Tuesday, January 19, 2010

Tuesday VIXology

Going forward this week we've got luke warm short signals from two separate high probability VXX PDQs. The upper PDQ is a model that's going to get a bit more exposure in the coming weeks as the direction of Project Z becomes more focused. The VXX short signal against the SMH is a brand new signal.
The lower VXX PDQ is comprised of the currencies and the single short signal against BZF is also brand new.

One of the joys of being a committed systems trader is never having to say "I wonder if I should really enter this trade." Serious system traders have a faith based comfort in their trade triggers and believe that while there may be drawdowns, the particular system stops will (should) prevent things from getting so out of hand that the trader develops sweaty hands and/or heart palpitations.
My approach to trading is a bit more flexible, fractal and largely reliant on the mining of various opportunity niches that I believe provide me with probability edges.
For daytrading I rely on the VIXEN and its permutations although for the time being, due to the floating nature of the VIX/equity crosses, it's been difficult to backtest the efficacy the those trades. The VIXENs are my faith based, albeit discretionary, mode of trading.
On the other hand, having devoted thousands of hours fiddling with TradeStation code and a variety of other linear and non-linear algorithms, I do have a certain confidence in system trading and deploy significant portions of my capital based on those signals.
Over the last 2 years the VIX (and more recently the VXX) have become two of my most important system trading tools, providing dynamic and reliable market momentum indicators, while at the same time providing revenue capture opportunities in pair trades.
This week our little VIX style box is a bit cloudy. The VIX/VXX and the dollar are looking technically oversold while the Qs are looking tired and prone to an excursion back down to the lower LR30 channel band at 45.

Here's a different look at the majors with each component sharing a common overbought theme, while TLT has broken off its bottoming pattern and now looks poised to gain some traction.
Last week our Telechart rotation scan picked IWM as the potential momo leader for the week and the results (kind of) bear out that forecast. For the week IWM was down 1.3%, Qs were down 1.5%, EEM was down 2.89% and DBC was down a heafty 3.98%. IWM didn't advance any but it held ground better than the other rotation candidates, reflecting its relative strength.


mike said...

Hey BZB - thanks for sharing your work! ? - do you have an alert that told you to get long SMH/ short VXX that went off this am? Trying to determine how you time your entries and exits? mike in Pensacola - SDSU class of 82 - majored in surfing, minored in beach vb

bzbtrader said...

I've been posting on the PDQ signals now for a couple months but apparently I need to post a few more explanations of what's going on with the dashboard signals. These are EOD signals so what I posted today are the results from the 1/15 close. I typically run the PDQ about 15 minutes pre close and then trade the signals just before the close. The whole point of the PDQ is to examine z-score signals generated by a non-correlated basket of stocks/ETFs in a effort to minimze trade risk and drawdown.

gohara said...

Hi Bob,

I, too, would appreciate some additional explanation as to how you use the PDQ dashboard.

For example, I have the 1/15/10 Market Rewind Pairs worksheet up. When I type in QQQQ VXX 4 Days z=1.5, I get no trades for the 6 month period becuase Z-score never exceeds +-1.5.
When I type in SMH VXX, 7, 1.9, I'm flat, not short SMH. Am I doing something different than you?
Thanks in advance,

bzbtrader said...

As time and price have moved forward from the 15th, I can't go back and recreate that PDQ signal on the dashboard.
For the referenced SMH/VXX pair I was using a condition 2 only filter and just to clarify .. the signal was short the VXX, long the SMH. The signals generated by the PDQ are for the traget ETF .. in this case VXX.

gohara said...

Thanks, Bob.

Understand now that signal was short VXX. My spreadsheet still shows flat since November on the VXX/SMH whether Condition#2 is checked or not. Z never penetrated +-1.9 after that.