Open Up!

This is kind of a weird one.

I was mulling over the question of what happens when the market opens up, i.e. above its previous close. Is the day likely to be an up day? A down day? I got out my data and started poking around. I looked at all “open-up” days with an open at least 0.25% above the previous day’s close. I looked at only days that opened up after a previous close-to-close down day. And the reverse.

The statistics were not significant, although it appeared there was something of a shorting opportunity there. I therefore put together a backtest for shorting at the open and holding to the close, and that looked like utter garbage. Continue reading Open Up!

Synthetic VXX/XIV Data

Anyone who trades VXX or XIV ETFs knows that their history is unfortunately too short. They track the VIX futures, but only go back to 2009. How would they have performed during the Kerfluffle of 2008?

A number of people have come up with ways to use the futures data from prior to the ETFs’ inception, and create synthetic data to use in testing. Many charge for this data.

A friend pointed me to a website that has the data for free. With a little know-how, you can create a synthetic version of VXX and XIV and import into your favorite backtesting software. It seems to track very nicely too.

In the above graph, the red line is actual traded XIV, and the blue is the synthetic version going all the way back to 2004. Looks close enough to me! The tail end is a prediction that the creator cooked up, which you should ignore for testing purposes.

I am relieved to find that my medium-term XIV system would have been out of the market for most of 2008. Very reassuring.

If you were looking for synthetic VXX/XIV data, head on over here.

Read also: What I Trade.

Pop or Drop part 2: Big Moves Upward

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?

Continue reading Pop or Drop part 2: Big Moves Upward

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