Damn Leprechauns!

For a reason that has yet to be determined, my backtesting platform is malfunctioning. Perhaps it is a sign. Perhaps I have not paid suitable homage to the Leprechauns.

Without the ability to run my nightly tests, I am severely handicapped…

Even without my software functioning properly I can say that my bullish disposition may yet pay off. We are currently in a neutral zone and can go higher from here. I would love to see a close higher than the last two day’s highs and a partial gap fill from Tuesday’s gap-down.

If we do start to fill the gap, the 50 day average will be watched as overhead resistance.

Cheers!

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While high volatility may cause the blood pressure to rise, it can also signal higher average trades and better win percentages for mean reversion setups.

The recent surge in volatility is typical for a market that is in correction mode. Sprinkle in a possible nuclear meltdown and it is not at all shocking to see the $VIX gain 20%+ in one day. While this can be scary for the uninitiated, there is sublime symmetry found in volatile markets: They don’t typically move in one direction for very long before changing directions. This is not to say that over a period of weeks that a volatile market won’t have a large, extended move. Its just that the move will be broken into up and down days. For the gifted trader, trading this type of market can offers generous opportunity. For everyone else, when caught on the wrong side of the trade in volatile markets, relief tends to come more quickly than in trending markets.

In order to demonstrate what I mean, we will look at Daily Mean Reversion (DMR) in low volatility vs. high volatility markets. DMR simply means that if the market has a close lower than yesterday’s close, you buy (or cover), and if the close is higher than yesterday’s close, you sell (or short).

For this demonstration, I will use $VIX to measure volatility. I like $VIX because it is accessible to even the most inexperienced traders and it has plenty of history to use for testing.

Rules:

• Buy the close (or cover) if it is lower than yesterday’s close
• Sell the close (or short) if it is higher than yesterday’s close
• A $VIX threshold of 25 will be used
• No commissions or slippage included
• All SPY history used

Results:

Note the significant differences in the average gain/losses. The win percentages also increase. The long average trade is large enough that if commissions are low and leverage is used, a viable system may be able to be created.

Bottom line: When the $VIX is above 25, if you don’t like what the market is doing, just wait a day.

I posted the following article in early March, and with $VIX surging more than 20% today, the implications are still very applicable : VIX Surges, Uptrending. What Happens Next?

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Today’s SPY action has lead to large gap ups the next day and is very bullish for the next 7 trading days.

I have modeled today’s SPY action and looked in the past to see what happened next.

Rules:

• Buy SPY when it gaps down 2% or greater and the close is 1% or more higher than the open.
• Sell X days later
• No commissions or slippage included
• All SPY history used

I have added three additional factors:

1. Gap down 2.5% or greater and the close is 1.5% or more higher than the open (this is almost exactly models today’s action).
2. #1 AND volume equals a 50 day high.
3. Gap down 2% or greater and the close is 1% or more higher than the open AND volume equals a 50 day high.

Results:

A word about sample sizes…Of course, the greater the number of samples, the more we can generalize the results. Since this setup is fairly specific, it suffers from small sample sizes. Therefore, results may not be generalizable.

• 2% GapDn, C 1% > O = 24 samples
• 2.5% GapDn, C 1.5% > O = 9 samples
• 2% GapDn, C 1% > O AND V=50dayHigh = 7 samples
• 2.5% GapDn, C 1.5% > O AND V=50dayHigh =4 samples

Results are very bullish for the next day, with the lowest return averaging 0.75% and the best return averaging 4.09% Due to these results, I believe there is a good chance that tomorrow will see strong gains.

As we look out over the short-term, results are still very bullish for up to 7 trading days with the worst average return gaining more than 2%.

The intermediate term results are very volatile. This is likely due to small sample sizes. If we look at the blue line, which has the largest number of samples, we see the possibility of  lower lows or consolidation.

The bottom line is that we should be looking for a bounce with some follow-through. Volatility is likely to remain elevated. The intermediate term is blurry but may become more clear over the next several days.

For more reading on this topic, be sure to visit the Quantifiable Edges blog: 2% Gaps Downs and Other Disasters.

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I’ve been think about Japan and other current world events and am wondering if coal is set to explode.

