This entry was posted on Sunday, November 4th, 2007 at 11:04 pm and is filed under Education, chart patterns, market commentary, system trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
The SP Bank (BIX–X) index has dropped 16% in the last 20 trading days and I wanted to test what sort of market action has happened after this magnitude of a decline. Since 1993 this has happened on 7 occasions.
In my test I bought the bank index the first open following the 16% drop in 20 days and sold in 10 days. Simple. On average that index has shown random 10 day holding periods to change in price on average about +0.39% . After this condition has triggered the average 10 day move has been about +5.07%. Wow massive. The volatility coming into this period tends to continue. If you look in the last 2 columns in the spreadsheet within the graphic you can see MAE% and MFE%. These represent Max Favorable Excursion and Max Adverse Excursion. This shows us how high (favorable) and low (adverse) price deviated within the 10 day holding period.
August 28, 1998 had the largest adverse excursion of 13.1% and ultimately finished 5% negative after the 10 day period. These periods are very volatile periods for the market as a whole and point to underlying concerns with growth and interest rate direction.
Over the next 2 weeks I expect to see what our small snippet of history has shown us.
- Massive volatility in the market and banking in particular
- A tendency towards a upward reaction after a panic low is put in
- I would expect the range in the Bank Index to have a range of >7% low to high over the next 2 weeks
Have a Great Night (and next couple weeks)!
Dave Johnson
November 5th, 2007 at 10:30 pm
Your’e to fancy, and smart for me, so do you expect, with volatility, the thing to advance over the next two weeks? Do you think the low, might have been today? Not being the brightest light blub in the room, I think we are probably, “close”?
November 5th, 2007 at 10:41 pm
I guess the greater question is if you believe it is going up how do you frame the trade?
MAE of 13 % suggests very wide stop/risk - which in turn suggests a smaller trade size suggestive of that greater risk.
But yes I think knowing the extreme deviations that may occur that holding for 10 days could offer a decent trade.
I have a hard time getting my hands around this one.
November 11th, 2007 at 5:12 pm
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November 19th, 2007 at 8:53 am
[...] my post 2 weeks ago about the large drop in the banking sector I had made a few comments as to what I thought this drop might mean going forward. I had used a [...]
December 6th, 2007 at 3:08 am
Hi…I Googled for history of interest rates, but found your page about Large Bank Index Drop- What has history shown us?…and have to say thanks. nice read.