• Stock Selection System results with a 20D rotation

    This is the Body of a message posted some days ago on the Model section.

    Billy and I have worked in the past month to revive the stock selection process that was developed a few years ago when the EV method was first published.

    The main idea had been to use a top-bottom approach: going from market to sector and then stock signal and not the opposite. We are keeping to this path and will therefore rely on the 20DMF to produce the main market direction signals.

    The Buy/Sell rules are set below. Note that we did not use the Active Boundaries indicator, because of a lack of past data. Instead, we use the price relative strength indicator, which has been a favorite of Billy for many years as well as a Money Flow measure - the money flow being a moving average of the Price * Volume, which is different from an Effective Volume based MF approach. Therefore, this method combines traditional measures with the EV method.

    The sectors measure uses the "number of days" approach that we developed last year.
    This means that this stock selection process is more advanced than any of the filters that are available in the filters section.

    The analysis looked at the two years between June 2011 and May 2013. We then used two independent periods to test the algos: between August 2007 and March 2009 for the bearish period and between March 2009 and June 2011 for the bullish period.

    We used SPY as a benchmark, although we might have used IWM, as SPY has been influenced by the poor Eurozone economic perspectives since June 2011.

    1. 20DMF Buy Signals

    As we can see in the table below, the Buy signals generated positive returns that are very impressive when the market is in a bullish mode. During the bear market earlier than 2009, the method did about as badly as SPY.
    You will note that since June 2011, shorting the worst picks would have led to much higher losses than the profits generated by buying the best picks. This is due to the short-covering rally that the Fed liquidity has generated.

    2. 20DMF Buy Oversold signals

    As we can see below, in an oversold market, it is better to buy the worst picks than the best ones, due to the impetus offered by the short-covering activities.

    However, buying leveraged ETFs (SSO for example) would work better than buying the stocks with the worst technicals.

    3. 20DMF Short signals

    Stock picking during short signals works much better during strong bear markets, but this information is available only in hindsight. However, in general, we can see that buying a double leveraged ETF such as SDS would have led to better returns over the whole period.

    4. 20DMF Cash signals

    This is probably the most tricky environment to trade stock picks. The EV method shows that we need to favor short trades during a bear market, but it is indecisive during the two bull market phases. We would advise to short individual stocks, but hedge with long SDS positions.

    What will we do from here?

    Since the 20DMF RT issues its signal during the day, we will do our best to produce the best long/short trading ideas before the market closes on a day of signal change. Once these ideas have been produced, we will follow them until the next signal change.

    We will also produce more regular stock selections and advise for rotation whenever necessary.

    This new system will be ready hopefully before July and will be made available here at no extra charge.

    I also added the following comments:

    Note that this is only a stock picking algo. It is not a trade management system. Hence, no stop loss, nor profit taking target has been used.

    Because 20DMF can sometimes be long (between 1 day and 130 days,) whenever a signal reaches 20Day, we close all the trades and open new ones with the best setting of that day. That way, we stay tuned with the 20Day measurement pattern of the process.

    I will soon test this stocks picking rotation with a one week rotation period instead of 20 days. The reason for this is that usually, when good opportunities are detected, they only last for a few days and then they start to go sideways or pull-back.

    This article was originally published in forum thread: Stock Selection Page started by Pascal View original post
    Comments 2 Comments
    1. ddstrader's Avatar
      I'm mostly a day trader so can you tell me more about what indicator or is it a message board would I need thank you
    1. Pascal's Avatar
      Quote Originally Posted by ddstrader View Post
      I'm mostly a day trader so can you tell me more about what indicator or is it a message board would I need thank you
      The indicators on this web site are mostly used for position trading. The idea is to find out what large players are doing when the price reaches some key support/resistance levels.

      For example, below is a position short trade on DECK. The stock was bouncing into resistance on a weak EV pattern, indicating that the resistance should hold. However, if the price breaks above the yellow line,of last resistance, then the gap above it could be filled. Hence a stop just above the resistance line.

      Attachment 23060

      For CACI, I bought a long position at the support level. LEV is rather strong and hence I believe that we will bounce. However, if we do not bounce, then a stop must be placed just below the support.

      Attachment 23061

      Below is the pattern for BK (a regional bank.) I published the BK trade some days ago, but did not take it as it did not come into my buy point (my mistake!)

      Attachment 23063

      HIG could be an interesting trading idea for today either if we pull-back to the 50MA support on a positive EV or if we break out above the ascending trend line on strong volume.

      Attachment 23058Attachment 23059

      ETH could also be an interesting short or long depending on how it behaves in the coming two days.
      We can see that it is bouncing to resistance on a weak EV pattern. It makes sense to short at the resistance level while keeping a stop just above it and eventually reverse to a long position if the break-out attracts good money.

      Attachment 23065Attachment 23066

      For day-trading, you can still use the EV RT indicator, which allows you to see how EV evolves during the trading day. for example, you can decide to go long or short depending on the EV pattern when the price reaches a previous low or a high. An example with GOOG is shown below.

      For example, yesterday an early bounce in GOOG did not seem to attract many buyers compared to the sellers of the day before. maybe a good shorting opportunity for a day trade.

      Attachment 23064Attachment 23067

      In any case, for day trading, I'd prefer to trade only prices. However, EV can give you some more clues.