Pop or Drop part 1: Stock Behavior After Big Moves

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.

The Drop

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:

Continue reading Pop or Drop part 1: Stock Behavior After Big Moves

Settle For Oil

Oil Rigs

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

Two Swing Trade Systems (Part 2)

Click to view larger.

Yesterday I discussed two swing-trade systems that work pretty well in out-of-sample data. While each works differently, they overlap enough that you don’t get any benefit from running them both at the same time. One great thing about these two systems is that they’re dead simple to manage. Trade at the open or the close, simple math, etc etc.

I will repeat the caveat from yesterday: these trades average <1% gain per trade. You must have sufficient capital and/or a low/nonexistent commission fee to make these work. While you can use leveraged ETFs or account leverage to help increase the profit/commission ratio, you also increase your chance of a catastrophic hole in your money.

In the lead image, you can see that I have indicators for both RSI and PIRDPO. PIRDPO occurs more frequently, and the RSI trades are a complete subset of the PIRDPO trades (during this particular time frame). There is no benefit to trading both systems.

Continue reading Two Swing Trade Systems (Part 2)