Blog | Quantifiable Edges | Assessing Market Action With Indicators & History

Big Time Swing System Results Updated for 1st Half 2012

Posted by Rob Hanna in Uncategorized July 7, 2012

I’ve updated the Quantifiable Edges Big Time Swing System overview page with results through July 2nd when the most recent trade closed out. There is not a trade currently open. Since the system only averages about 1 trade per month, I typically update the results bi-annually. The 1st half of 2012 produced a net return of 2.6% for SPY (including dividends, commissions of $0.01/share, and an assumed interest rate on cash of 0.1%). This was achieved with 1 short trade and 4 long trades. Four of the five trades made money.

For those looking for a system that they can use as a base to build their own system from, the Big Time Swing is an attractive option. It is all open-coded and comes complete with a substantial amount of background historical research. And since it is only in the market about ¼ of the time, it can easily be combined with other systems to provide greater efficiency of capital. Once you’re ready to try and improve the system yourself you can also refer to the system manual or the August 2010 purchaser-only webinar – both of which discuss numerous ideas for customization.

And if system development isn’t your thing, the Big Time Swing System provides easy to follow mechanical rules that you can follow. The standard parameters have performed quite well. There are only about 11 trades per year averaging 7 trading days per trade. All entries and exits are either at the open or the close. And to be sure you have everything set up properly traders may follow the private-purchasers only blog that shows all SPY signals and possible entry/exit levels. This service is free for 12 months from the date of purchase.

For more information and to see the updated overview sheet, click here.

If you’d like additional information about the system, or have questions, you may email BigTimeSwing @ Quantifiable Edges.com (no spaces).

Late-Day Optimism Getting Overdone

Posted by Rob Hanna in Quantitative Study July 5, 2012

Despite the strong move higher over the last several days, the market has been consistently producing bullish studies. At Tuesday’s close I noted the first bearish study to trigger in a while (using the Quantifinder). It is an interesting one so I thought I would share it on the blog.

The market has seen a lot of strong finishes lately. When it consistently closes near the high of the day it suggests optimism on the part of traders. This optimism is now at a level that suggests it is a bit overdone and there is a good chance of a pullback. The study below exemplifies this concept.

Downside risk appears to be reaching a level that the market will often experience a brief pullback. But while the downside edge appears to remain in place for a full week, most of the edge has been realized over the 1st 2 days.

Solid Upside Breadth on a Down Day

Posted by Rob Hanna in Breadth, Quantitative Study June 29, 2012

Sorry the blog has been slow lately. It will probably be so for another week. One study identified by the Quantifinder yesterday considered the strong breadth on days the SPX declined. I have produced the results table below.

The edge isn’t huge, but it does appear to be high-percentage.

A Historical Look At 2% Drops In Uptrends

Posted by Rob Hanna in Quantitative Study June 22, 2012

The SPY fell over 2% yesterday. Below is a simple study that looks at SPY performance follow all 2%+ drops while the market is above the 200ma.

The stats table is impressive and suggests a solid upside edge. But there is a problem with this study that can’t be seen in a stats table. It hasn’t worked well lately. To illustrate this I have broken it into 2 studies below. This first one shows the 1993 – 1999 period.

Extremely strong edge suggested here. But then market behavior changed. Here is 2000 – present.

No edge suggested here. Market dynamics are always changing. Sometimes for reasons we can explain, and sometimes not. In either case, when you use edges in setting your bias, it is important to make sure those edges have held up in recent times as well.

A New Look At Short-Term Strength After FTDs

Posted by Rob Hanna in IBD Follow Through Day, Quantitative Study June 18, 2012

Tuesday was a Follow Through Day (FTD). Despite the fact that it gave inclinations of being a weak one that would probably fail, the market so far is doing well. In 2008 I showed that performance in the week after a FTD was often indicative ofwhether the attempted rally was likely to succeed or not. I took a fresh, and slightly different, look this weekend. Using the current expanded FTD list I looked at performance starting 3 days after the FTDs. If a rally succeeded or failed before the close of day 3 then it was not included in study. There were 34 instances that closed under the FTD close on day 3. Of those, 12 (35%) went on to successful rallies. There were 46 that closed above the FTD close on day 3 (like Friday). Of those, 27 (59%) went on to successful rallies. Not overwhelming odds, but at least notable, and perhaps worth some consideration.

A Strong Move Up Ahead Of OpEx

Posted by Rob Hanna in Quantitative Study June 15, 2012

It is a little unusual to see the market close so strongly just ahead of options expiration. And when it has happened it has typically led to selling over the next few days. The study below shows this. I last showed it on the blog in January. All stats have been updated.

