Friday, April 30, 2010

Friday Fun - Scruggs Rocky Top Breakdown

04.30.10 - Using Volume As Trend Confirmation

In today's chat, I have been discussing the use of relative volume to confirm fast momentum move reversals. The dashed line represents volume on the SPY adjusted for the daily "smile" effect where am and pm volume are higher than mid-day volume such that we can see how unusual volume is on a normalized basis. Fast intraday moves will often wiggle around trend, and its easy to get itchy trigger fingers and take profits too soon. Note how the cessation of volume in the first example confirms the end of trend (volume in orange, price in blue). Likewise, in the second case, the trade remains open because volume is still rising even as price shows potential early stabilization. In this case, the light gray VIX line crosses also act as confirmation.

Thursday, April 29, 2010

04.29.10 - Powerful Internals

Excellent internals featuring strong cumulative tick and advancing volume suggest a continuation of the bullish morning trade. However, I'll grant that price is facing mid-day resistance near its highs at this time.

Wednesday, April 28, 2010

April FOMC Statement Comparison

Blue-lined markup comparison of the April versus March Federal Open Market Committee statements below. Also see past Fed-Day reactions on this site, and prior statement markups here. Virtually no changes, including the requisite Hoenig dissent. [Click Graphic Below to Enlarge]

04.28.10 - Noisy Trade

The sizable opening gap higher closed for a retest of yesterday's lows on a swift reaction to the Spain downgrade just as the SPY tagged its daily pivot. However, in spite of the noisy trade, internals continue to warrant a positive outlook into the afternoon session. Be sure to check back for the fastest Fed statement markup comparison on the web later in the day! Meanwhile, keep an eye on the pivot for the SPY and the respective VWAPs for the QQQQ and IWM.

Never Investment Advice

Tuesday, April 27, 2010

VIX +30% -- What's Next?

 Thanks to Bill Luby of VIX & More for pointing out in our trading room today that the VIX has only risen 30% or more 13 other times over the last twenty years or so.  The natural question -- what has happened next?  Here is the real quick one-day out answer for the S&P500, not considering relative market structure:
  • Average +.0015%
  • Max +5.4175%
  • Min -0.6940%
Not a terrific edge looking at the statistic in isolation.  But markets are never quite that simple, are they?  In addition, we should consider relative range price positioning, sample size, statistical significance and distribution, current market behavioral tendencies, and specific news flow backdrop.  Just food for thought for now and a short checklist to consider when thinking about "quick studies" like this.

[Splendid Elaboration by VIX & More]

04.27.10 - "What's Your Big...?"

With Goldman Sachs on the Hill and Portugal in the limelight, the market got its pre-Fed reason to sell  overbought conditions.  Will we get a Fed-day reversal tomorrow? That would be the recent norm, but that question will loom for the day with internals as negative as they are even as price attempts to stabilize right here just below the SPY's twenty day moving average.  Look at that VIX go --  plus 20%!  The leading sector groups that I track are nearly fully correlated today, no all clear until that disperses.

Never Investment Advice

Monday, April 26, 2010

04.26.10 - Monday Range Day

The overnight move higher has held, but intraday action has been flat with an ever so slight negative bent.  We are overbought -- but there again too, when was the last time a day like this didn't resolve to the upside?  Has anyone looked at GOOG or GS lately, the former is tagging its 200-day, while GS has been under its for days and continues to resolve to the downside, although it may also be nearing technical support.  Will tomorrow's hearing provide an opportunity for interested buyers?

Never Investment Advice

Sunday, April 25, 2010

ETF Rewind - Week 16 (4/23/10)

(Click Image to Enlarge/ ETF Rewind Glossary)

The market's eighth unabated weekly run higher left the S&P 500 up +2.1%, while the Russell 2000 advanced an even stronger +3.7%.  Many of the tracked indices are reaching the early stages of -- dare I say -- overbought status.  Again, without a news catalyst, this is just a heads up artifact of this market's persistent strength.  Week Seventeen of 2010 economic calendar features a Fed Rate Decision and the advance First Quarter Gross Domestic Product readings, as follows:
I hope you had a terrific weekend!

