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

The Link Between Junior High School Girls and Stock Market Bounces

Posted by Rob Hanna in Quantitative Study, volume March 8, 2012

Below is a study I showed in last night’s Subscriber Letter (click here for a free 1-week trial). It considered volume’s impact on a short-term oversold bounce. It also utilized a long-term trend filter.

These results suggest there should be more upside to this bounce. Statistics across the board are impressive over the next week.

But does the low volume really matter? To answer this I ran the same study below but flipped the volume requirement and insisted volume come in higher.

Volume accompanying a move can signify enthusiasm for the direction of the move. Short-term oversold bounces sometimes remind me of junior high school girls. Back when I was in school, if you wanted a girl to like you then you had to make sure she didn’t think you liked her. Showing any enthusiasm would scare them off quickly. You had to play it cool, man. It appears that is what the bounce did Wednesday – it played it cool, man. And now it’s chances are better.

What Recent Closing TICK Values Are Saying About the Next Few Days

Posted by Rob Hanna in Quantitative Study March 7, 2012

The study below considers the extremely low reading in the TICK TomOscillator. The TICK TomOscillator is an indicator that uses recent closing TICK values to determine buying and selling interest at the end of the day. It was developed by Tom McClellan. I’ve done some work with it and the name I use is one I made up. For those who would like to learn more about the TICK TomOscillator, the link below is a good place to start.

https://quantifiableedges.blogspot.com/2011/05/how-nyse-closing-tick-can-be-utilized.html

The study below looks for an extremely low reading in conjunction with a short-term oversold price condition during a long-term uptrend. It has been shown in the subscriber letter before and triggered again at Tuesday’s close.

There has been a strong propensity for the market to bounce over the next 2-3 days.

Does Turnaround Tuesday Apply to Shocking Gaps Down

Posted by Rob Hanna in gaps, Quantitative Study March 6, 2012

Look like the SPY is going to open down more than it has dropped any single day so far in 2012. This can be startling to market participants. Many may be caught flatfooted. Of course Tuesday is the #1 day to see a Turnaround. But does it apply when the market gets a shock at the open? I ran the test below to see.

It does not appear Tuesday give us a hig probability play.

I also ran the test on all days using a 20-day requirement instead of 10. Similar non-edge. Should be an interesting day…

Early Morning Strength Ain’t What It Used To Be (An Adaptation Example)

Posted by Rob Hanna in Quantitative Study March 2, 2012

I’ve been asked many times what I believe has been my key to success as a trader. My answer normally is “I always test out my ideas. I never believe anything I read… Even if I wrote it.” It sounds funny but it is true. The tool I use to help me identify edges I have published in the past is the Quantifinder. But when I do my nightly analysis and write my letter I don’t just refer back to a study I published 3 years ago and assume it is still providing the same edge. I retest it. Every time. With this in mind…

Both Wednesday and Thursday of this week we saw very strong and persistent buying in the 1st half hour of trading. In fact, neither day saw a single negative TICK reading for the entire 1st 30 minutes. There was a time when this kind of buying would almost certainly create a pile-on situation and the market would continue to rally throughout the day, only ever pulling back moderately, and finishing the day near its highs. Dr. Brett Steenbarger, who used to write the excellent Traderfeed blog (and several books), often referred to these kind of days as “Trend Days”. He wrote several posts on them. He would say that the key to profiting from a Trend Day is to identify it early and then jump aboard. If you fight a Trend Day by trying to short the highs you will keep getting run over.

Strong early TICK action was one clue that a Trend Day might be forming. But in recent years it has become very unreliable. Let’s look at some studies to see what I am saying.

The study below shows how strong early TICK action (no negative TICK reading in 1st 30 minutes) suggested a strong upside edge for the rest of the day. The period studied is 2006 – 4/2009.

Pretty awesome stats all around. Now let’s look at a profit curve.

While that one trade in the middle gave an extra-large boost you can see that new highs were made continually throughout the curve. Overall, this appears to be a very appealing edge.

But now let’s look at the period from May 2009 through the present. Same setup.

Over the last 26 instances it appears there has been no discernable edge. Let’s see how the profit curve looked over this period.

Very inconsistent. A few minor streaks. Not an appealing curve in the least.

What’s this mean? A few thoughts:

First the obvious: if you are an intraday trader and you look to play Trend Days, then you are hopefully aware before reading this that some of the old identifications tools are not working as well lately. Don’t get caught in reversals like those that occurred the last 2 days.

For everyone – something changed that eliminated this edge. I don’t know what. It isn’t my job to know what changed. And I don’t care the reason. I’m only interested in being aware when it happens so that I can adjust my strategies. And no matter what your timeframe you must keep in mind that the market is always changing. Identifying those changes and adjusting to them is vital for long-term success as a trader.

