Thursday, September 29, 2016

MACD Whipsaw This Week - BackTest Results

The daily MACD this week made a couple whipsaw crosses.  It crossed up on Friday, then down on Monday, then up again on Tuesday.  This type of cross in one direction followed the next day by a cross in the other direction is not very common.

Going back to 1995 in SPY I only found 4 instances where there was an up/down/up pattern on three consecutive days.  The back test results did not seem significant.  No major skew in the forward returns, and small sample size.

When I look at just the down/up pattern on back to back days, I found 21 prior instances before this week.  In this case there was a definite bearish skew, with some large decliners in there, and the forward return showed a bearish skew with the forward MAX loss being over twice the size of the MAX gain at time frames from 3 days out to 1 month.

When I filtered the results for the occurrences where the MACD line was below 0, the results were even more bearish (this condition matches the current market) but with only 8 instances.  Only 1 out of the 8 had MAX losses less than 3% in the following month.

When I filtered for the weekly MACD being in a down position instead of the daily being below 0, the results were roughly similar with a pronounced bearish skew.

So, the first couple days since the signal in the last post, have not been typical of the strong negative skew suggested by that small sample size study.  But here again we see a piggy back study with a strong bearish skew, but small sample size.

Anything can happen, but I currently see no really great reason to abandon the previous trade currently.

As a side note, when I reversed the signal order for the whipsaw to up/down on consecutive days, there were only 13 prior instances, and the results were shorter term bearish, but more positive looking forward several months. 

My take away here is still to favor the downside for upcoming weeks.


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