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.

Never Investment Advice: Prior Weekly Summaries: ETF Rotation Models

Friday, April 23, 2010

Aloha Dr. Brett,

In addition to your prodigious quality postings along an amazingly broad spectrum of relevant topic areas at TraderFeed, you were part of the inspiration for this blog, as I know you were for many others.

While I'm sure we haven't seen the last of you, my heartfelt thanks at this milepost moment for your kind support and encouragement through the years.  Certainly your many contributions to the field and financial blog-o-sphere will long endure.  All the best in your new endeavors!   

Jeff Pietsch

04.23.10 - Noisy Range Trade

We have had a very noisy range trade with a slight negative tilt in-spite of the run to prior highs.  Let the banal double top talk begin?  I'm not expecting any big moves going into the weekend either way.

Thursday, April 22, 2010

04.22.10 - Twenty Day Holds Again

The twenty-day moving average held firm for its second test by the SPY in a week's time.  Internals are pulling hard for a potential afternoon upside reversal, although the QQQQ's have their falling five-day moving average to contend with just as the IWM simultaneously challenges its daily R1.

Wednesday, April 21, 2010

04.21.10 - Five-Day Moving Average Recovery

Once again, the S&P has managed to come back strong off it's five day moving average (magenta dashed line).  It probably helped that S1 (cyan line) was right there near SPY $120.45.  Internals are still net negative, but coming back strong in terms of slope and we now have a bullish VIX cross at the midday.  Overall, I'm still looking for a range trade though.

Tuesday, April 20, 2010

04.20.10 - Bullish Trend Day

Our gap higher held firm at the rising five-day moving average.  Internals are very strong, though I'll grant that tick is beginning to look a little thin going into the final hours of trade.  Apologies for the late post today and good trading to you.

New FOMC Rate Change Probability Tool

My brother John works at the CME Group, where he has assisted in programing a neat new little tool that extracts the probability densities of future rate changes using differences in 30-Day Fed Funds futures contract prices.  This is obviously a terrific resource for independent traders [link]:

The tool apparently goes alpha for official launch any day now -- Awesome work John!

Monday, April 19, 2010

04.19.10 - Support Above the 20-Day Moving Average

The SPY put in lower lows just above its twenty-day moving average, where it seems to have found some initial support even though internals remain very weak.  Market Rewind catch up reading from the weekend:

ETF Rewind - Week 15 (4/16/10)

(Click Image to Enlarge/ ETF Rewind Glossary)

The major indices put in a mixed week after Friday's Goldman Sachs hiccup, with the S&P 500 down a fractional -0.2% while the Russell 2000 finished higher a full +1.7%.  Early indications Sunday evening are for a lower open Monday morning.  It will be interesting to see whether this can snow ball into an overdue pull back, or even a pause at this point, in what has been a very rare sustained upward move.  Week Sixteen of 2010 brings a somewhat lighter, but no less significant economic calendar, as follows:
I hope you had a terrific weekend!

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.

Never Investment Advice: Prior Weekly Summaries: ETF Rotation Models

Saturday, April 17, 2010

Mrtkt_Rotation Back Up

Whoops, just back from an all day trip and noticed that the rotation models page was accidentally replaced by other content. Not sure how long that has been the case, but I have fixed that now, restoring the rotation material. Looks like they are back on track and running strong. Best, J

Painting the Trend with a Twist

Most of you are familiar with painting the tape using the direction of the linear regression line-of-best-fit as an indication of trend.  That's a good start, this analysis ups the ante a notch by measuring how unusual the standard error of the regression estimate is relative to that line.

Okay, don't get freaked out by the Stats-101 reference!  It's simply a measure of how accurately the predicted trend line is fitting the actual price series!  In this case, we are referencing that accuracy level relative to historical norms to decide whether we are in fact in more of a mean-reverting versus a trending environment.  Think of it as a "third state".