Traders don’t all need to quantify everything as I do. But identifying changes and understanding what is working and what is not is important. You must constantly adapt to stay in business. Early morning TICK strength is just one example of environmental change. The longer you trade the more examples you will see. So trade with an open mind. Take advantage of market behaviors while they last. When the market begins to behave in a different way, adapt. Stay in business.

Did Wednesday’s Reversal Bar Mark The Top?

Posted by Rob Hanna in Quantitative Study March 1, 2012

Wednesday’s action saw a new intraday high, an outside day, and a lower close, and it came after a closing high was made the day before. Engulfing reversal bars such as this are often viewed as bearish. I’ve looked at them a number of ways in the past. Below are updated results of one such study.

Results here are similar to other studies I’ve run on outside day or key reversal bars. It is often followed by a few days of weakness but it rarely marks the kind of significant top it is renowned for.

I also ran this study requiring longer-term highs (50 days instead of 10 for instance). This did not have a material impact on the results.

What Friday’s VIX Action Hinted At

Posted by Rob Hanna in Quantitative Study, VIX February 27, 2012

The study below looks at instances of SPX and VIX both closing positive on a Friday. The VIX has a tendency to move opposite the SPX, so when they move in the same direction, it can often suggest an edge over the next few days. Due to calendar effects the VIX has a natural tendency to sink on Friday afternoons as we approach the weekend. So seeing the SPX and VIX both rise is less common on Fridays than any other day of the week. This is why I use Friday as a filter in the below test.

Note that I also included a long-term trend filter. And even in an uptrend the numbers here suggest a short-term downside edge.

Looking Back on the October 18, 2011 Follow Through Day

Posted by Rob Hanna in Uncategorized February 23, 2012

When SPX hit a new 200-day high last Thursday (Feb 16), doing so deemed the 10/18/11 Follow-Through Day (FTD) “successful” according to the possible definitions of “success” I included in the FTD studies.

Based on the FTD studies, it is not a surprise to see this FTD turn into a successful rally. It had several strong positives going for it. For one, it occurred in conjunction with a 20-day high. Secondly, it was accompanied by strong breadth. And third, it occurred after the 10th day of the rally (which Investors Business Daily says is a negative but 8 of the 9 FTDs that have come after day 10 have now been successful). There were some mild negatives that this FTD had to overcome – namely the fact that it occurred under the 200ma, and that it occurred after a substantial market decline. For those interested in learning more about FTDs, there is a bevy of information available on the blog under the “IBD Follow Through Day” label.

And for anyone interested in purchasing the Tradestation code to study FTDs in more detail on their own may do so here.

The Weak Tendency Before President’s Day

Posted by Rob Hanna in Quantitative Study, seasonality February 17, 2012

Friday is the last trading day before the President’s Day holiday. The day prior to many holidays we see a bullish tendency. This is NOT the case with Presidents Day. Over the last 20 years the Friday before President’s Day has been a very poor performer. I showed this last year in the 2/18/11 Subscriber Letter. I have updated the results in the table below.

Inclinations appear squarely bearish.

77% of the Time the SPY has Been Lower 6 Days After This Setup

Posted by Rob Hanna in Quantitative Study February 14, 2012

Action in SPY the last couple of days has been interesting as it has left large unfilled gaps in both directions. The Quantifinder identified the study below. It looks at other instances where you had a 20-day closing high, then an unfilled gap down, and then an unfilled gap up. All results are updated.

These results seem to suggest a moderate downside edge over the next 6 days.

3rd QE Buying Power Index Webinar Added for Wednesday

Posted by Rob Hanna in Uncategorized February 13, 2012

Due to popular demand and a very positive response I have decided to hold one more live webinar on Wednesday at 12:15pm EST for the QE Buying Power Index. After that I don’t anticipate any more live webinars being held in February.

If you’d like to attend you may go here to register (and to find links with more information).

Below are a few brief clippings from emails I received from attendees last week.

“I thought it was a GREAT VALUE!!”
-Roger S

“Rob, I thought the webinar was fantastic: 1. It started on time. 2. It got the point across in an appropriate amount of time and 3. was professionally done… I quickly played with the indicator against one of my MR systems (long and short) and can see the indicator helps.
– Rob K

I loved your webinar…I also like your style as far as finding numbers and stats to back your decisions.
-Diane F

So if you want to attend the Wednesday webinar (or if you can’t make it and would just like to view the recorded version), here’s the link again.

