Edging in on DV Indicator Differentials

As a congratulatory hat tip to David Varadi on the launch of his new DV Indicators website, this post investigates potential trading edges gained by combining observations of the absolute value of David’s bounded DV indicator together with its smoothed difference relative to Welles Wilder’s classic Relative Strength Index (RSI).

Both indicators construct oscillators that compare current price to historic levels. However, while the RSI strictly employs differences in recent closes, the bounded DV looks at a great array of relationships between daily closes and their high/low ranges, prospectively capturing inherent volatility effects in addition to relative price placement.

An initial investigation suggests that differences in their respective behaviors and resulting lead-lag effects may be exploited to derive high-edge short-term swing systems and investment hedging strategies alike, as summarized below.

Performance Above & Below Various Differential Thresholds

CSS Analytic’s research indicates that the more positive the divergence between RSI(2) and DV(2) as measured using a proprietary smoothed RSI-DV calculation, the greater the next-day return expectation and vice-versa.

Additionally note below how these edges may change according to the absolute value of DV(2), with the far right-hand side of each table including all values of DV(2), then becoming progressively oversold towards each left-hand side. Maximum next-day loss expectations also increase as divergences become more negative. Various short-term trading strategies may be tested based on these observations.

SPY/ Dividend Adjusted/ Five Years Ended October 2009/
Differential ><

Performance Above Various Differential Thresholds

Here we see aggregate performance above various thresholds only. Focusing on Cumulative Profit and Loss multiplied by Equity Curve Linearity (see table d), note how Differential readings greater than -10 in combination with absolute DV(2) readings below 60 maximize returns for minimized risk.

This suggests a long-term strategy whereby investors may consider hedging their holdings when these criteria are not satisfied.

SPY/ Dividend Adjusted/ Five Years Ended October 2009/
Differential Greater Than Only

A Systematic Hedging Strategy

The following chart shows the results of our hypothetical hedging strategy using the SPY as a proxy, going to cash each time our Divergence/ DV(2) filters are not favorable. The strategy was only invested 49% of the time during the 1,250-day study period. Positive results were also found for many other major equity-based ETFs.


Again, congratulations to the whole CSS Analytics crew on the launch of their new website: It's a DV World Baby! We all look forward to seeing it evolve and grow.

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Never Investment Advice. This article was first published for ETF Rewind subscribers several weeks ago. The ETFR scans nearly 200 ETFs each night for setups that fail the discussed thresholds. For additional reading on DV vs. RSI differentials, I also want to recognize this terrific predecessor/companion article by Woodshedder. As a disclosure, I assisted in programming many of the available indicators according to DV's specifications.

11.20.09 - Downside Follow Through

Well, it has been a while since we have seen any downside follow through and here we have it. Nevertheless, the SPX has been able to hold the overnight lows just above 1,080 and price has been moving mostly sideways since mid-morning. Cumulative Tick has managed to repair itself somewhat, but other internals remain quite negative. With options expiration, it's more difficult than usual to call the second half of the day, though it would seem likely well see some binary option pin action between these 1,080 and 1,090 levels.

11.19.09 - Comeuppance vs. SPX 1,090 Support

The S&P finally hit an air pocket after days of lateral move and mixed technical indications.  Normally I'd expect this reaction to take us back to 1,080, but for now we are finding good support at the round SPX 1,090 level, and we'll just have to see how enticing this is as a buy for the late-to-the-gamers.  Our Market Sentiment reading is very negative and was pegged at zero at one point.

Maybe you can guess where I find myself once more based on today's graphic... sigh.  Fortunately I have been playing the chop on the short-side with small tactical positions, and they have worked out well today though honestly this could have just as well been the belated move to 1,120 on the right news I suppose.

11.18.09 - Second Day of Consolidation?

Internals are running sideways with price on slightly negative sentiment.  It's possible consolidation here as short-term overbought readings cool off through time.  By the same token, we are seeing fewer new highs and the intermediate-MACD indicator again appears poised to roll over.  At the very least we can say we are at a momentum lull as traders look to gain a feel for the next break.

11.17.09 - Inverse Dollar Trade Persists

At the mid-day we have seen mild selling pressure at best after yesterday's breakout move, though perhaps today is the bigger tell. While 1,120 would appear just around the corner, I still see signs that the end of this cycle is near. I am hopeful that my internet connection will be up and running very soon. The cafe is cozy, but...

11.16.09 - Second Stage Launch

Horrid internet issues after a series of windstorms have me out-of-pocket once more and holed up in an internet cafe.  The morning economic reports provided enough bullish confirmation for another big push higher even though last week's action had left many short-term indicators rolled over.  Just can't fight this bull for long.  Will we get our projected fib-extension to SPX 1,120?

Without my main workstation on-line, I have found the Daily Sentiment indicator embedded into the Mrkt Metrics charts to be enormously helpful (sorry, Firefox only).  Speaking of which, do take a look at the Normalcy indicator; this market is tremendously stretched from its intermediate mean, which is particularly unusual on the upside.

ETF Rewind - Week 46 (11/13/09)

(Click Image to Enlarge/ Glossary)

After a bumpy ride, the S&P500 (SPY) finished its second week in a row higher, up +2.3%.  This seemed paltry against the Real Estate (IYR) sector's +6.2% gain on hints of extended low costs of borrowing, while the Energy (XLE) complex came in at a mere +0.3%.  At the end of the day; however, it was difficult to disaggregate daily equity performance from that of the US Dollar (UUP), which inversely ended the week down some -2.2%.

Week Forty-Seven of 2009 features a particularly busy economic calendar:

• Yahoo! - U.S. Economic Calendar
• Yahoo! - U.S. Earnings Calendar

If you are interested in a significantly more thorough version of this weekly summary, consider taking a look at Market Rewind's nightly ETF Rewind Pro service. In addition to coverage of nearly 200 ETFs across twelve major asset classes, you will find three model portfolios, daily market signals and commentary, pairs trading and various powerful portfolio management tools.  Enjoy your weekend!

Never Investment Advice

11.13.09 - Lucky 13

The reasserted crush in the Dollar has allowed the SPY to bounce nicely off it's five-day moving average, and the other indices are following suit. I'm flying slightly blind with a bad internet connection today, but I see that our Market Sentiment meter swung positive during the mid-morning.