Volatility Contraction & A Study In Memory of Bruce Hanna

Posted by in Uncategorized October 26, 2010

Notable about current action is that the 3/10 Offset HV Indicator has fallen into “extremely low” territory. I first introduced this indicator in the July 13, 2009 blog. It looks at the historical volatility over the last 3 days versus the historical volatility over the previous 10.  Low readings in this indicator occur when there has been a sharp contraction in volatility. In that blog post I showed that these sharp contractions are typically followed by volatility expansions.

About a year ago I wrote a detailed study that examined using the 3/10 Offset HV Indicator as a filter for daytrading Opening Range Breakouts. The study is 5 and a half pages in length. I’ve never offered it through the blog before. It is only available in the members section of the Quantifiable Edges site.

I took the last week off from blogging after my father passed away. He got dementia at a young age and it took him away from us much too soon. In his memory a fund has been set up with the Alzheimer’s Association.

If you use the link below to make a donation to the Alzheimer’s Association I will happily forward you a copy of the Quantifiable Edges Opening Range Breakout (ORB) Study. The donation may be in any amount. I would ask that if you have found the blog helpful in your trading over the years that you consider a generous (tax-deductable) donation.

https://act.alz.org/site/TR?pxfid=27370&pg=fund&fr_id=1060

I will receive notification from the Alzheimer’s Association when a donation has been made, along with the person’s email. With this information I will forward a link to the Quantifiable Edges Opening Range Breakouts Study along asap. If you do not get it within a few hours, please email me at ORBstudy @ quantifiableedges. Com (no spaces) and let me know.  I apologize for not being able to automate the entire process.

About the Alzheimer’s Association (from their website):

The Alzheimer’s Association is the leading, global voluntary health organization in Alzheimer care and support, and the largest private, nonprofit funder of Alzheimer research.

More information may be found directly from their home page.

https://www.alz.org/index.asp

Thanks,
Rob

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Modest Gaps Higher From High Levels

Posted by in gaps, Quantitative Study October 13, 2010

I’ve shown several times before that when the market is already at a high level and it gaps up large in the mornining there is a quantifiable downside edge for the rest of the day.  The large gap up incites profit taking.  See the link below for an example:

https://quantifiableedges.blogspot.com/2009/08/large-gaps-up-from-1-month-high.html

But what of times like now when the makret is at a new high, but the gap up is only modest?  Below is one way to look at it.

It appears when the gap up is of a moderate size a downside edge no longer exists.  And while a large gap up would have had me excited about shorting this morning, this study suggests no substantial edge at all. 

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Low VIX:VXV Ratio At A 50-day High

Posted by in Quantitative Study October 12, 2010

I’ve found in the past that a very low VIX:VXV ratio can often be a bearish indication for the market.  Monday we saw the ration drop sharply and the SPX close at a 50-day high.  Below is a study that examines a low VIX:VXV ratio and market at a new high.

Implications appear to be mildly bearish, but are mostly exhausted after just 2 days.

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Happy Columbus Day?

Posted by in Quantitative Study, seasonality October 8, 2010

While the stock market is open on Monday, banks, schools, government offices, and the bond market are closed. In past years with the bond market closed, the stock market has done quite well on Columbus Day. Of course the most famous Columbus Day rally was in 2008 when the market gained over 11% after having crashed the week before. This year circumstances are much different and the market has put in some nice gains this week. In the Subscriber Letter last year I showed research that suggested an up week prior to Columbus Day typically made for a good Columbus Day. Below I have updated some of that research.

I’ve circled some of the more impressive stats here. With more than 7 out 0f 10 trades profitable and winners nearly twice the size of losers risk/reward has been very favorable. It appears positive momentum from the prior week has shown a fairly strong tendency to follow through on Columbus Day. Below is the profit curve.

We see a fairly steady upslope here. Combined with the stats above I’d say Columbus Day does appear to provide a solid seasonal edge. Happy Columbus Day!

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Quantifiying how Market Analysis can Enhance Individual Stock and ETF Trading Methods

Posted by in Quantitative Study, System October 6, 2010

Stock traders are aware that it is generally beneficial to have the market on your side. Whether the market moves up or down will often have an influence on an individual stock or ETFs movement. As they say, a rising tide will lift all boats. Yet too often traders (especially short-term traders) either ignore the general market action or underemphasize it in their decision making. They’ll look for a trigger without carefully considering the likely direction of the market.

I have found trading with the general market on my side to be of great importance. In August I conducted a study for my gold subscribers that demonstrated and quantified this concept.

As part of their gold subscription, traders have access to 11 different swing trading systems. On the system pages they are able to see the rules, Tradestation code, and backtest results across 2 lists of securities. One list is the S&P 100 and the other is a list of about 100 ETFs. The ETF list looks just at equity ETFs. It does not include any inverse or leveraged ETFs and there are no duplicates in coverage (like SPY & IVV). Most of the systems were first published within a few months of the subscriber letter first being published over 2 ½ years ago. When updating all the original backtests in late August I decided to see how the system performed when there was a perceived market edge versus times there wasn’t.

Many readers are aware of my Aggregator tool. The Aggregator utilizes the market studies I publish in the subscriber letter (and sometimes in the blog). It uses them to generate short-term market projections. Aggregator configurations can produce a long, short, or flat bias. A more detailed description of the Aggregator can be found here. A post describing how the Aggregator has been used as a system can be found here. The bottom line is that the Aggregator is my #1 tool for setting my short-term market bias. It also has a history dating back to the inception of the subscriber letter so I can easily see what my bias was going in to any given day.

