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

A SPY Gap Study from Master the Gap

Posted by Rob Hanna in Uncategorized June 6, 2011

I spoke with my friend Scott Andrews from MasterTheGap.com the other day and learned that he is currently offering a detailed study on SPY gaps on his website. The study is free and available for the next few days. When I last saw Scott in February at the New York Traders Expo he presented some of the information in this study at his seminar. I saw that seminar, and I’ve reviewed the study that is currently being offered, and there is a lot of information that quant-oriented traders may find useful. Therefore I have posted a link below to Scott’s site where you can download this SPY study. If you’re interested at all in trading gaps then I would suggest checking it out. It does contain a lot of good information. It’s about 30-pages of tables and bullet points looking at SPY gaps from many different angles. I believe he often charges for similar studies. Anyway, here’s the link:

https://www.masterthegap.com/public/45.cfm

Full disclosure: 1) Scott is a friend of mine. 2) When you go to download the study it will ask you where you heard about it. Quantifiable Edges is one of the drop-down choices. I’m simply letting you know this so you’re not surprised. I am not receiving any compensation from Scott for doing this and have no formal business relationship with him (though he did contribute a section to the Quantifiable Edges Guide to Fed Days book). I’m doing it both because I feel the study is good, and that Quantifiable Edges readers may find value in it. Of course if enough people choose the Quantifiable Edges drop-down then I will definitely bully him into buying me a beer next time I see him.

Re-Examining A Spiking CBI & A Moderate VXO

Posted by Rob Hanna in CBI, Quantitative Study, VIX June 6, 2011

The Quantifiable Edges Capitulative Breadth Indicator (CBI) jumped up to 8 on Friday. While I generally consider 10 or higher to be strongly suggestive of an upside edge, we’re getting very close, and even readings of this level have suggested bounces. As sometimes happens, while the CBI is suggesting the selloff may be getting exhausted, the VIX (and VXO) are showing very moderate readings. Moderate VIX readings on sharp SPX drops can often mean more selling to come.

But back in July of 2008 I looked at similar scenarios where the CBI spiked without the VXO. The VXO is currently 7% above its 10ma. I have updated some of the studies from that blog below.

First let’s look at times the CBI rose to a high level along with the VXO.

Results here seem to strongly suggest an upside edge. Now let’s look at times where the VXO did NOT spike.

See the big difference? Neither do I. It appears the odds favor a bounce soon with or without a higher VXO.

Recent & Long-Term Subscriber Letter Trade Idea Results

Posted by Rob Hanna in Subscriber Features/Letter June 4, 2011

I don’t often discuss trade idea results from the subscriber letter here on the blog. In fact, I checked and it looks like the last time I did so was a little over two years ago. I used to do it more often, but I fell out of the habit. Also while I’ve always posted and tracked trade ideas in the subscriber letter, it isn’t the main focus of the service. I don’t consider Quantifiable Edges to be a stock picking service. I consider it one where traders can gain market and trading knowledge through the published research, systems, and tools. The objective is to provide tools and instruction to help traders improve their own trading and results.

But the published trade ideas have done quite well. In fact, May marked the 8th month in a row where the trade ideas added up to positive gains. I’ve had several letters from subscribers lately telling me they’ve done quite well either following certain ideas or trading the systems, and explaining to me how they approach the trades.

I don’t suggest position sizes, and I would never suggest that the trade ideas represent any kind of complete portfolio strategy. They are what they are -ideas about certain stocks or ETFs that have historically provided a statistical edge.

All of the trade ideas are in either highly liquid ETFs or in highly liquid large cap stocks (almost exclusively S&P 100 components). I do this so that executing trades and getting fills at reasonable prices is not an issue. I think the most frustrating aspect of following trade ideas offered by another person (not that I’m encouraging that, but I know it happens) is not being able to get into or out of the trades that they suggest at a similar price. I’ve addressed this problem with limit prices and highly liquid securities.