The color key below employs a smoothed monthly look back period with up-trends in green, down-trends in red, and mean-reversion oriented periods in purple.  I expect that this concept could be advanced significantly with further study, but here is a first pass graphical look at the idea going back ten years using the S&P 500 (SPY) as inspiration:

Friday, April 16, 2010

04.16.10 - Financials Hit Hard

Put an overbought market together with options expiry and some juicy news, and this is what we get.  The VIX is higher by plus 22% (VXX +8%... geez) while XLF is down just under four on the Goldman charges.  Maybe a Long XLF/ Short SPY as a trade idea?  Meanwhile, we are coming in fast to my trailing long stop levels.  With internals so negative, it is usually a bad idea to try and catch the falling knife intra-day.

Never Investment Advice

Thursday, April 15, 2010

04.15.10 - Witch Hat Tax Day

In spite of this morning's mini witch hat reversal at SPY $121.50, price is now more than 15% above the early February lows.  That's one heck of a run by any definition.  Internals are weak, but not falling apart - in fact, possibly making a comeback just now at the mid-day.  Watch for any reaction back at the VWAP -- and --  don't forget to file your taxes (extensions) today!

Wednesday, April 14, 2010

Raising Stops on the Majors

New daily time-frame stops for intermediate long swings here:
  • IWM — $69.10
  • QQQQ — $48.30
  • SPY — $117.40
  • DIA —$108.50
  • EFA —$56.30
[Oh, methodology, heavily modified trailing ATR stops.]
    Never Investment Advice

    04.14.10 - Trend Day into Major Resistance?

    We have a strong trend day in play, taking the SPY and QQQQs just below potential major resistance territory (say $120-122/ $50, respectively). Is there such a thing?  Well, it takes an awfully long-dated chart to come up with those levels.  ;-)

    Tuesday, April 13, 2010

    DV_indicators Available!

    DV_indicators — Fellow blogger and creative indicator maven David Varadi has finally released his new DV_indicators service.

    To keep the cost of the suite of indicators affordable, he is offering them as part of a one-year subscription service that includes access to the indicators in MS Excel plus Tradestation or Ami-broker and unique and powerful members-only research with the promise of continuous improvements and market adaptations in the years ahead.

    As many of you know, I have played a small role in programming David's many brilliant insights, and now you can take advantage of them too.  Each year's subscription includes:

    1. Excel Plug-In
    • Nearly Forty Custom DV User Functions & Studies
    • Short-Term Reversion Indicators
    • Intermediate-Term Reversion Indicators
    • Long-Term Trend Indicators
    • Environmental Volatility Filters
    • Adaptive Trend vs. Mean Reversion Indicators
    • Historical Data Downloading
    • Basic Back-testing Capabilities
    2. Excel Charting
    • Incorporates everything above in graphical fashion.
    • More thorough back-testing metrics.
    • Live e-mail signal alerts.
    3. Trading Platforms [lifetime license]

    A $700 value in their own right, your choice of the majority of indicators and strategies included in the plug-in in either Tradestation or Ami-broker format.

    4. Proprietary Research

    Really the most important part of the service in my mind, regular members-only strategy guides, updates and custom DV_index reports from David and the CSS Analytics team.

    You know I rarely tout commercial projects with dedicated posts, but this is really a developer's delight that nevertheless remains accessible to the full spectrum of traders.  The membership price is not inexpensive at $1,199 per year, but when I think of how it compares to less robust stand-alone products and signal services, I believe it would be a bargain at twice that price for the serious systematic trader (but don't tell that to DV!).  Personal involvement granted -- Highly Recommended!

    [Images: One | Two | Three | Four ]

    Notes:  ETF Rewind subscribers only, check the members' site for a special courtesy code.  Excel components minimally require MS Windows XP with latest Service Pack and  Excel 2003 with Service Pack 3 or Excel 2007 with Service Pack 2.  PayPal processing is through Maple Park Management, LLC.  Subscribers will receive follow-up information and files from CSS Analytics -- real humans are handling the subscriptions, please allow a reasonable time to process!