Numbers here are moderately compelling and suggest a downside edge.

FTDs on Moderate Volume

Posted by Rob Hanna in IBD Follow Through Day, Quantitative Study June 13, 2012

Total NYSE volume was down slightly but Nasdaq volume rose on Tuesday. Using the original 1% gain rules that we used to create our Follow Through Day (FTD) database, this meant Tuesday did see a FTD in the Nasdaq. But what happens when volume rises to trigger a FTD, but it is still light? This is one concept I looked at in last night’s subscriber letter. To answer this question I looked at all FTDs where volume came in below its 10ma.

The inclinations over the 1st few days here appear moderately bearish. The stat at the bottom is interesting, and suggests the rally attempts often fail when FTDs don’t come on strong volume. And for those that may be curious, the success rate rises to 56% when volume comes in above its 10ma.

Historical Implications of Monday’s Multi-Day Engulfing Pattern

Posted by Rob Hanna in Quantitative Study June 12, 2012

Monday’s action was so extreme that it engulfed the last 2 days. The Quantifinder identified the below study, which I last looked at in the subscriber letter a little over a year ago. Results are all up-to-date.

While the immediate 1-3 day reaction has been unreliable, these extreme outside days with poor closes have commonly been followed by upside over the 4-10 day period.

A New Look At 3 Down Days After An FTD

Posted by Rob Hanna in IBD Follow Through Day, Quantitative Study June 4, 2012

Last June I showed a study that looked at times the SPX pulled back 3 consecutive days after a Follow Through Day (FTD). Johan pointed it out in the comments so I thought I should take a fresh look. I made an adjustment an re-ran the results. The adjustment was that the study last June was conducted using the list of FTDs from the original Follow Through Day study. Since then, all of the FTD studies I have conducted have used a more complete list. The difference is that the original list was as generous as possible in determining a failure. It required the market to close below its intraday correction low before being deemed a fail. The more complete list simply requires an intraday probe to a new low, and it doesn’t look at the close. If I use the newer list, rather than the original, then results would look like this:

Results still appear bullish, but the 2 additional trades are both losers (over the 3-day period). They occurred on 8/2/82 and 10/13/98. There is also 1 important factor to consider about Tuesday’s FTD. It has already failed. The market hit new lows on Friday. There have only been 3 other instances of FTDs that have failed so quickly. One was the 8/2/82 that was just added to the study. The others were 3/8/01 and 9/25/08 (neither of which were followed by 3 down days in a row and are not included in this study). I’m not sure that the fact that the rally has already failed will matter, but it does mean the market is in a different state. It is undergoing a selloff and no longer involved in a rally attempt. And just the fact that we are in a different state makes me cautious about this study.

FTD Arrives on Moderate Breadth

Posted by Rob Hanna in IBD Follow Through Day, Quantitative Study May 30, 2012

In the 8/24/11 blog I looked at the impact of breadth on Follow Through Days (FTD). To compare breadth across market regimes, instead of using absolute breadth readings I use relative breadth readings. The study below uses the 1-yr Up Issues % Rank. This reading compares breadth versus all other days for the last year. Despite the strong price action, Tuesday only ranked in the 84th percentile breadth-wise. All stats are updated.

As you can see, there is no discernible short-term impact from the FTD. The stat at the bottom is interesting, and suggests the bears may even have a slight intermediate-term edge when FTDs don’t include strong breadth participation. And for those that may be curious, the success rate rises to 52% when breadth comes in above the 95th percentile.

A Long-Term View of Memorial Week

Posted by Rob Hanna in Quantitative Study, seasonality May 29, 2012

The week of Memorial Day has shown some bullish seasonal tendencies over the years. This can be seen in the chart below.

There was no substantial edge apparent throughout the 70s, but starting in 1983 you’ll note a bullish tendency. The last 2 years have not followed suit, though. A more detailed breakdown of Memorial Day week was shown in this weekend’s Subscriber Letter. (Click here for a free trial.)

CBI Returns to 1. Now What?

Posted by Rob Hanna in Uncategorized May 25, 2012

After spiking up to 11 last Friday the Quantifiable Edges Capitulative Breadth Indicator (CBI) dropped back down to 1 on Thursday’s close. (I noted this on Twitter https://twitter.com/qerob ) I’ve discussed for years how buying selloffs when the CBI reaches 10 or higher and then selling when it returns to 3 or lower is a reasonable approach to taking advantage of the CBI. In Monday’s blog I listed all 26 instances and the results of taking this approach. We now have one more to add to the list. Buying on the spike to 11 on Friday the 18th and exiting the trade at yesterday’s close would have meant about a 2% gain.

