Advance Issues Pattern 2

By Lawrence

After demonstating a pure daytrading short signals in Advance Issues Pattern 1, we are going to look at the data to see if we can figure out a daytrading pattern that works from the long side. Since year 2000, the S&P 500 is in a major downtrend, is it possible that there exists long side pattern that can make money?

First Experiment – Reverse Condition of Advance Issues Pattern 1

The first try to get a valid pattern is obvious, lets try to reverse the conditions stated in Advance Issues Pattern 1 to see if it is a profitable pattern.

Advance Issues Pattern 1 seek for 2 consecutive higher highs in advance issues and then a mild drop, then we expect than a retreat should be likely.

Is it true when the condition is reversed?

That is, after two consecutive days of advance issues going lower, and then a small reversal happen, can we expect a follow through in advance issues, and the price too?

Here is the equity curve of the signal.

AIP1 Inverse Equity

The performance is not really consistent nor of any real interest for further investigation. Although the signal still produce reasonable profit, it is not as good as its short side counterpart.

Are we missing something important here?

A New Pattern Emerged

Why is the inverse of Adance Issues Pattern 1 not performing?

Simply put, long and short patterns are not necessarily the same, no matter what time frame.

Short patterns are price patterns built on the fear of the participants, while long patterns are built on greed and doubts. Short patterns oftern do roll over and then hit the sell claimax at a late stage, while most of the long side patterns bounce fiercely from extreme sell-offs.

Based on this basic observation, we are going to modify our pattern to catch the bounce back from sell extremes –

After three (3) consecutive days of dropping advance issues, we will step in to pick the bottom the next trading day.

Visually, the pattern is easy to spot on a chart,

AIP2 Title

And here is the equity curve since late 1998,

AIP2 equity

Pretty impressive performance for a simple setup.

One interest rule added to the signal is that we will not consider the long signal as valid if the previous trading day already qualifies as a buy setup. That way, the system will not keep buying into a strong down trend unnecessarily.

The formula system Advance Issues Pattern 2 can be downloaded here. You can use indicator manager in NeoTicker to install the downloaded script.

Summary

This long side pattern (AIP2) can be integrated with Advance Issues Pattern 1 (AIP1) into a single trading system. The two patterns do not interfere each other as they are seeking for distinctly different patterns within the customized S&P 500 advance issues daily data.

We will explore another pattern next time.

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