Large Gaps Down From 50-day Highs

Posted by Rob Hanna in gaps, Quantitative Study February 10, 2012

Big gap down from yesterday’s high. Below is one way to look at it.

These results were similar to a few scenarios I ran. The evidence suggests no edge in trying to buy the low open. In fact there may be a bit of a downside edge from open to close today. Historically, things have gotten worse throughout the day.

When VIX Rises and SPX Closes at a 50-day High

Posted by Rob Hanna in Quantitative Study, VIX February 9, 2012

There were a few studies related to VIX action that appeared in the Quantifinder yesterday afternoon. This particular study looks at large mid-week rises in the VIX during times the SPX is closing at a 50-day high. All results are updated.

New readers may wonder why I use a day-of-week filter with this study. The VIX has a natural tendency to fall on Fridays and rise on Mondays. Because of this I typically separate out those days from the rest of the week when conducting VIX-based studies. Implications of the rising VIX and 50-day SPX high appear to be moderately bearish over the next few days, suggesting a pullback.

Applying the QE Buying Power Index to Breakouts

Posted by Rob Hanna in Uncategorized February 8, 2012

I discussed the QE Buying Power Index a few times in the last week and demonstrated how it could be used as a filter for a mean reversion system. While a good number of people have signed up for the webinar there are many that remain unconvinced of its value. There are likely also a large number of you who after seeing the mean-reversion results thought, “Who cares? I don’t trade mean reversion techniques.”

So I’ll show one more example before I get the blog back to regular programming. This time let’s look at the QE Buying Power Index and its impact on a simple breakout system over the last 4 years.

This first study below looks to buy the SPX any time it closes at a 5-day high and hold for X number of days. I also filtered to exclude any instances where the QE Buying Power Index was 3 or greater. (This is the same level used in the mean-reversion posts.)

As you can see it is red across the board. This would have been a losing strategy and not one with an edge.

Now let’s look at results using the same techniques but this time filter to only include those instances with a QE Buying Power Index of 3 or greater.

Huge difference here. The first couple of days are a bit of a crapshoot, but after that statistics turn strongly bullish. This again would suggest that if you are looking to go long the market you want to have Buying Power on your side.

Let’s look at a simple system designed to trade long when 1) buying power is strong, and 2) price confirms by making a new high.

Results here are very strong. Typical of a breakout strategy vs. the mean reversion approach the % profitable isn’t as strong but the winners far outsize the losers and the big wins bring in some hefty profits.

Learn how to compute the QE Buying Power Index in one of our special upcoming webinars. (Or sign up and view the recording if the times don’t work for you.) And you have nothing to lose, because they are 100% satisfaction guaranteed. (Guarantee relates to quality of the information, and is NOT a performance guarantee.)

Very Low Range In SPY Potentially Short-Term Bearish

Posted by Rob Hanna in Quantitative Study February 7, 2012

The market was down a little and no one seemed to care. Volume was extremely light, and the range was the lowest in months. This kind of indifference can sometimes mean that bulls are done (temporarily). They pushed prices higher leading up to Monday then held a buying strike. Often this kind of action will be followed by sellers entering the market to fill the vacuum that is being created with the buyers leaving. A number of studies triggered yesterday that exemplify this concept. Below is one.

Such extremely low range on a day the SPY dips a little has commonly been followed by a further drop. I will note that the short side does not have the QE Buying Power Index in its favor…but it will soon.

The QE Buying Power Index for Swing Trading Short

Posted by Rob Hanna in Uncategorized February 6, 2012

On Friday I introduced the QE Buying Power Index and showed results over the 2008-2011 period when looking to buy pullbacks with a strong QE Buying Power Index reading versus a weak one. Today I’ll show the other side of the coin. Below is a short-side version of the same swing trade system. On Friday the system I used to demonstrate the importance of buying power simply bought the SPX when it closed in the bottom 20% of the 10-day range and then sold it when it closed back in the top half. Today we’ll look at shorting closes in the top 20% of the range and covering in the bottom half.

First let’s look at times when the QE Buying Power Index was positive.

As you can see, when the QE Buying Power Index has been positive, trying to short overbought market readings has been futile and there has been no edge in doing so.

But now let’s examine results when the QE Buying Power Index was NOT positive.

We see here a remarkable difference. Simply taking buying power into consideration changes the results dramatically.

Over the last 4 years buying power has been extremely important in determining market movements. In the special (100% satisfaction guaranteed) webinars later this week I will explain to traders the concept behind the QE Buying Power Index and teach them how to calculate it. I’ll discuss how the it has influenced the intermediate-term over the years and how you can use it to swing trade with a system like those I’ve discussed the last few blog posts.

Click here for more information on the webinars and to register.