Monday, September 29, 2008

Weekly Pivot Metrics

With VIX in the high 39's, the Qs and XLE hitting the weekly S2 within the first hour today and the XLF and IWM at S1, the argument for substantial range expansion this week looks strong. I've added several metrics to enable an objective study of the ETFs most likely to mean revert.
For those of you who have stuck with me on this study, I'll explain the metrics line by line and retain in the archives for future reference when the coding of the larger mean reversion study is finally complete. That project is turning out to be considerably more effort than I had originally forecast and November now looks like a more reasonable target date for release of a working model. In the meantime, this simple excel spreadsheet has provided a nice tell for the coming week's likely volatility.
R1-S1 is simply the range value for the first levels of support and resistance.
% Range is the value of the R1-S1 divided by the value of the PP pivot.
% Delta is the value of this week's R1-S1 divided by last week's value X 100 to yield a % value.
The next 4 rows are averages of the 3 and 4 week lookback data.
The 4W R/PP is the value of the 4 week average range divided by the 4 week average PP.
Keep in mind that this is a non-directional study. Although it's easy to imply a trend from the progressive weekly data, that's not my primary focus of attention. In conjunction with the 3 Linear Regression study, the weekly pivots are intended to add confirmation to butterfly (and other spreads positions that strictly limit risk and at the same time provide good risk/reward potential.
This week's % delta is the lowest we've seen for several months in my little test basket and the % range in all 4 ETFs is below the 4W R/PP, also a clear change of character.

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