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Trading Gap Reversals
The AIQ code based on Ken Calhoun’s article in April 2016 issue of Stock & Commodities Trading Gap Reversals”, is provided below.
AIQ has also posted the EDS file at “ is provided for downloading at
Save this file to your/wintes32/EDS Strategies folder.
Since I mainly work with daily bar strategies, I wanted to test the gap-down concept on a daily bar trading system rather than on one-minute bars. I set up a system that buys after a stock has gapped down at least 10% in the last two days and then trades above the high of the gap-down bar. The entry is then at the close of that bar. For exits, I used the built-in exit, the profit-protect exit set at 80% once profit reaches 3% or more combined with a stop-loss using the low of the gap-down bar and also a time exit set to five bars.
I then ran this system on the NASDAQ 100 list of stocks in the EDS backtester over the period 12/31/1999 to 1/11/2016 (Figure 7). The system generated 303 trades with an average profit of 1.09% per trade with a reward-to-risk ratio of 1.35. Slippage and commissions have not been deducted from these results.
FIGURE 7: AIQ. This shows the EDS test results for the example system.
Again, the code and EDS file can be downloaded from www.TradersEdgeSystems.com/traderstips.htm, and is also shown below.
!TRADING GAP REVERSALS
!Author: Ken Calhoun, TASC April 2016
!Coded by: Richard Denning 2/1/2016
!www.TradersEdgeSystems.com
!INPUTS:
GapSize is 10.
GapLookBack is 5.
MaxBars is 5.
!CODING ABBREVIATIONS:
H is [high].
C is [close].
C1 is val([close],1).
L is [low].
O is [open].
GapD is (O / C1 - 1) * 100.
GapOS is scanany(GapD < -GapSize,GapLookBack) <> nodate()
then offsettodate(month(),day(),year()).
Hgap is valresult(H,^GapOS).
Lgap is valresult(L,^GapOS).
SU if scanany(GapD < -GapSize,GapLookBack).
SU1 if scanany(GapD < -GapSize,GapLookBack,1).
SU2 if scanany(GapD < -GapSize,GapLookBack,2).
LE if ((SU1 then resetdate()) or (SU2 then resetdate()))
and H > Hgap.
ExitLong if {position days} > maxBars
or C < Lgap.
EntryPr is max(O,Hgap).
List if C > 0.
Beware the Middle of May
The beginning of the month of May and the end of the month of May into early June have overall been a decent time to be in the stock market. The middle of May, typically not so much.
For our purposes we will split May (into June) into three segments:
*Segment 1: The first 3 trading days of May (Bullish)
*Segment 2: May trading days #4 through #16 (Bearish)
*Segment 3: May trading day #17 through the 5th trading day of June
Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during the first three trading days of May since 1934.
Figure 1 – Growth of $1,000 invested in Dow Industrials during 1st three trading days of May (1934-present)
Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during trading days 4 through 16 of May since 1934.
Figure 2 – Growth of $1,000 invested in Dow Industrials during trading days 4 through 16 of May (1934-present)
Figure 3 displays the growth of $1,000 invested in the Dow Jones Industrials Average only from the close of May trading day #16 and the close of the 5th trading day of June.
Figure 3 – Growth of $1,000 invested in Dow Industrials during trading days #17 and higher during May and the 1st five trading days of June (1934-present)
Combining and Comparing
In Figure 4 the blue line displays the growth of $1,000 invested in the Dow only during Segment #1 and Segment #3. The red line displays the growth of $1,000 invested in the Dow only during Segment #2.
Figure 4 – Growth of $1,000 during Segments 1 and 3 (blue) versus Segment 2 (red)
*During Segments #1 and #3 the Dow gained +157.5%
*During Segment #2 the Dow lost -51.1%
During 2016:
*Segment #1 extends from the close on 4/29/16 through the close on 5/4/16
*Segment #2 extends from the close on 5/4/16 through the close on 5/23/16
*Segment #3 extends from the close on 5/23/16 through the close on 6/7/16
Summary
So is the Dow sure to gain ground during Segments #1 and 3 and to lose ground during Segment #2? Not at all. For the record:
*Segments 1 and 3 combined have gained an average of +1.2% with 65% of years showing a gain and 35% showing a loss
*Segments 2 has lost an average of (-0.8%) with 49% of years showing a gain and 51% showing a loss
So clearly there are no “sure things” being unveiled here. Still, if the early days of May see the stock market register a meaningful gain it might make sense to avoid jumping on to the band wagon.
