There are two systems I’ve been trading since the beginning of 2016. That’s fifteen months of true out-of-sample, real live experience. I’m pleased to report the results have been very good, and consistent with their original backtests.
In the last post (here), I examined what happened after a stock moved down a significant multiple of its previous day’s Average True Range (ATR20 in this case). Stocks tended to have up days on day 1 and days 3-5, with a down day on day 2 as an average. What about bursts upward? Are they the opposite? Would they make a good shorting opportunity?
When stocks are moving gently from one day to the next, there is often no discernible pattern. However when they start rockin’ and rollin’ one direction or the other, they show certain similarities.
I’m always curious how stocks behave when they show a significant drop, or when they pop upward unexpectedly. I ran some simple statistics and noticed a couple of things.
First, I decided to look at what happens when stocks drop significantly. Rather than look at a fixed percentage, I instead used Average True Range of the stock. This shows the average price movement over the previous days, and is a measure of volatility. I took the ATR(20) before a drop, and corralled all the stocks that fell at least 3x the previous day’s ATR(20) value. I also looked at stocks that dropped at least 5x the previous ATR. Here’s a visual:
I then recorded the percent gain or loss for each day’s close following the drop, for five days after. This resulted in thousands of rows of data, but you know I gladly suffer through spreadsheet hell so that you can have pretty graphs.
It turns out there’s a clear pattern:
Above: long-exposure nighttime shot of oil rigs off the coast of California.
Strange things happen to options and futures on fairly predictable dates. Options expiration dates, contract settlement dates…these are trading days where – and this is just my theory – some traders just want to get out of a trade by any means necessary. So it can, in theory, lead to behaviors that can’t easily be arbitraged away. Best theory I’ve had today. Continue reading Settle For Oil
The indicator (more info here) has turned red. It’s interesting to see the divergence between the S&P 500’s positive direction, and the indicator, which is staying solidly below the threshold.