    04.13.10 - 1,200 as Natural Resistance Post Tag

    Not too surprising action today, although internals really aren't all that bad.  In fact, they are suggestive of just a slight down to range bound trade more than anything else.  In higher contrast, see the NASDAQ 100, which is holding up quite well going into INTC tonight -- a leading tell?

    Monday, April 12, 2010

    04.12.10 - Market Wants to Tag SPX 1,200

    In spite of flat price action, internals are holding up well ahead of earnings and the VWAP remains green even as price is tightly wound around it.  The VIX is nearly at 15, incredible.  On the other hand, I'm not imagining a clean break into the 1,200 region even as I give the benefit of the doubt to the bulls here at the midday.

    Closes Above or Below the Pivot

    Last week a friend asked me whether a close above the daily pivot, defined here as the prior day's (High + Low + Close x 2)/4, was bullish or bearish for the next day's trade. My off-the-cuff answer was "bearish", to which he made a derisive remark that included the words "mean reverter", among others.

    Well, to settle that score, here is a ten-year study of cumulative next-day SPY performances when the closing price was above or below the pivot considering all long-short combinations:

    To my friend's point, over the last year it has indeed been bullish to close above the pivot; however, over a longer time frame it has been quite the opposite.

    All this goes to show, is that the conventional wisdom needs to be continuously reevaluated. By the same token, because certain behaviors often persist for extended periods once they begin to assert themselves, doing so may provide a tradable edge. Lastly, as fodder for further study, it's easy to imagine how the slope of a rolling summation of wins or losses for this indicator may provide a more "timely" read of when the market is best suited to either a trending or mean reverting strategies ala the ex ante support and resistance lines drawn above.

    [Related Post: Trading Equity Curves Like a Stock]

    Sunday, April 11, 2010

    ETF Rewind - Week 14 (4/09/10)

    (Click Image to Enlarge/ ETF Rewind Glossary)

    The major indices recorded their sixth consecutive week of gains, leaving the S&P 500 higher by another +1.5%.  While historical analogues suggest continued smooth sailing into the months ahead, select indices are once again beginning to look short-term overbought (see QQQQ/ IYT/  XLY/ XLF).  As strong as equities have been, this is not a short signal so much as a heads-up going into an earnings season with particularly high expectations.

    Week Fifteen of 2010 promises a much busier economic calendar, and the kick-off of First Quarter Earnings, as follows:
    I hope you had a terrific weekend!

    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.

    Never Investment Advice: Prior Weekly Summaries: ETF Rotation Models

    What's Ponzo's Time Machine Saying Now?

    Well, it's quite hung up on 2006 as the current best-fit analogue, so take it with a larger than usual large grain of salt.  But the short answer for the reader who asked is, full steam ahead into the 2010 analyst predicted ranges. Hmmm...

    [Related Link:  Ponzo's Time Machine]

    Friday, April 9, 2010

    04.09.10 - Resistance at Prior SPY Highs

    "Short" of an obvious fade attempt at the highs from several days ago, internals continue to look relatively strong. I'll be working with the new Blogger "pages" feature to clean up the organization of Market Rewind and make it easier to get to the member site, chat features and rotation models in the days ahead -- hope you like it!

    Does the Overnight-Session Predict the Day-Session?

    Building on the recent overnight- versus day-session performance comparison post, this note considers whether the direction of the overnight-session of the SPY can predict that of its daily performance.  In the chart below, the red line represents a rolling 100-day percentage correct of directional follow-through for the night- to day-session:

    In the ten-year study, follow-through was a near random 48%, although the balance of the distribution was clearly negative.  However, there where definitely periods when the indicator trended heavily to lows of 34%, and highs of 62%.  As it turns out, these extreme periods where fairly well correlated to trailing market volatility, as represented by the light green line.

    This suggests, not surprisingly, that high follow through has been largely a function of increased negative directional volatility.  In contrast, low follow-through has corresponded to very muted periods of volatility supporting behavior more akin to a random walk.  In answer to this post's title -- yes and no -- while the typical edge is slight at best, certainly both extremes may provide an informative edge with volatility acting as a leading signpost.

