This entry was posted on Monday, December 17th, 2007 at 11:23 pm and is filed under Education, Trades, 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.
John and I have in the past showed you how the T2108 indicator can be used to pinpoint extreme pessimism and with that a potential for a snap back upward in the swing timeframe on daily bars. The T2108 indicator is part of the Worden Telecharts package and plats the percentage of stocks below the 40 day moving average. I have used it in various systems that I have developed to filter the fear/pessimism environments.
One of the systems I recently tested was stumbled upon the last time the T2108 crossed below the level of 20 in mid November. This also coincided with a period that I was testing the Ultimate Oscillator as another tool to trigger oversold conditions in ETF’s and individual stocks. The knowledge of edges in each of these indicators allowed me to combine them into a system for trading stocks and ETF’s.
Seeing a chart with the 2108 indicator on it during bull and bear markets may help you visualize what these periods look like. In both these charts I used the SPY to represent the SP-500 and noted a period in the last bear market as well as the most recent bullish period we have just gone through. The blue buy dots you see are only showing a period when the indicator went to single digits which we discussed back in August. I circled the clusters of days where the indicator was below 20.
Bear Chart (click to enlarge)
Bull Chart (click to enlarge)
The system I created will only begin to trigger buys when T2108 is below 20, which closed at 19.93 today after the selloff into the close. Now that the condition is turned “on” I can now look for the trigger with the individual stock or ETF. With ETF’s I want the Ultimate Oscillator to close below a reading of 30 and on individual stocks a close under 25. Today 7 ETF’s closed below 30 from my list of about 100 very liquid ETF’s. They are:
EWJ
EWS
FXI
HHH
VNQ
VTV
XLY
With this system any of these would be considered a buy. But as with any system we need to determine how much capital to deploy and how to enter the positions based on past drops. My testing has shown using a 8-10 position portfolio where on each day no more that 2-3 entries is triggered is about the best. So lets say we are going to use 8 holdings and we can add 2 new holdings on any one day while older positions are open. So if tomorrow is still below 20 on the T2108 we will look and see if any ETF’s are still below 30 on the Ultimate Oscillator. The exit for the system is like any system and is hard coded. It is either a 3% profit target or a cross above 50 on the Ultimate Oscillator indicator- which ever comes first. The 3% target can trigger intraday. A time out exit also comes into play beyond a 40 day holding period. That is it. Really quite simple,
For my portfolio I will be buying EWS and VNQ. Tomorrow we’ll see what other setups are brought to us. Oh yes the entry is at the open the day following the condition triggering. So my entry will be at tomorrows open. Here are those charts:
This system is truly a standout in terms of winning percentage, drawdown, and profit factor. In the last 8 years a total of 116 buys have triggered and 88% of them were winners. The average winner was 3% and the average loser was about 2.3%. I have tested beyond this period but I don’t want to go too deep into the past for now because we would have to confront some backtesting challenges and I want tokeep it simple for the blog. Needless to say the period beyond 8 years is just as good and provides validity to the most recent data.
Each wave that dips into these areas are unique and it would not be unusual to see a foray into these areas that are not profitable so as always allocate a reasonable percentage of the portfolio to a system like this and follow it to the letter.
Oh yes I mentioned the individual stocks portion of the system. Today from the Nasdaq 100 I have only SBUX triggering. So I will keep an eye on that one as well.
Have a Great Night!
Dave Johnson
December 18th, 2007 at 9:18 pm
[...] a quick follow up on my post last night about the T2108 and Ultimate Oscillator System. The T2108 indicator popped back above the 20 level so we will not have any new entries tomorrow. [...]
December 23rd, 2007 at 10:31 am
[...] has been 4 days since I mentioned a simple trade trade setup using the T2108 and the Ultimate Oscillator. I wanted to show you what that list of ETF’s have done since then with a [...]
December 23rd, 2007 at 7:38 pm
[...] also had mentioned SBUX as a trigger off the t2108 entry as the individual stock type entry. On there we use a 5% profit target versus 3% on the [...]
January 7th, 2008 at 8:43 am
[...] has been about 12 trading days since I first highlighted a system to trade extremely oversold conditions in the overall market using the T2108 indicator. Based on the last foray below the reading of 20 on that indicator we [...]
January 20th, 2008 at 11:11 am
[...] last time we crossed this level I described a simple system that would allow you to trade to the long side with a portion of your portfolio that may be in cash now. I set it up as a system that would only [...]
March 12th, 2008 at 9:09 am
[...] ETF’s I threw out yesterday that were part of the whole T2108 trade I designed, really popped up [...]