Sunday, December 12, 2010

SPX Overbought Indicator: Bollinger Bands?

I was inspired by the Woodshedder's post about SPX overbought indicators. He commented on Bespoke Investment's chart showing that the SPX was the most overbought in a year. I had seen this graph too and wondered how they measured it. Mr. 'Shed tried to replicate it and could not do it. I tried to replicate his replication and couldn't do that either. But I think I know what Bespoke is using: 50 day Bollinger Bands. On Friday 12-10-10, the SPX crossed above the 2 standard deviation line for the first time in year.


http://www.bespokeinvest.com/


Here is what I have, using Bollinger (50,2) as my paramter:


The bottom graph really looks like theirs.

I guess when the the SPX hits these levels it is overbought according to the graph. But what does that mean for future SPX prices?

Over the next week...


Buy when SPX crosses 2 standard deviations above its 50 day Bollinger Band; sell 'n' days later. $10,000 per trade; 1990 to present.
Exit n
 days
Net Profit
# Trades
# of winners
% of Winners
Max. Trade % DD
Avg % P/L
W. Avg. Profit
L. Avg. Loss
Profit Factor
Payoff Ratio
1
        455.44
219
113
51.60
-3.66
0.02
      44.88
     (43.55)
1.10
1.03
2
    1,985.07
164
96
58.54
-2.27
0.12
      62.73
     (59.36)
1.49
1.06
3
        (73.86)
138
78
56.52
-4.13
-0.01
      81.87
   (107.67)
0.99
0.76
4
    1,024.60
118
63
53.39
-4.07
0.09
    104.96
   (101.60)
1.18
1.03
5
        192.63
107
60
56.07
-4.53
0.02
    103.37
   (127.87)
1.03
0.81


Over the next 8 weeks...

Buy when SPX crosses 2 standard deviations above its 50 day Bollinger Band; sell 'n' weeks later. $10,000 per trade; 1990 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
1
       192.63
107
60
56.07
-4.53
0.02
    103.37
  (127.87)
1.03
0.81
2
    1,127.88
86
50
58.14
-6.31
0.13
    170.07
  (204.87)
1.15
0.83
3
    1,804.00
71
41
57.75
-10.80
0.25
    224.77
  (247.05)
1.24
0.91
4
 (1,359.39)
64
34
53.13
-11.98
-0.21
    241.08
  (318.54)
0.86
0.76
5
       461.19
60
36
60
-11.98
0.08
    279.14
  (399.49)
1.05
0.70
6
    1,229.45
58
36
62.07
-11.98
0.21
    295.87
  (428.27)
1.13
0.69
7
    5,094.86
56
34
60.71
-11.98
0.91
    385.98
  (364.94)
1.63
1.06
8
    7,705.74
53
36
67.92
-11.98
1.45
    406.63
  (407.81)
2.11
1.00


This looks like one of those overbought indicators that doesn't really pan out to anything meaningful. I'm not sure if overbought indicators ever translate into predictable lower future prices or any kind of selloff. I believe this is especially true in an uptrending market where the S&P 500 is above its 200 day moving average. I do think overbought indicators work better on the VIX though. I'm also only looking at relatively short timeframes, so maybe this is a longer term omen.

2 comments:

Mike said...

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Day Trading Platforms Tradervc said...

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