    Thursday, April 8, 2010

    March 2010 Rewind - Marching Along

    Marching Along was an apt descriptor indeed for last month's consistently bullish market behavior with up days outpacing down by more than two to one.  The powerful move left US equities at fresh rally highs with the VIX at lows not seen in years.

    The S&P 500, Dow Jones Industrials and NASDAQ 100 cash indices finished higher across the board by +5.88%, +5.15% and +7.68%, respectively.  As we get set to wrap up the first full week of April, no storm clouds appear imminent in spite of mixed economic readings and earnings season just on the horizon....

    Sentiment:  Positive
    Volatility:  Consistently Low (VIX 16-20)
    Direction:  Highly Positive

    The Style-Box was calculated using the following PowerShares™ ETFs: Small-Growth (PWT), Small-Value (PWY), Mid-Growth (PWJ), Mid-Value (PWP), Large-Growth (PWB), and Large-Value (PWV). The Sector-Ribbon was calculated using the following Select Sector SPDR™ ETFs: Materials (XLB), Industrials (XLI), Energy (XLE), Staples (XLP), Discretionary (XLY), Financials (XLF), Technology (XLK), and Healthcare (XLV). The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.

    04.08.10 - Gap Recovery

    The market is happy with the retail numbers and has put in an even sloped move higher.  I have R1 for the SPY at $118.90.

    Wednesday, April 7, 2010

    Day- vs. Inter-Session Performances

    It has been a while since I have looked at this -- here is an updated chart of the cumulative performance for the SPY S&P500 proxy ETF for its Daily versus Overnight Sessions since inception:

    As shown, it comes as no surprise that they have been more aligned to the upside than not since March of 2009.  However, throughout the history of the security, the overnight session has far outperformed in terms of both absolute, and especially, risk-adjusted returns.  While I'll grant that the opening price data is likely more suspect than the close due to opening cross procedures, the "tale of two markets" is retold nevertheless. [Follow-on Post]

    04.07.10 - Running Sideways

    Markets have gotten a little pop on the strong bond auction, but otherwise internals continue suggest range-day trade.  There again too, it would surprising not to see the bulls eventually take the upper hand, right?

    Tuesday, April 6, 2010

    Seeking Linearity - Part 2

    This post is a continuation of last weekend's "Seeking Linearity - Part 1", where we investigate reducing the noise from trading models.

    To start off, I'm making a small alteration to the described formula to sharpen it up by normalizing for long-term volatility, as follows:
    • A = Average_Price(Days) - Average_Price(Weeks)
    • B =  A/ Last_Price
    • C = B/ Standard_Deviation(B, Years)
    • D =  Percent_Rank(C, Years)
    The simple, frictionless equity curve trading the SPY according to the very same rules from our last post, looks like this:

    As shown, the simple indicator does a fairly good job in its own right at self-attenuation.  Let's take a moment to consider what attributes allow it to do so:
    1. Daily Return Smoothing/ Noise Reduction
    2. [Fixed] Cycle Consideration
    3. Volatility Normalization
    4. Real World Distribution Factoring
    5. [Binary] Environmental Rule Shifting
    That last point is my least favorite aspect.  We'll take a look at that and Adaptive Cycle improvements in later iterations.  Then we will focus on the original premise of this series, which is using the raw equity curve as a feedback element in its own right.  In fact, since the base indicator does a fairly good job of that on its own, here is a first look at the concept, applying our little indicator to its very own equity curve (albeit using more liberal buy-sell rules).  The derivative equity curve results for this approach are shown below:

    Well, not too bad as a second attenuation attempt.  However, beyond the long-term linearity, the feedback loops created around the line of best fit are pretty outrageous!  Perhaps a more nuanced gradient-based or other approach will do a better job of managing that noise.

