Tuesday, January 6, 2009

SPX Bottom Finder

Anyone who knows me, or has sifted through the posts thus far on this blog, will recognize I can be a bit compulsive and have an unnatural enjoyment of working with Excel to find patterns and correlations. Sometimes this is in pursuit of confirming for myself something that I've read asserted as "common wisdom" and other times in trying to test out something I stumbled across that piqued my interest. Here's a chart of my latest investigation and a bit of explanation:

The idea was to create a measure to identify when turning point potential was high. This measure is in the red line. When it is above 0, the risk for a bearish reversal is higher and when it is below the potential for a turnaround to the upside is good. Unfortunately, the meter doesn't seem to provide very good timing on the market tops. However, I did like the bottom indicators. The yellow line is the average reading and the blue arrows in the chart mark out SPX bottoms. (I'll admit there was no particular numerical threshold for selection and it was done on just visual assesment - which I normally dislike.) At any rate, the blue arrows and lines line up pretty well with the lower risk for going long in the red-line meter. I haven't done the returns yet (perhaps a follow-up post this week) but I would be fairly confident in adding this measure to help with confirmation of a bottom. The nice thing about it is that several of the downward moves are very dramatic, which would allow for a quick decision.

Something that troubles me a bit is the current reading. I stated earlier that this meter isn't all that great at timing tops and bear reversals on SPX so it does not make me all that nervous. There is also some residual of the dramatic fall in the last quarter that I believe the indicator is working off, which is resulting in the very high risk reading for a drop.

I'll try to update this from time-to-time as I go along posting and see how it (and myself) performed.