Walking The Parapet
Rallying commodity prices helped lead an advance in the stock market today. The Dow Industrials added another 60 points to close at 14,673.46. The S&P 500 Index rose .35% while the Nasdaq Composite was up .48%. The Transportation Index was down .31%, bucking the trend. Silver prices were higher and oil recovered some of last week’s sell-off.
TAN, the solar ETF, soared 14.60% on the back of huge earnings from First Solar. GDX, the gold miner Bull ETF gained 3.98% and SIL, the silver miners ETF, was up 3.64%. Please click on the symbols for details.
Yesterday and today, EWT, the Taiwan Index ETF, set off buy signals in the %b strategy. Discussed in the book he co-authored with Cesar Alvarez, High Probability ETF Trading, the %b is one of the components of the Bollinger Bands, developed by Mr. John Bollinger. It measures how overbought or oversold a security is. The higher the %b reading, the more likely the asset has moved higher. The lower the %b reading, the more likely the asset has moved lower. Ideally, traders want to buy low %b readings and sell high %b readings.
The system is straight-forward. For long trades:
- The ETF must be above its 200-day SMA;
- The %b must close under 0.2 for 3 days in a row. If this occurs, buy the ETF on the close;
- Aggressive traders – Any additional day while you’re in the trade, if the %b of the ETF closes again below 0.2, buy a second unit on the close;
- Exit when %b closes above 0.8.
EWT closed today at 13.05 and yesterday at 13.04.
In a test of 20 ETFs from their inception date to 12/31/08, the basic (no-scale-in) version had average %P/L was .70%; the average trading days held was 4.2 days; and the average %Winners was 76.5%. The aggressive (scale-in a second unit of shares) version had an average %P/L of .91% and a %Winners of 80.7%.
Mr. Chris White, developer of the ETF Trading Bandit software which I reviewed in the 2.3.11 blog, walk-forward tested all the the strategies from January 1, 2009 to December 31, 2012 on the 20 ETFs Connors/Alvarez used in their book. Chris tested both the original close-close methodology (buy and sell on the close) and his open-open methodology (buy and sell the next day on the open).
With the %b using the original close-close Connors/Alvarez strategy, the %b had an average %P/L of .58%; an average hold time of 5 days; and a %Winners of 76.16%. With Chris’ open-open strategy the average %P/L was .55%; the average hold time was 5.2 days; and the %Winners was 70.92%. The aggressive close-close version had an average %P/L of .79%; an average hold time of 5.2 days; and a %Winners of 81.32%. The aggressive open-open version had an average %P/L of .65%; an average hold time of 5 days; and a %Winners of 75.22%.
I ran a backtest of the strategy with EWT from its inception through today’s close. Using the aggressive close-close methodology, the %Winners was 76.11% and the average hold time was 5.2 days. Of course, past performance is no guarantee of future results.
I will be unavailable tomorrow so the blog will resume on Thursday.