Last Thursday I showed an incredibly simple system with outstanding performance over the last 15 months. It basically sold short any time there were 2 up days and looked to exit at the 1st profitable close on or before day 4 – at which time it would exit no matter what. Incidentally, today’s drop would’ve been yet another winner for the system.

It’s not terribly surprising that a short-selling system has performed well over that time period. Fairly amazing is how a long-oriented system based on the same ideas can output numbers nearly as good. Below are system criteria reminiscent of last week’s studies:

Entry criteria:
1) The S&P closes lower two days in a row – buy on close.

Exit Criteria:
1) If the S&P closes above the entry price of the trade, sell on close. 2) Sell on the close of day 3 regardless of profitability.

Time Period: 6/1/2007 – present

Results – There have been 39 trades, 35 (90%) of which were profitable. The average trade made about 0.65%. Total profit over the period about 25.5% All trades are listed below:

Once again I should note that this system is a product of the environment and not a well-designed trading system. Entry and exit techniques are too raw for actual decision making.

That said, results were fairly impressive. There have now been 16 winners in a row going back to February and the market has seen a difficult time during that period.

Now that we’ve had two down days it’s likely a poor time to try and jump to the short-side. Those that are already short may want to consider taking profits. Traders could also begin thinking long in the next day or so.

In my recent Trend vs. Chop series I showed how over the last 15 months or so the market has become more prone to chop and less prone to follow-through. Tonight I will show an incredibly simple system that would have fared exceptionally well over this time period. I’ll then discuss the possible value of such a system.

Entry Criteria:
1) The S&P 500 closes higher 2 days in a row AND
2) The S&P closes below its 200-day moving average then sell short on close.

Exit Criteria:
1) If the S&P closes under the entry price of the trade, cover on close OR
2) Cover on the close of day 4 if not profitable.

Time Period: 6/1/2007 – present

Results:

There have been 26 trades, 25 (96%) of which were profitable. The average trade made about 0.75%. They are listed below:

If you relax the entry criteria and don’t require the S&P to close below the 200ma, then there will be 43 trades – 41 (95%) of which were profitable.

Some thoughts:

Although the performance has been stellar over the last 15 months, this is not a great system. In fact, if you run performance back to 1960, it’s not even a winning system.

I’m not a fan of the exit criteria. It keeps winners small. With a little effort I’m sure traders could come up with a more profitable exit strategy – even if it meant suffering a few more losing trades.

The bottom line here is that the market has been especially choppy over the last 15 months. Once aware of this, traders should look to take advantage. Seeing the market move in one direction for even a couple of days should alert traders that they may want to take profits or consider a strategy to benefit from a swing in the opposite direction.

Lastly, this environment will certainly change. While the above system may not be a great “trading” system, it does appear to be a very useful “tracking” system. In other words, moves higher of 2 days or more have quickly reversed and provided the system a nice string of winning trades. Traders should be on alert for system failures, as they could be a sign that selling into up-moves may be falling out of favor and the market environment changing. Therefore they would need to adjust their approach to take advantage of the new, emerging environment.