Soggy Bottom

Here's a variation of my hairy bottom formation. . .something I'll call the Soggy Bottom in honor of the immortal Soggy Bottom Boys bluegrass band as portrayed in the movie O Brother Where Art Thou? The pattern sets up like the hairy bottom, the difference is the relative position next to the support pivot. In the hairy bottom, the pattern sits right on the pivot and tends to form a kind of squat bar for 4-8 2 minute bars.
In the example shown The Qs flash 4 bars in an ascending pattern, followed by a simultaneous parabolic BUY on both the NYAD and the Qs. The MA bull cross on the Qs is a confirmation that the odds are now favoring a run up.
Then, at 10:24 the Qs and the NYAD fire simultaneous SELL (or cover) signals as the Qs MAs roll over and the NYAD MACDs go downslope. These confirming signals reinforce the new short stance.
Finally, at 11:00, The Qs and NYAD parabolics again fire simultaneously BUY (or cover) signals as the NYAD MACDs turn upslope and the Qs start a run back up to the PP pivot. . . although I don't like the divergence of the MAs and MACDs on the Qs and decide to stay flat at this point.
A nice little cycle trade of 90 minutes duration with a .27 gain on the first leg and .11 on the second for a net gain of .38.

Qs Soggy Bottom

Here's another example of the Soggy Bottom pattern from yesterday's Qs action.
Just as in the original post, the Qs inability to hit the S1 pivot led to a subsequent display of strength. Just compare the original chart with this one and not the many similarities.
Immediately after the Soggy bottom, the MACD crosses the zero line to the upside.
The MAs cross and turn upslope.
The parabolics fire a BUY signal , and
The MACD (or Signal Lines) cross and head upslope.
All signals were bullish and all confirmed.
For future reference. . .an alignment not to easily dismissed.
.
FYI, regarding the VWAP indicator I mentioned last week....the Qs price has closed above the VWAP for the past 13 consecutive days.

Qs Soggy Top

Here's is the inverse of yesterday's Soggy Bottom pattern.
It displays the Qs upward momentum's inability to rise to the R1 pivot and reflects underlying weakness. In this case the 10:00 drop back to the PP pivot was accompanied by the release of consumer confidence numbers and as such has to be considered event driven.
This was a tough trade to enter as the 10:00 down bar dropped .17 in 2 minutes. Unless you had preset an entry for the low close of the previous squat bar formation (39.31) there was little opportunity to enter short until 39.24.
This turned out to be a quick trade as the Qs bounced off S1 at 10:18 and the MACD signal line turned up. I jumped the exit gun on this one as the parabolics had not fired a BUY yet, but I was nervous about holding on. My Schwab platform killed the NYAD live feed yesterday so I was kinda trading with one hand tied behind my back and was being extra cautious as a result.
Net time in trade 10:00 - 10:18 = 18 minutes
Net trade gain 39.29 - 39.06 = .23 for 18 minutes exposure

Not so bad

The Qs recovered overnight a substantial portion of the initial dramatic response to INTC's earnings report. I suspect some of the big dogs were similarly positioned as myself prior to INTC's news, the difference being that they can manipulate things overnight and I cannot. I did basically nothing today, flipping some long puts for long calls, but making just enough to cover commissions as delta was absolutely dead in the FEB OTMs on both sides.
I stayed away from the WFC and WM trades mentioned yesterday....WFC's surprise rise and the ridiculously high cost of WM puts and calls made any kind of strangle play way too expensive for my tastes.
The Qs finished on a perfect long tailed doji for the daily bars, hinting that there may be a change in market temperament, but it's too early for me to get seriously interested in the long side. Although I am still holding long FEB OTM calls, I will wait until we get a 3/7 bar SMA crossover before I add to the position.
The smart money says wait till this earnings season is over prior to putting on any size as there could be some nasty surprises with a significant trickle down effect.
I'm adding the following link for my fellow traders featuring the aptly named Soggy Bottom Boys with their greatest hit. It seems appropriate to describe the curent markets.

Fade to Black - III

OK, this is the last post on this setup.
I'm teaching a trading class in the afternoons this week, and this setup has been a focus of our attention, so I thought I'll get double duty from the post and link it to the blog.
Right out of the gate the Qs drop and look like the PP is coming up fast.
But then, by 9:34 we've got a little bullish soggy bottom formation (discussed last week) and the parabolics fire a BUY at 9:35.
Now this is pretty early in our 9:38 - 9:48 magic circle, so I've got some hesitation about jumping in at this point.
But then I look at the Qs technicals and the MACDs and MAs are all upslope and the NYAD is upslope along with its MAs and MACDs.
The NYAD parabolics are divergent but, as has been noted in the previous 2 posts, we disregard the NYAD parabolics for the first 30 minutes so the total net signal is strongly bullish.
We enter at 9:35 at 36.17 and I'm ready to cover at the first sign of a head fake.
That's exactly what looks like might be happening as a 9:39 - 9:40 dip develops.
But the NAYD is still chugging upstream and the Qs parabolics are still bullish. This type of 2 or 3 bar liquidity building fade is always a challenge for me, as one never knows if this is a start of a reversal or just a pause. I have a stop in place at 36.15 so I'm ready for whatever happens here.
As luck would have it, it turns out to be just a one bar fade and the Qs surge on up for the next 5 minutes before fading off again. I'm expecting this surge to run to R1 (36.67), which would make one great trade, but I'm also thinking "today is Friday and Friday's tend to be neutral to negative over 70% of the time", so I not wildly optimistic.
At 9:48 the Qs parabolics flash a SELL (cover).
The NYAD has started to flatten out and the Qs technicals are neutral to negative so, with a bit of hesitation again, I cover the trade.
Net time in trade: 9:35 - 9:48 = 13 minutes
Net trade gain: 36.17 - 36.35 = $ .18
Better than .01 a minute but a REALLY short term trade. Nevertheless, the signals were there and I followed my plan so I've no regrets.

VIX % Change Advantage

Soggy bottom in the Qs today after first hour should have warned you we were going up!!!
And now for something completely different. . . . . .

One thing that's caught my attention for a while is the daily % change in the VIX relative to the major indices, including the Dow, SPX and NDX.
I've noticed a tendency for exaggerated VIX moves to foreshadow subsequent short term trends in the indices and here's a simple little study to validate my intuition.
I choose to make the indices the target of the trade rather than the VIX since, by it's very nature, there's considerably more daily noise in the VIX than in the underlying indices.
That format almost makes it easy to test alternate indices performance relative to the VIX.
Simply put, the system sells the SPY if the daily % change in the SPY is greater than the daily % change in the VIX, and then exits the position after a fixed period. Vice versa for the sell side.
.
A 65% percent profitable return may not seem very impressive, but this is a very simple system and easily improved by adding entry filters such as a % change threshold, an MA trend, etc., as well as exits conditions, trailing stops, etc.
Those improvements could also improve the drawdown and consecutive winners/losers ratio. . . 2 of the most important metrics that I consider when evaluating a system.


And, as always, keep in mind that these studies are not meant to be canned solutions but rather jumping off points for your further exploration. That's one of the reasons they're free. The equity curve really begins to take off around trade # 20, which was initiated on 12/27/07 which is reflective of the beginning of the bear paradigm. Were we to rerun the data backtest with this as out start date, the results would be improved considerably without any further code modications.

Below is the TS 2000i code with the fixed bar exits optimized for the SPY. In future posts I'll look at some of the other indices, add a few filters and some other tweaks. So far this simple approach looks very encouraging for both capturing short term gains and creating a probability model for short term direction.