So now that the CBI is back to neutral, what might traders want to be on the lookout for? One obvious answer is an IBD Follow Through Day (FTD). There are many, many FTD studies on the blog, and if one arrives I will be sure to note and discuss it.

What Wednesday’s High TICK Reading Implies For Thursday

Posted by Rob Hanna in Quantitative Study May 24, 2012

The rally near the end of the day Wednesday saw broad participation and aggressive buying. At one point the NYSE TICK spiked over 1500. It actually registered its highest intraday high since the end of August. I saw comments suggesting the very high TICK reading after a test of the lows was a good sign for the bulls. So I evaluated this concept. I formulated a test to simply seek out other instances where SPY probed or tested a new 50-day low while the NYSE TICK hit its highest intraday level in at least 100 days. The 1-day returns were the most interesting. I have listed all instances below.

The consistent and sizable weakness the next day has been very impressive. On average, the day following the extreme TICK near a market low has lost just over 2%. The average drawdown (2.5%) has been over 12 times the size of the average run-up (0.2%). It sure doesn’t look like the frantic intraday buying and high TICK is a positive.

CBI Crosses 10 – How Bad Can The Selloff Get From Here?

Posted by Rob Hanna in CBI, Quantitative Study May 21, 2012

Notable about Friday’s action is that the selling caused the Quantifiable Edges Capitulative Breadth Indicator (CBI) to rise from 7 to 11. We now have the 10+ CBI reading that I have discussed and written so much about over the years. Over the weekend I thought I would examine individual instances of CBI readings of 10+ and look to answer the question “How bad could it get?” The table below again considers the approach of buying the SPX when the CBI hits 10 or higher and then selling when it moves back down to 3 or less.

Before we look at drawdowns you’ll note I circled 3 dates in blue. The current selloff has been a slow-motion meltdown. There hasn’t yet been a down day of 2% or more. The blue circles mark the only other 3 instances where the CBI reached 10 without a single-day decline of 2%+ in the last 10 days. We can’t deduce much from just 3 instances but it is notable how unusual the current selloff has been.

I’ve marked all the other instances that occurred over the 200ma on the table. As you can see, the worst declines were less than 4% from the entry point.

But perhaps you don’t feel these volatility or trend filters are appropriate. In that case you should consider all the other listed instances.

I’ve circled in red above the 4 worst selloffs that occurred after the CBI hit 10. They were in 1998, 2001, 2002, and 2008. All of them were historically notable selloffs. They ranged between 8% and 15.64%. And while 3 of the 4 resulted in profitable trades, an 8%-15% drawdown over a few days can be pretty painful to sit through. I looked at them all closely in last night’s subscriber letter. (Click here for a free trial.) One thing I will note is that they all made their selloff low within 3 days of the CBI crossing 10.

CBI on Rise. A Breakdown of Different Readings.

Posted by Rob Hanna in CBI May 18, 2012

The Quantifiable Edges Capitulative Breadth Index (CBI) closed at 7 on Thursday. For years I have viewed 7 and 10 as key CBI levels. A CBI of 7 has generally suggested a decent upside edge, while 10 or higher has suggested a strong upside edge. The CBI will only typically rise to levels of 7 or higher during sharp market pullbacks. I decided tonight to examine results following CBI readings between 7 and 10. But tonight for the first time I am breaking out results by whether the market is above or below its long-term moving average.

First let’s look at times, unlike the present, when the SPX was trading below its 200ma. The stats table below looks at returns assuming you bought the close on a day where the CBI registered at least a certain number. The exit signal occurred when the CBI dropped back down to 3 or below.

Results here are strong across the board. Most traders would agree that it might make sense to wait for a CBI reading of 10 or higher, rather than enter early with a CBI of 7. While there are 42% less trades, 85% of the net profits are still realized by waiting for a reading of 10, rather than using 7 or higher as an entry signal.

Now let’s look at times like the present, where the CBI is spiking but the market is still above its 200ma.

There are few things to note here. First the average trade is much lower than you see when the market is < 200ma. This is primarily because volatility is generally higher during bear markets. What's interesting is that there has been the exact same number of instances where the CBI reached seven or higher (31), but while the CBI has reached ten 18 different times when below the 200ma, it has only managed it 8 times above the 200ma. And with the average trade being almost identical regardless of whether you use 7, 8, 9, or 10, in the long run you would have made nearly 4x as much by using 7 as your trigger rather than 10.