Tuesday, November 16, 2010

VIX and SPY at even more RSI(2) Extremes

The market plunged today. (I like using 'plunged.' It sounds better than fell or pulled back; adds drama. Use it to describe big down days or a woman's neckline.) Of course the $VIX is spiking and  CNBC is getting everybody scared. Last week I did a little study on what happens when the $VIX RSI(2) > 90 and the $SPY RSI(2) < 10. The results were very interesting, but after all it was just a test. And if you bought last Friday's close, you're hurting a bit. Well, today we hit the same setup as last Friday, except the $SPY RSI(2) is now below 2. It's very oversold indeed.  Doesn't mean it can't go lower, but super oversold nonetheless.

Here is a little primer. This is simple as it can get. Buy the $SPY on a close above the 200 day MA when the $VIX RSI(2) > 90.

VIX RSI(2) >90, buy SPY on close > 200 day MA; sell RSI(2) > 65. $100,000 per trade; 1993 to present.

Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio

 128,624.32
157
125
79.62
-5.87
0.82
 1,248.86
  (858.85)
5.68
1.45


Now combine this with the $SPY RSI(2) < 2. It hasn't happened very often, but check this out.

VIX RSI(2) >90 and SPY RSI(2) <2, buy SPY on close > 200 day MA; sell RSI(2) > 65 $100,000 per trade; 1993 to present.

Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio

26,320.53
11
11
100.00
-2.54
2.39
 2,392.78
   N/A 
 N/A
 N/A


Umm. 100% win rate. Yikes! When a test is perfect, it does concern me because it may mean we're overdue for a loss, but it is hard to ignore these results.

When doing these studies and I think I've found an edge, I don't just go all in. Take a small position, see how it moves. After a day like today, some may want to dump their positions for the sake of mental peace. I look to add to mine; it's called scaling in. But have everything pre-set ahead of time. Am I scaling in 2, 3, or 5 times? Am I scaling in at all? Do I understand that scaling in =  adding to losing positions? Can I psychologically handle this? Money (and risk) management is so crucial to a successful trader. Something that is always a work in process.

Below are the 11 trades for your viewing pleasure. Go ahead, noodle on them.

Ticker
Date
Price
Ex. date
Ex. Price
Profit
% Profit
Value
Cum. Profit
# bars
SPY
10/17/1997
       93.97
10/21/1997
    97.21
    3,448
3.45%
  100,000
          3,448
3
SPY
10/27/1997
       86.93
11/3/1997
    93.72
    7,814
7.81%
  100,000
       11,262
6
SPY
11/12/1997
       90.23
11/14/1997
    92.79
    2,832
2.83%
  100,000
       14,093
3
SPY
7/23/1998
    113.85
7/30/1998
  113.91
          55
0.05%
  100,000
       14,148
6
SPY
5/25/1999
    128.62
6/3/1999
  130.24
    1,260
1.26%
  100,000
       15,408
7
SPY
7/26/1999
    134.35
7/28/1999
  135.91
    1,160
1.16%
  100,000
       16,567
3
SPY
1/4/2000
    139.34
1/7/2000
  145.32
    4,293
4.29%
  100,000
       20,861
4
SPY
8/5/2003
       96.14
8/7/2003
    97.71
    1,639
1.64%
  100,000
       22,499
3
SPY
3/11/2004
    110.79
3/17/2004
  112.71
    1,728
1.73%
  100,000
       24,227
5
SPY
5/18/2006
    126.21
5/25/2006
  127.73
    1,204
1.20%
  100,000
       25,432
6
SPY
2/27/2007
    139.50
3/8/2007
  140.74
        889
0.89%
  100,000
       26,321
8


Do what you want with this, but we've reached levels that have historically led to upside bias.

Footnotes

-Test run in Amibroker with Norgate data. No commissions or slippage included.
-Max Trade % drawdown = intra-trade drawdown. So even though the test was 100% correct on a closing basis, there was a little pain before the trade closed profitable.
-Disclosure: I'm about 65% Long invested right now, gradually been buying oversold names over the last few days.
-If you think I've screwed something up, just let me know. Thanks.


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