With a subscription to Quantifiable Edges I try and provide traders with ideas and instruction to improve their trading. These ideas may come in the form of previously published studies identified by the Quantifinder, or they may be something I discuss in the current subscriber letter, or perhaps it’s a webinar focused on a certain trading approach or indicator, or any other number of tools that I’ve designed and made available. (For a more complete list of tools, see the “Using Quantifiable Edges” series of posts.) The trade ideas found in the subscriber letter are examples of how I put these tools and ideas to work. While past performance is not necessarily indicative of future results, over the long run they’ve performed well enough that many subscribers have utilized them and easily paid for their subscriptions with the profits.

The blog is free. But what I post here is only the tip of the iceberg.

My goal with a gold subscription has always been to help people improve their trading through the use of quantified research, and while doing so to help them offset the costs of the subscription by offering easy-to-execute trade ideas with a long-term positive profit expectancy. To date I believe Quantifiable Edges has succeeded in doing this. I’d encourage anyone who enjoys the blog but hasn’t yet tried a subscription to do so.

Today I broke the results down by year. I also listed all of May’s trade below so that traders could see some examples. And of course with the full archive of subscriber letters available on the subscriber site, you can go back and see what I wrote about any trade and my reasons for entry and exit when it happened. First lets look at the results by year:

Now May’s trade ideas:

For those that are interested, the complete list of trade ideas from 2008 – 2011 can be downloaded from the systems page of the members’ section of Quantifiable Edges. (Available to paid and trial subscribers.)

For more information on a gold subscription, or to subscribe, click here.

Lastly, below is the explanations and disclaimer from the Trade Ideas Results Spreadsheet.

All trade ideas ever tracked in the Quantifiable Edges Subscriber Letter may be found on this spreadsheet. I don’t suggest position sizes. The primary reason for this is I’m not acting as a financial advisor. I don’t feel it is appropriate to suggest allocation sizes without understanding someone’s financial situation and risk tolerance. Even for my own trading I run different portfolios with different levels of aggressiveness. For instance, my most aggressive may use options to sometimes get 300-400% leveraged. Other portfolios on the other hand normally take much more conservative stances and some rarely reach or exceed 100% exposure.

Since I don’t suggest position sizes this is should not be considered a performance report, but rather a trade idea scorecard. Therefore, no matter how objective I try to be the reporting of the results is always going to be skewed depending on how you approach the trades. For instance, I always recommend scaling into the Catapult positions in 3 parts, whereas the “System” trades (whatever system I unveil other than Catapult) are normally one entry. The “Index” trades I normally recommend scaling into as well. For my own trading I trade much larger size with the index trades than any of the individuals. I also control my exposure by limiting the total amount invested per day. As I mentioned, this will vary depending on the account I’m trading. My most aggressive account I may put in up to 100%/day and get heavily leveraged using options. A more conservative account may max out at 15%-20% per day.

It’s unlikely anyone would have taken all of the trades with equal amounts, so personal results would vary greatly depending on the trader’s approach. Simply adding up the results of the individual triggers as I do is an admittedly poor representation of returns. A net positive or negative does not necessarily mean a person following the ideas would have made or lost money during the period measured. And the sum total is certainly not representative of what a portfolio would return.

Feel free to contact me at support@QuantifiableEdges.com if you have any questions.

As required by the NFA: Except where otherwise specifically stated, all trades are based on hypothetical or simulated trading. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under-or-over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Commissions, fees, and slippage have not been included. This is neither a solicitation to buy/sell securities or listed options.

A Rare Setup That Has Been Followed By Returns of 6%-12% Over The Next 2-Week Period

Posted by Rob Hanna in Quantitative Study June 3, 2011

Positive seasonality has been run over the past 2 days by strong selling. To see such a weak start to a month is rare. There have only been 5 other times since its inception where the SPY lost over 2% on the 1st day of the month and then closed lower again on the 2nd day of the month. That’s a very low sample size but over the next couple of weeks returns have been outstanding. Below I have listed all 5 instances.

The average return over the 2-week period has been close to 9%, and the worst trade gained 6%! I’d be surprised to see the market repeat returns this strong over the next couple of weeks, but the results and consistency are impressive enough that it seems worth considering the pattern of the last 2 days may suggest a bullish influence over the next 2 weeks.

