off. A market not encumbered by trading beneath the 50 day moving average should be expected to have gained 2% or more 50 bars later. These tests show the market unable to meet this benchmark.
Most of the time, markets trading beneath the 50 day moving average will consolidate and re-take the average. The question that should be asked is when should we NOT expect the market to re-take the average?
Bottom line: I’m not seeing enough evidence to make me excited to take a stand on either side, long or short. It looks like consolidation and mild volatility is the best bet for the short term.
To see a what the Honey Hole looks like on a chart, be sure to see Gilbert’s post in the Peanut Gallery.
Comments »What effect, if any, does a falling 50 day moving average have on a MA20/MA50 cross?
In the comments section of my recent post, Obligatory Post: MA20 Crossing Beneath MA50, JB wrote:
I would maybe start with some simple qualifier like ‘when the 20 crosses below the 50 AND the 50 is lower than 10 bars ago’, i’m sure you could experiment. I would expect in those instances it would more likely result in a successful sell signal, ie, the market would presumably already be downtrending and the 20 crossing below would suggest a short-term acceleration of that. Bottom line, the 20 crossing the 50 part is fairly moot, it’s what the 50 is doing when the 20 crosses. Just what I believe.
Okay, I’m a sucker for a simple moving average cross, and although I’ve tested crosses using dozens of different configurations, I haven’t tried this exact setup…so what the heck. For what its worth, here was my response:
You might be right. I can say with certainty that most MA crosses should be faded. I might run the test tonight for fun.
Plus, I’ve always found competition, even if it is competing intuitions, to be healthy.
Here are the results from running the same test as before but with the added criteria of downtrending 50 day moving average.
Results:
Absolutely, over the short term, as JB suspected, the 20/50 cross with a downtrending MA50 is a better short setup than long setup. Over the long term, it appears that the setup can be faded. In essence, we were both correct.
A word about QQQQ. The QQQQ caught some really really bad trades using this setup.
Because SPY and IWM show quite different results, I’m tempted to write these trades off as a string of outliers. Perhaps readers have a different take on why the QQQQ has performed so badly with this setup. Also, sample size for both QQQQ and IWM (10 samples) were small.
Congratulations to JB for discovering a setup that appears to have a decent edge on the short side. Those types of setups are hard to come by.
Comments »This post is for Jake Gint. The man is a master blogger and prescient precious metals trader. I’d like to think I’ve shown him one or two things about trading the technicals, but I probably haven’t. He has been responsible for me having metals exposure in the retirement accounts, and that has been worth its weight in…
Anyway, PDS picked SLW back on 3.10.11, to be entered the next day. The trade will be closed tomorrow. I meant to remark on the setup when it happened, but I got busy doing something else. I bring it to your attention now because I like Jake Gint and I like it when his thesis lines up with PDS picks.
The blue up arrow shows the buy on the open. Right now, the trade is showing a profit of 7.6%
This was a great trade as it only went against the entry price about a point or so before taking off again.
Comments »I’ve covered this before, like here, but inevitably, whenever there is an impending moving average cross, I see mention of it throughout the blogosphere. So let’s run the numbers, again…
Actually, not too long after Chess starting blogging for iBC, he mentioned the cross as a bearish setup. As I am driven to correct untruths as soon as they are muttered on the internets, I went over to Chess’s blog, intent on setting the record straight. Of course, that event was the exception to the rule, and Chess was right. (Here is the offending post.) It was a good time to get short. Generally speaking though, a 20 day moving average cross beneath the 50 day moving average has been at best a neutral setup and often a better bullish setup than a bearish one.
Rules:
Results:
Takeaway:
IWM looks like a great trading vehicle for those who like to trade the indices. Look at that volatility!
Overall, nothing much to get excited about for either the bulls or the bears.
Comments »All models are now under-performing SPY (+0.83%) and IWM (+0.66%).
There are two trades that have seriously impacted performance, and those are OPXT and TA. TA will be closed soon, while OPXT is still open. Both trades have been large losers, and have fallen almost every day, with little to no bounces, since the trades were initiated. I chalk this up to bad luck, and know that given enough time, there will be good luck trades to balance these out.
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 PDS site, there is a tab labeled “Models” where graphs are housed showing previous drawdowns. The current drawdown from the last equity high is ~15% and looks to be very typical of performance during a market correction.
For anyone worried that the system will dip buy itself to death, it will not happen. As a stock must be in an uptrend to meet the buy criteria, during a sustained market correction, there are very few stocks in an uptrend. Thus, the system sits mainly in cash until the market improves.
20% of Equity per Trade
Net % Profit: -4.38%
Annualized: -19.83%
Average Trade: -0.43%
Winning %: 60.98%
———————————————
10% of Equity per Trade
Net % Profit: -7.38%
Annualized: -31.50%
Average Trade: -0.95%
Winning %: 59.21%
———————————————
ATR Position Sizing
Net % Profit: -3.34%
Annualized: -15.41%
Average Trade: -1.12%
Winning %: 61.82%
.01/share was included for commissions.
A free PDS trial is available.
Comments »