So to quantify the value of trading with the market on my side, I ran tests on all 11 numbered systems to show their performance over the last 2 ½ years. I filtered the results to show trades that were accompanied by a confirming Aggregator signal versus trades with a neutral or offsetting Aggregator signal. In general I found results to strongly favor entering trades at times when there was also a perceived market edge (confirming Aggregator signal). Below is a partial example of the results that are shown on the website. This is “System 80509”.  It looks to enter long trades in strongly oversold securities.

The discrepancy here is more substantial than was seen in many of the results. Still, the general results suggested you are much better off trading with the market winds at your back.

The lesson here is not that you need to utilize Quantifiable Edges systems or the Aggregator tool to enhance your results. It does mean that whatever trading methodologies you are using, you will likely stand a much better chance of success if you also incorporate some solid market analysis as a filter.

One last note for advanced system developers and testers. Complete historical Aggregator values are available with a QE subscription. You could easily download and apply them as a filter to test the effect on any of your own systems.

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An Indicator Suggesting A Pullback for the NDX

Posted by in Nasdaq Volume Spyx, Quantitative Study September 28, 2010

Some indicators I haven’t discussed in a while are the Quantifiable Edges Volume Spyx indicators.  The charts are found on the top of the charts page every night.  The calculation for Spyx is proprietary, but basically it looks at volume on a relative basis across multiple securities.  When Spyx levels post extremely high readings it suggests an upside edge over the short-term.  Extremely low levels suggest a downside edge.  Moves below 0 or above 100 are especially suggestive. Monday we saw the Nasdaq Volume Spyx come in between -3 and -4.  Below is one of several studies from last night’s Susbcriber Letter related to this low reading.  It shows what happens when an extremely low Spyx reading occurs while the market is making a short-term high.

Results here are strong and consistent.  Very low Spyx levels when the market is posting new highs have been greatly suggestive of a pullback in the past.  Spyx readings can be found every night in the Quantifiable Edges members section.  Gold subscribers may also download full histories of both S&P and Nasdaq Spyx.  Files are updated each night.

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Large Gap-n-Go Formations to New Highs Revisited

Posted by in Quantitative Study September 27, 2010

Friday saw the SPY gap up strongly and then never look back.  The gap never filled and it closed well above the open.  In the 10/15/09 blog I looked at these type of situations when the market also made a 50-day high. I’ve updated that study below.

Instances are low here but the results are strong enough for me to take them under consideration.

Edit: This post appears not to have made it out at the desired time (almost a day late to my RSS feed).  I am using a new blogspot editor and will look into what may have caused this.  Apologies.

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Declines On & After Fed Days

Posted by in Fed Study, Quantitative Study September 24, 2010

Historically Fed Days have generally had an upside bias. Often when the market closes down on a Fed Day it will bounce soon after. This week we have seen a down Fed Day (Tuesday) followed by 2 more days of selling. I looked at this situation in last night’s subscriber letter.

While instances are low, there appears to be a decent upside edge. This is especially true on day 1. I discussed some more details in the letter. Those that wish to take a free trial may do so at any time. Here is a link to the free trial. Those who are already registered but would like to do so again may simply send me an email. As long as it has been 6 months since your last trial, you are all set.

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Strong Breadth on the Breakout

Posted by in Breadth, Quantitative Study September 21, 2010

It is very rare to see a fresh breakout occur on such positive breadth as we saw Monday. In the past it has often led to a successful breakout. Below is a study that examines this.

A positive impact can be seen right away. And when looking out 4-5 weeks the risk/reward remains very favorable. The market is certainly very overbought and could pull back at any time. But this is one study suggesting there’s a good chance the current momentum begets more buying.

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When the SPX and VIX Both Rise on a Friday

Posted by in Quantitative Study September 20, 2010

There was some unusual action in the VIX on Friday. As many traders are aware, it typically trades counter to the S&P 500. So on days the SPX finishes up the VIX will normally close down. I have shown several times in the past that there are often bearish implications when both the SPX and VIX rise on the same day. One quirk of the VIX is that it has a natural tendency to fall on Friday afternoons and then rise on Monday mornings. So while it is unusual to see both the SPX and VIX rise on the same day, it is especially unusual to see it happen on a Friday. I looked at this scenario last night.

In last night’s Subscriber Letter I broke down the results a little further by filtering on the long-term SPX trend. I found that while downtrending reactions were more exagerated, occurances during an uptrend were still quite reliable.

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Testing Tuesday’s Outside Bar

Posted by in Quantitative Study September 15, 2010

I found it interesting that the SPY put in an outside day and closed down after closing at a short-term high Monday. Outside reversal bars such as Tuesday’s are often viewed as bearish by many traders. I ran a study to examine the potential significance of this kind of bar.

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

Recall though that Monday’s study did suggest the possibility of an intermediate-term top, so it is a possibility. In any case, a few days of weakness here would be typical.

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Very Low Volume & Range Often Make For A Bearish Combination

Posted by in Quantitative Study September 13, 2010

In general very low volume and range when the market is not above its 200ma will lead to a pullback. I showed several studies along these lines in the subscriber letter this weekend. One with both short and intermediate-term implications is below.

Stats across the board including Win %, Win:Loss Ratio, Profit Factor, and Average Trade all favor the bears. This is the case not just for a few days but even for a few weeks.

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