Overbought Going in to the 1st of the Month

Posted by Rob Hanna in Quantitative Study, seasonality June 1, 2011

There was a lot of research to consider for me to discuss today, but I decided to stick with the theme we’ve been examining over the last few days, which is seasonality. In my last post I discussed the combination of the bullish Memorial week edge and the 1st of the month edge. I showed that together they appeared even more powerful than in isolation.

But how do bullish seasonal tendencies hold up when the market is short-term overbought as it is now? Perhaps the move simply came earlier than usual. One way to measure short-term overbought is to see if the market has already closed higher for at least 2 days in a row. The study below has been shown in the subscriber letter a number of times. It looks at just that scenario.

If you can spot a consistent and tradable edge here then your eyesight is much better than mine. Under these circumstances “1st of the month” no longer appears bullish. At the least this would appear to dampen Wednesday’s seasonally bullish inclinations.

So perhaps today action isn’t as black and white as it appeared in yesterday’s study. But then again – it never is. And isn’t that what makes the market so interesting?

A Potentially Bullish Memorial Week & June 1 Combination

Posted by Rob Hanna in Quantitative Study, seasonality May 30, 2011

One reader asked me this weekend whether the combination of Memorial week and the positive seasonality experienced on the 1st day of the month has provided any special results. I took a look, and it has. If the 1st trading day of the month is Tuesday then there was no edge apparent. But since 1977 any time you could actually buy the close of May 31st and sell the close of June 1st (meaning neither fell on a weekend or holiday), then June 1 would have been a winner. I have listed all 15 instances in the table below.

A couple of thoughts: 1) Between 1962 and 1976 the SPX was only 2-3 under the above conditions. 2) The Memorial week edge didn’t kick in until 1983 and the 1st of the month edge began in the late 80s. Therefore, the 5 instances between ’77 and ’84 may be due more to chance than to a seasonal influence. In any case, the combination has me giving Wednesday a bit more seasonal weight than I would if I considered either of these edges in isolation.

Memorial Week Seasonally Strong

Posted by Rob Hanna in Quantitative Study, seasonality May 27, 2011

Memorial week has some seasonal tendencies of which traders should be aware. I’ll be going in to some of these in this weekend’s subscriber letter, but below is a study that takes a broad look at the week as a whole. You’ll note that the study goes back to 1983. The reason it doesn’t go back further is that before 1983 the market did not exhibit a seasonally strong tendency during Memorial week.

Despite last year being down the circled stats are all impressive. An average gain of nearly 1.2% for the 4-day week along with a profit factor of 5 is very good. I’ll be discussing this and other Memorial week tendencies in this weekend’s letter. If you would like to view it you may sign up for a free trial here.

Wednesday’s Reversal Bar Suggesting An Upside Edge

Posted by Rob Hanna in Quantitative Study May 26, 2011

On Wednesday SPY made a 20-day low before reversing to close higher. During long-term uptrends these kind of reversals have typically shown an upside edge. Below is a study from last night’s subscriber letter that demonstrates this.

These results appear strongly suggestive of an upside edge. Below is an equity curve using a 5-day exit so that you may see how the edge has played out over time.

The consistent returns make the equity curve appealing and provide me greater confidence in the results.

Market Could Bounce, But Tuesday Isn’t Providing Its Usual Help

Posted by Rob Hanna in Quantitative Study May 24, 2011

Tuesdays are renowned for short-term trend reversals. I discussed this in the 1/13/09 Blog and I’ve shown it a number of times since using different filters.

So Monday afternoon I took a look at 2-day drops above the 200ma on a Monday. Results were choppy and unremarkable. I then added one more filter in that the SPY had to close at a 5-day low. I was surprised by the results.

It appears that under these conditions, Tuesdays do NOT provide an upside edge. In fact, there appear to be bearish implications with the setup.

While I am seeing other evidence that the market may bounce here shortly, Tuesday seasonality does not seem to be providing the upside reversal edge it often does.