    04.06.10 - Easy Gap Fill

    Sometimes these seem too easy, no?  The Russell 2000 (IWM) is leading the pack; only the Semis (SMH) are trailing significantly, down about 1% as of this writing.  we are seeing some resistance near yesterday's highs in the S&P500, so I'll be keeping an eye on that level in the afternoon session.  Don't forget we have Fed happenings today.

    Monday, April 5, 2010

    04.05.10 - Monday Trend-Day Push

    Although we are in the mid-day lull with strong resistance at SPY $118.85, internals are suggestive of trend day continuation.  The wild card is when and what the Federal Reserve comes out with from its special meeting today.  It was really something to see the ten-year rate tag 4% just a short while ago, no doubt responding to both recent economic reports and competition from equities on a day like this.  Catch up with holiday Rewind posts here:

    2010 S&P Price Target Zone

    A quick review of where we are at versus analyst S&P 500 targets for 2010.  As shown, we are just about ready to challenge those heights.  I'd expect that $120 level to provide resistance at the first attempt after this continuous five-week-plus rally.

    Sunday, April 4, 2010

    ETF Rewind - Week 13 (4/01/10)

    (Click Image to Enlarge/ ETF Rewind Glossary)

    Holiday shortened trade allowed the major indices to put in their fifth consecutive week of gains, leaving the S&P 500 higher by a full +1.0%.  The question going into Monday, is whether the official withdrawal of stimulus and on-going tepid real estate and employment results are sufficient reason for traders to minimally take pause here ahead of earnings. 

    As of early Sunday evening, futures have been able to carry forward moderate momentum following Friday's net-positive jobs report.  Importantly, the Federal Reserve is holding a special expedited meeting tomorrow to discuss rates.  Was the jobs number and bond market response sufficient to rattle their policy cage?

    The lighter economic reporting calendar for Week Fourteen of 2010 is as follows:
    I hope you had a terrific long weekend!

    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.

    Never Investment Advice: Prior Weekly Summaries: ETF Rotation Models

    Saturday, April 3, 2010

    Day-Trading Lessons from the NCAA

    Well, I'm quite serious about at least one of the three mini columns in the WSJ out-take below... I'll let you decide which -- and -- I hope the trading "lesson" is self-evident at that!  When uncertain, step back, assess the situation and take a dribble or two.  There is no need to rush into a trade for the sake of action alone.  Your performance will likely suffer if you do.

    Source: Wall Street Journal, Weekend Edition, April 3, 2010.

    Seeking Linearity - Part 1

    I have been thinking a lot lately about self-attenuation of the linearity of return series.  As a vehicle for this exploration in this first of a series of posts, I will generally proscribe the formula for a very simple indicator below:
    • A = Average_Price(Days) - Average_Price(Weeks)
    • B =  A/ Last_Price
    • C =  Percent_Rank(B, Years)
    The trading rules will start with a "level-one" attenuation using the 200-day moving average as a filter proxy for volatility of the underlying, as is common practice, holding long only when the price is above this average and C is less than 70%, else going to cash.  In contrast, when price is below the 200-day moving average, long positions will be held when C is below 50%, and short when C is above 50%.

    Naturally, much smoother indicators and methods exist, but I am choosing this as a starting point because it appears so linear in its own right from the 20,000-foot level -- It's that close up turbulence that will be the focus of future articles in this series, particularly when we see what happens when these returns are compounded.

    The hypothetical additive, frictionless return series shown below uses the SPY back through April 1993, and excludes returns on cash.  I highly doubt the proscribed indicator would have performed as well on other indexes, but that isn't the point of this piece.  Also, as a preemptive strike -- with respect -- please don't write asking for the specific parameters.  Everything needed to replicate this very simple model is found above, and I have increasingly come to the conclusion that one cannot "own" an indicator without conducting individual research.

    Thursday, April 1, 2010

    04.01.10 - Shiny New Month Pop

    Internals look very good, although the major indices have all faced strong initial resistance at their respective R2 levels. I'd also be remiss to not note that the Semi's are pulling back, making progress difficult for the QQQQ's