Without discussing whether nuclear is or isn’t a good alternative energy source, I think it is safe to assume that the nuclear renaissance is effectively halted and that the industry will again spend years to remove the tarnish from its image.

With a vast portion of the world’s crude oil supplies controlled by tyrants and dictators and third world countries, I’m wondering how long people can tolerate volatility before considering an alternative.

As the wind and solar industries are effectively unable to provide energy on a large scale, what is left besides coal?

Am I missing something here? Are we seeing a perfect storm which could see demand for coal explode?

***Update*** A commenter on Fly’s Blog has mentioned that perhaps there will be an increased demand for steel due to the destruction in Japan. Isn’t coal the primary energy source for steel mills?

As a bonus, here is a list coal stocks sorted by RSI2.

Take the poll and leave a comment with your thoughts.

[polldaddy poll=4713658]

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Friday’s bounce came as expected. If it were not for Japan and Libya, I’d feel pretty good about being long right now. In fact, I’d be bullish for the next week or so. However, there is so much going on in the world, so much confusion and uncertainty, it makes it hard to get a feel for what comes next.

The QQQQ is still trading beneath the 50 day moving average, as is IWM (just barely).

I think it makes sense here, given the uncertainty in the marketplace, to have some shorts in mind. While Friday’s bounce was not strong enough to generate really strong short setups, if the uncertainty from Japan and Libya weighs heavily on the market, we may not see a couple of strong up days on which to get short.

Since the QQQQ is still beneath its 50 day moving average, it might be good to focus on tech stocks but I have included other sectors as well.

There were also some energy stocks that made the screen but I did not include them. More on my thinking about that in the next post.

THRX

NTGR

TEN

NFLX

JBL

KKD

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What happens when the S&P 500 spends over 100 days above its 50 day moving average, and then falls beneath it? Is this a buying opportunity, or is it time to go to cash?

Background information: On March 9th, the S&P 500 had been trading above its 50 day moving average for 130 consecutive days. Since 1960, this has occurred only 8 times. On March 10th, the S&P 500 closed beneath its 50 day moving average.

The Rules:

• Buy if S&P 500 has been trading above the MA50 for 100 days or more and today it closes beneath the MA50.
• Sell X days later.
• All buys and sells made at the close.
• No commissions or slippage added.
• Testing begins in 1960.

Results:

First, I added additional factors to the test to see what happens with a larger sample size. There were 18 previous instances of the $SPX trading above its MA50 for 75 or more days and 51 instances of 50 or more days.

What jumped out at me was that the the next day’s returns are good for the 75+ and 100+ models at 0.37% and 0.82%, respectively. The win rate for the next day’s returns is high at over 77% for 100+ days and over 63% for 75+ days or more.

Past history shows that a significant bounce usually occurs almost immediately following this setup.

Results at the intermediate time frame of 50 trading days are soundly bullish.

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Tonight the Wisconsin GOP amended the budget bill to remove the provision that appropriates funds. In doing this, the bill as amended was no longer subject to the same rules as a budget bill. This allowed the Senate to vote on the bill without a quorum. And vote they did, 18-1.

Over the past several days Governor Walker attempted to negotiate with the fleebagging Democrats, but to no avail. Governor Walker published the emails of the negotiations, which clearly showed the Democrats to be intransigent. Of course, had the Democrats not fled the state, emails would have not been necessary.

Governor Walker and the Wisconsin GOP have successfully ended major collective bargaining provisions in a state known to be a union stronghold. Moreover, as Wisconsin is widely viewed to be the state that birthed the modern Progressive movement, this vote represents a historic defeat to unions and Progressives alike.

Look for liberals to fume and spew vicious irony about the death of democracy over the coming days. Watch as the “new civility”, birthed from the Giffords tragedy, goes down in flames as unions and Progressives demonstrate over the GOP exercising the rights given to them by the electorate.

The truth is that this has nothing to do with the teachers or worker’s rights. The truth is that this defeat severely damages the ability of the unions to collect dues. With over 95% of union political contributions going to Democrats, the vicious cycle of the unions extorting tax-payer dollars and then using the money to elect Democrats to ensure continued extortion, is finished.

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