A Long-Term Look At POMO & the Stock Market

Posted by Rob Hanna in POMO May 20, 2011

I’ve discussed my POMO stimulus indicator a number of times on the blog – most recently in the March 3, 2010 post. Below is a slightly different version of the indicator. Rather than look at volume it simply looks at “days”. Each POMO day in the last 20 that there was buying adds 1 to the indicator. Each day there was POMO selling subtracts 1. The reason I am showing a day count rather than the typical “volume amount” is that we are looking at a long-term chart. During 2005-2007 there was a good amount of POMO buying. But the levels of buying at that point were much lower than they are now. Therefore if I show “volume” instead of a simple day count, then the activity during that period would be almost imperceptible on the chart. (Click on chart to enlarge.)

The green shaded areas are times where there was some pumping over the last 20-day period. The pinkish-red shading marks the period where the Fed was selling treasuries instead of buying them. The white areas marked the times where there was no POMO activity over the previous 20 days. POMO buying didn’t always seem to take effect immediately, but periods without that buying were generally dismal. The 2 lengthy periods where the POMO indicators were at 0 or below lasted from 6/1/07 through 9/19/08 (SPX lost 18.3%) and from 4/22/10 through 8/17/10 (SPX lost 9.6%).

With QE2 ending soon, this raises the question, is the market capable of rising without the Fed liquidity pump? Or has it become completely dependent on it?

The Difference ADX Makes When Examining Reversals of Breakdowns

Posted by Rob Hanna in Quantitative Study May 17, 2011

In the past I’ve discussed how breaks from consolidations are often much less reliable when looking for a reversal than if you hit a new high or low during a trending market. This is because the breakout will often create new excitement in the direction it occurs. Some of that is stops being blown and some of that is from breakout players looking to take advantage of a newly emerging trend.

One way to measure the strength of a trend is with the ADX indicator. It was pointed out to me today by a subscriber that the SPX 14-day ADX was dropping under 12 – which is an extremely low level. (The 14-period reading is the default reading for ADX with most charting packages.)

So using ADX as a measurement of trend strength I created a study that demonstrated low-ADX vs. high-ADX breakdowns, and how the implications were much different. First let’s look at situations like the present where the SPX breaks down and ADX is under 20.

As you can see, there is no substantial edge suggested when you are looking at a sharp move out of a consolidation with a low ADX.

Next I ran a 2nd test. This one used all the same parameters except I required the ADX to close above 20 instead of below it. This suggests the market has been moving instead of meandering. Those results are below.

What we see here are vastly more compelling results.
Unfortunately, with the ADX now just under 12, there does not appear to be a substantial upside edge offered by the break lower.

How the NYSE Closing TICK can be Utilized as a Valuable Indicator

Posted by Rob Hanna in Quantitative Study, TICK May 13, 2011

One market analyst whose work I’ve become familiar with and whom I have a great deal of respect for is Tom McClellan. Tom created an oscillator based on the closing TICK reading on the NYSE. The TICK simply measures the number of securites that last traded on an uptick versus. a downtick. The closing value tells you how many finished the day on an uptick versus a downtick. Tom told me he first got the idea to measure closing TICK values from Peter Eliades. The oscillator Tom created takes a 10-day moving average of the closing TICK, then a 10-day moving average of that value, and then subtracts the two. In November 2010 Tom published on his website a detailed overview and description of the indicator. Below is a link to Tom’s article.

https://www.mcoscillator.com/learning_center/weekly_chart/tick_not_just_a_bloodsucking_insect/

Tom has demonstrated that, like many overbought/oversold indicators, oversold readings will often lead to a bounce, and the market will often struggle after overbought readings.

I’ve done some work with Tom’s TICK Oscillator (which I have begun calling the TICK Tomoscillator.) As a visual indicator it is excellent on its own. But for conducting quantitative research I had some concerns with simply using raw readings. TICK ranges have evolved over time. They are affected by the number of securities traded on the NYSE (which constantly changes), and in 2007 they were impacted by the elimination of the uptick rule for shorting. Therefore I thought it might be worthwhile to use a relative reading rather than an absolute one. To do this I used a trick I learned from David Varadi of CSS Analytics and simply created a % Rank of the TICK Tomoscillator over a defined period.

