Friday, October 12, 2012

Unhealthy, Short-Biased, & The Plan

The JTS flips to unhealthy mode, which stops out half its position and changes the internal dynamics of the model, making it easier to generate short signals and harder to generate longs.   Meanwhile, the CCI coincidentally flips to "short-biased" mode, which unlike the JTS, means very little.  However, one built in feature of the CCI system is that as a precaution, it will sell any long position on the transition.  This means the JT Comp will move to 50% long on the close.  (JT Comp ignores the JTS half-stop).

Now...THE PLAN
I am cutting back to 25% long XIV/75% cash.   There is a good chance we will continue to sell off early next week.   (If we don't, it will be a good shorting opportunity.)    We have been healthy for ~90 consecutive trading days and "long-biased" according to the CCI for about 80 days in a row.  After such a run, it's highly unlikely the market will just take a straight dump south from here.

I've gone through past data to see how the market reacts after flipping to these negative modes after being positive such a long time.   I will try to put together a weekend post detailing each case, but here is a quick study for your consideration. 

Using only the past 2 years for SPY (I can go back farther this weekend), when CCI flips to "short-biased", the average number of days until a short-term bottom is achieved is about 3 days.  (Shortest time was 0, longest was 4 days until bottom).  Buy at the bottom and hold for 5 days - Avg SPY return is 5.59%.  Best return 8.77%, worst return 2.24%.
 
So the only tricky part here is figuring out if the bottom is today or someday early to mid-next week... The best way to play this is an average down strategy.  Here is my plan.  I'm going to hold a small position over the weekend and if we get a big drop early next week, I will get longer.  If we continue dropping into Weds-Thursday, I will go hardcore 100% long.  I will exit the position the following Wednesday Oct 24th.  Using leveraged and/or volatility ETF's, a bottom to top trade should be able to net at least 10-20%.   If we rally hard next week, I will scrap the plan.  In that event, we will surely get short signals from both models that should carry very good odds of being winners.   Obviously, I'm favoring mean reversion right now.  Good weekend!
 
 

12 comments:

  1. So, on your average down strategy are you going to buy more XIV? Does this now switch to TNA/VXX?

    Also, I was wondering if I should buy into XIV or TNA since I sold all my XIV yesterday.

    Thanks for all your info, great post!!!

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    1. Sitting in cash now, so lets see what happens.

      Have a great week-end !!

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    2. Thanks! I think you're in a good place (cash) right now. My systems will all stick with XIV until futures shift to backwardation. Right now it's not even close, with the spread between the first 2 months still over 8%.

      If we get to a point where I'm all, my final long lot that I purchase will be TNA. It will be all XIV up until that point.

      Thanks again, RMI.

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  2. Thanks for the explanation, J. But, could you explain one thing: why Oct. 24th?

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  3. In other words, why not five actual days from the bottom?

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    1. Sorry, I should've said the 24th "ish". I'm assuming the bottom is Weds, in which case I'd sell the following Weds. Of course that is subject to change and I'll update my plan as needed, but that's the gist of it.

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  4. Alex, are you still Long NFLX from your Oct 8 post?

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    1. Hi JKH
      NFLX position is closed but if i see a weakness next week i going to jump on it again for a price target 79.45
      i also target xiv for a large long position but my system is still waiting for unfilled gap for xiv
      thanks

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  5. J, I like all of your plan, but don't understand the "timed exit" for Oct 24th. I didn't know that timing was a key part of your system. Seen too many "timed" systems go bust for me to be interested in them. It's hard enough to pick direction -- it's nearly impossible to pick "time as well as "price". Good luck w/that.

    I'm sticking w/my plan, and averaging in. Got some YM futs on sale Friday. Mkt is weaker than the system might have originally suggested, but both you and I read it right several days ago, and, again, glad to have a human at the helm.

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  6. My trades the next 2 weeks will be more discretionary than mechanical. However, if things don't go as planned...i.e. we go up hard early next week, I'll scrap the plan and take short positions according to the JT Comp output. Otherwise, we'll see if my plan can net me 10% in 1.5 weeks. Thanks and good luck to you/us!

    ps- I'm still banking on a hard bounce on any revisit/fill of the 9/6 gap.

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