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:

1. The ETF must be above its 200-day SMA;
2. The %b must close under 0.2 for 3 days in a row.  If this occurs, buy the ETF on the close;
3. 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;
4. 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.