The chart below is taken from the charts page in the subscriber section of the Quantifiable Edges site. (Click here for a free 1-week trial.) On it you can see the closing TICK moving averages, the TICK Tomoscillator, and the 1 yr. % Rank of Tomoscillator. It isn’t at an extreme currently, but you can see where recent extremes took place. The April 18th dip in the Tomoscillator % Rank marked the market low, and it became extremely overbought at the end of April just before the early May market dip.

I’ve published a few studies in the Subscriber Letter that have shown very strong edges based on a combination of extreme readings and price action. But even on its own I have found substantial value in paying attention to the TICK Tomoscillator % Rank. Below are two equity curves from some research I published in the 4/19/11 Subscriber Letter. The first one looks at owning the SPX the day after the TICK TomOscillator 1-yr % Rank comes in under 20%. The 2nd one looks at TICK TomOscillator 1-yr % Ranks above 80%.

As is clearly demonstrated by the equity curves, closing TICK values, and the TICK Tomoscillator % Rank, are well worth monitoring.

Quantifiable Edges subscribers can see the TICK Tomoscillator readings every night on our charts page. The Tomoscillator indicators are also included in the Quantifiable Edges Tradestation Indicators & Functions package, which is free for all subscribers (or may be purchased by non-subscribers). The code package allows Tradestation users to place the Tomoscillator readings on their own charts and conduct their own research.

This SPX Pattern is Offering Some Compelling Bullish Evidence

Posted by Rob Hanna in Quantitative Study May 11, 2011

Last night I decided to explore the pattern the SPX has carved out over the last several days. What I noted was that after making a new high it then pulled back for 4 days in a row. That 4 day drop has now been followed by a 3-day rally. At this point the SPX has not managed to overcome the recent highs. So I plugged those observations into a study and found some very compelling results.

While the number of instances was smaller than I would prefer the statistics appear to heavily favor the bull side.

A New Tool For Quantifiable Edges Subscribers

Posted by Rob Hanna in Using Quantifiable Edges May 10, 2011

Quantifiable Edges subscribers were recently treated to a new feature available with their subscriptions.

Over time I have had numerous requests from members who wanted to utilize some of the Tradestation indicators and functions I’ve designed. Many of the indicators requested are shown on the Quantifiable Edges Charts page in the members section of the site. Others are discussed from time to time in the subscriber letter. I recently completed putting a few of these indicators together in a package. It is now available to the public (free of charge to all subscribers as long as their membership is active, or $125 for non-subscribers with no expiry on the code).

A list of calculation groupings is shown below:

1) Fast/Slow Offset Historical Volatility

2) Fed Days (today and tomorrow)

3) Breadth %

4) Breadth % Rank

5) Ratio Adjusted McClellan Oscillator (RAMO)

6) McClellan % Ranks

7) McClellan % Ranks (Pos/Neg)

8) Closing TICK TomOscillators

More detailed information on all of the calculations as well as instructions and examples can be found in the Quantifiable Edges Tradestation Analysis Techniques User Guide. The user guide may be downloaded by anyone who takes a free 1-week trial of Quantifiable Edges subscriber service (only name and email required).

Purchase includes Tradestation formatted .eld files for import as well as the 15-page guide. More indicators and functions will likely be added to the package over time. Purchasers may download updated versions free of charge for up to 1-year after purchase.

For a free Quantifiable Edges trial and to access the detailed user guide you may register here. The user guide can be found by clicking on the “QE Indicators/Functions for Tradestation” tab on the left hand side of the members’ pages.

Large Gaps Up On 1st Friday of the Month

Posted by Rob Hanna in gaps, Quantitative Study May 6, 2011

The employment report nornally comes out on the 1st Friday of the month. Today’s report is helping to trigger a large gap up in the SPY. I looked back at other times since 2003 where the SPY gapped up more than 1% on the first Friday of the month.

Results here are a little dissapointing in that they don’t seem to suggest much of an edge in either direction. Also a little surprising is that the employment report hasn’t triggered more big gaps up. In any case, I’ll keep this test in mind in the future in case a more definite edge appears to emerge, but I’m not basing any trades on it right now.