TradingMarkets.com
Should you start buying? Here's what history says...
Thursday October 13, 5:39 pm ET
By TradingMarkets Research
The World's Largest Site For Traders -- www.tradingmarkets.com. Visit us now.
The market has continued to sell off despite the oversold nature. This hints that the market may not be oscillating in its normal way. Anyone who has studied Larry Connors CVR signals understands that by looking at VIX levels as compared to their short-term moving averages, entries may be timed with a great degree of consistency. But what happens when the VIX get stretched upwards (indicating fear) and the market continues to sell off? It means the market could be in the midst of a runaway selloff. To see what I mean, consider the following tests:
Buy the S&P 500 (AMEX:SPY - News) each time the VIX closes 12% above its 10 day moving average. (Do not make additional buys if you are already in a trade).
Sell 5 days later.
This simple strategy would have been successful about 60% of the time over the test period (1991-present). The net gains over the period would have been more than double the net losses for a profit factor of 2.16.
Test 2
Buy the S&P 500 only when the VIX manages to close at least 12% above its 10-day moving average for six days in a row. (It appears this will happen today as I write this at 3pm). Again, do not make additional buys if you are already in a trade.
Sell 5 days later.
You might think that by waiting to buy into an oversold and fear-filled market like this, your profits would be even greater. Not so. In fact, the results were terrible. Using this strategy over the last 15 years, you would have made money only 3 of the 9 times it triggered. And your net losses would have been 3.5 times larger than your net gains!
This indicates that when an oversold market is unable to bounce, it could really be in trouble. This is exactly the scenario that is unfolding currently. It is not a scenario where you want to be loading the boat on the long side. Be careful out there.
Best of luck with your trading,
Rob robhanna@comcast.net
Rob Hanna is the principal of a money management firm located in Massachusetts. He has spent the last several years developing and refining methods for trading in stocks across multiple time frames. He selects stocks using both fundamental and technical criteria, and then trades them using technical analysis techniques.