At least for another 13 trading days.….
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
For Every Season, a Sector Fund Portfolio
In this article dated 1/28/16 I wrote about a simple two-fund portfolio that had somehow managed to make money from the end of January to the end of April, 27 years in a row. OK, make that 28 years in a row.
(See also A ‘Simple Hedge’ as Market ‘Bumps it’s Head’)
The portfolio was 50% invested in retail stocks (via ticker FSRPX) and energy services stocks (via ticker FSESX). As you can see in Table 1 below, FSRPX underperformed most of the major averages but FSESX far outperformed. As a result, the 50/50 FSRPX/FSESX portfolio gained +12.8% from the end of January to the end of April.
Figure 1 – Jay’s 2-Fund Portfolio versus Major Market Indexes
Figure 2 – Tickers FSESX and FSRPX; end of January through April (Courtesy AIQ TradingExpert)
This year’s gain (+12.8%) exceeded the historical average (+10.3%) and historical median (+10.1%). So chalk one up for the good guys.
Moving on to May
In case you missed it, I also wrote recently about a “May portfolio” here. This portfolio is a bit more defensive in nature and consists of 25% in each of the four funds listed below:
FDFAX – Fidelity Select Consumer Staples
FSHCX – Fidelity Select Health Care Services
FSPHX – Fidelity Select Health Care
FGOVX – Fidelity Government Income Fund
This portfolio has showed a gain during the month of May in 22 of the past 27 years (or 81% of the time).
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
A ‘Simple Hedge’ as Market ‘Bumps it’s Head’
The S&P 500 has “bumped its head” in a clear resistance level. The VIX Index has dropped into a familiar support level. Is the party over? I hope not. I would love to see the stock market keep heading higher. But hey, warning signs are warning signs right?
So should we all panic? Not necessarily. Still – and fortunately – there is a difference between “being panicked” and “being prepared”. So let’s talk about a simple hedge “just in case” the stock market decides to sell off in the not too distant future.
Figure 1 displays ticker SPY with a fairly obvious resistance range highlighted. As the verbiage on the chart asks, “will you be surprised if the market pauses or worse here?”
Figure 1 – Ticker SPY at in resistance zone (Courtesy AIQ TradingExpert)
Figure 2 displays ticker VXX (the ETF that ostensibly tracks the VIX Index). From a completely and entirely subjective point of view it can be argued that the VIX is in “the calm before the storm” mode.
Figure 2 – Ticker VXX at support zone (Courtesy AIQ TradingExpert)
Figure 3 displays that the implied volatility for options on ticker VXX has fallen significantly and that VXX options are relatively cheap.
Figure 3 – VXX option implied volatility has fallen hard (Courtesy www.OptionsAnalysis.com)
Figure 3 – VXX option implied volatility has fallen hard (Courtesy www.OptionsAnalysis.com)
So what about buying the June VXX 16 call for $200 as a hedge against the stock market suffering a hit between now and June option expiration?
Figure 4 displays the particulars and Figure 5 displays the risk curves.
Figure 4 – VXX June 16 call (Courtesy www.OptionsAnalysis.com)
Figure 5 – Risk curves for VXX June 16 call (Courtesy www.OptionsAnalysis.com)
Figure 4 – VXX June 16 call (Courtesy www.OptionsAnalysis.com)Figure 5 – Risk curves for VXX June 16 call (Courtesy www.OptionsAnalysis.com)
Summary
As always I am not “recommending” this trade I am simply pointing out that several factors (S&P at resistance, VIX at support, option premiums relatively low, and don’t forget “Sell in May” which is just around the corner) may be coming together to make considering a hedge a reasonable idea.
The questions to ask yourself are:
*Do I think there is a chance/likelihood that the S&P will suffer a selloff in the next 7 weeks or so?
*Am I willing to risk $200 if it doesn’t?
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and TradingExpert Pro client