Tuesday, September 22, 2009

Ugh! I Should Have Known!!!

This comes from the Department of I Should Have Known. More specifically, this is the kind of thing you do on a slow Tuesday afternoon before a Fed announcement.

Over the past several months, I have commented that the market will have an upward bias with a bid under the market and that shorting the market beyond an hour would be a very difficult proposition. Observing the intraday price action of the S&P Depository Receipts (symbol: SPY) over the past several months, it seems to me that markets never sell off for more than hour before the buyers appear. Not having much to do today, I decided to see if my observations were correct, so I crafted a simple study.


1) 60 minute prices bars on the SPY
2) study start date: March 6, 2009
3) entry: two consecutive price bars where close less than open then buy next bar at open
4) exit: first price bar where the close greater than open and where close greater than entry price then sell next bar at open
5) no stop losses utilized
6) did not account for slippage or commissions

In the study, there were 67 trades yielding 30 SPY points. Buy and hold since March 6, 2009 has netted 38 SPY points. There was only 1 losing trade, but this is what we would expect from strategy that sold on the first close greater than the entry price. The average length of time of each trade was 8 price bars. With this strategy you spent 45% of the time in the market. The equity curve for this strategy is shown in figure 1, and this basically reflects the strong up move over the past 6 months.

Figure 1. Study/ equity curve

Figure 2. is the Maximum Adverse Excursion (MAE) graph for study #1. MAE measures individual trade drawdown (x axis), and what we can see is that 57 out of the 67 trades from this strategy had an MAE or draw down of less than 1.5%. These are all the trades to the left of the blue vertical line.

Figure 2. Study/ MAE graph

In other words, my observation that this market hasn't stayed down for long is pretty much correct. Over the past 6 months, two consecutive closes below their opens (on a 60 minute bar chart of the SPY) has generally brought in the buyers. Furthermore, with the average trade only lasting eight 60 minute price bars, traders didn't have to wait long before being made whole again.


Anonymous said...

could you please clarify on this part??

4) exit: first price bar where the close greater than open and where close greater than entry price then sell next bar at open

you mean, greater than open of the current bar right?

Guy M. Lerner said...

no it is exactly as I said....

1) the close is greater than the open and that close is greater than the entry price (this is why there were almost 100% winners)

Several other points.....in the prior 6 months such a strategy was a big loser; so this just illustrates how ridiculous the market has been

Other iterations of this strategy such as to two consecutive closes that are lower or using 3 bars etc produced similar results

the point of the article was to point out what I had observed the past 6 months was indeed correct

Anonymous said...

And what you think about near term future? MArket wiil be the same- only longs there? :))

Guy M. Lerner said...

Near term future? The only thing certain is that the market will go up and down.

Dollar still in down trend; equities in up trend; treasury yields in down trend. Commodities in shore term range and at lower end of that range.

In stocks, the pullback has been small so far; from my perspective, little has changed; equities still risky in that they have moved long ways in short time; commodities at lower end of range. All those buy signals on the Dollar must have triggered but of course, that was after all those sell signals yesterday. Longer term the trend is still down.