Sunday, October 12, 2008

Weekly Pivots Update

Above, the 3 LRs study on weekly bars.
Results for the past week: Qs down 13.5%, IWM down 20%, XLE down 14.6%, XLF down 3.7%.
The XLE did retrace to 2005 levels, as suggested last Monday. I frankly did not expect it to occur so quickly, but then expectations about recent market behavior have surprised more than a few traders.
The Qs and IWM retraced to 2003 levels, while XLF sank to its lowest level ever. Although its not at all clear that the weekend global economic summit will produce any meaningful results, perception is the key.
Once again our little pivot and range spreadsheet proved accurate in forecasting market range expansion, and once again I was surprised by the magnitude of the % range gain, punctuated by a VIX of 75 on Friday.
What is interesting to me is that this rather simple statistical approach to mean reversion was able to find some direction in the volatility of the markets. Last week I talked about the relative range contraction in XLF as indicative of a basing pattern. While this week's range activity was clearly in an expansion phase, the fact that XLF returned the best performance of the basket demonstrates the potential of closely examining range expansions and contraction patterns. Looking forward, what's different about this week's pivot matrix is that 3 of the ETF basket components managed to close above the low of the week by one half pivot and the XLFs managed to close above the low by a full pivot. Contrast that performance with the previous week, when all the weekly closes were on the low half pivot of the weekly range.
Things are looking up with XLF the ETF most likely to outperform this week again.
I read several articles on Thursday suggesting that unleashing the short sellers would actually support the XLF (and other financials) by providing liquidity. Whether that argument holds up to close scrutiny is subject to some debate, but the net effect was, as noted, out performance by the financial sector this week.
Above is the next generation of the weekly pivot study. . . a work in progress that is designed to analyze the probability of a single stock, ETF, index, etc. for mean reversion momentum. Clearly, we have a downslope trend in progress accompanied by an expanding weekly range, both in absolute values and percentage. I've added a graphical interface to demonstrate the mean version parameters, but blogger has done strange things and locked up when I've tried to post it, so I'm working on that little problem and hope to update this post early next week.

No comments: