Still a Dip Buyer's Market

[MarketOwl]

Wow, it happened again. Not that it should surprise anyone, but we got another face ripping V bottom after going down for a few days. How many of those have we seen this year?

Ever since January, we've bounced off of SPX 2000 liked a scalded cat to 2060 like its a magnet. We've also done the dip down to 2040 to bounce to 2100 a few times as well. Take out that big trench in August, and it has been almost 100% success rate buying any 70 point dips this year, setting a stop 30 points below the most recent low.

A simple strategy of buying a 70 point dip from the 1 month high, and setting a price target of 50 points from entry, with a stop 30 points below entry. If stopped out, suspend system for 3 trading days and take the next signal. This strategy would have resulted in the following:

January: 3 trades. 3 wins - 0 losses: +150 points profit
March: 2 trades. 2 - 0: +100 points
June: 1 trade. 1 - 0: +50 points
August: 2 trades. 1 - 2: -10 points
September: 2 trades: 2 - 1: +70 points
November: 1 trade: 1 - 0: +50 points
December: 2 trades: 1 - 1: +20 points

That is just 13 trades this year, 9 wins, 4 losses, with a 5:3 risk reward ratio, and a net profit of 430 points, or about 2 points a day. More than the mythical dream of just a point a day with very limited time in the market.

Yet it still amazes me that people get scared on these dips, even though they've been money makers. I don't expect this to continue, but it goes to show you the mean reversion nature of the equity indices.

 

[NoVoodooHere]

Wow, it happened again. Not that it should surprise anyone, but we got another face ripping V bottom after going down for a few days. .... I don't expect this to continue, but it goes to show you the mean reversion nature of the equity indices.

I was surprised as well but not unpleasantly so & feel exactly as you do as expressed in above partial quote of your post. That said, I just re-read on of the Livermore books, and noted the following passage [paraphrasing] the nature of the market never changes, only the participants change, a new set of suckers replaces the previous set of suckers and stocks go down a lot faster than they rise. Now, contrast that with the mechanized market we have currently where everything and everyone gets mean reverted... That is... Until they don't (eg a multi stdv event causes programs to switch out). We don't know when or if or what. I guess in the end it really is "same as it ever was"

 

[Amalgam]

Screams of curve-fitting and hindsight bias. There are five variables in which you provide no justification for the value you set them at other than "looking back this worked." That's why these dips still scare people.

 

[ETcallhome]

ok, they have been buying those dips, but they have also been selling that dow 18000. So the traders are buying dips and selling rallies. Will the range compress or expand? All the money is made being on the right side of the long term trend.

 

[der_kommissar]

That is... Until they don't (eg a multi stdv event causes programs to switch out). We don't know when or if or what. I guess in the end it really is "same as it ever was"

Yes, such as 8/24...and I think that enough of us saw just how illiquid this market really was when that range bound mean reversion trade finally failed (albeit briefly)...

 

[der_kommissar]

ok, they have been buying those dips, but they have also been selling that dow 18000. So the traders are buying dips and selling rallies. Will the range compress or expand? All the money is made being on the right side of the long term trend.

True...and it finds a home right in the middle of that range...sitting right on the 50 and 200 day MA's...But it sure creates alot of excitement and anxiety on its way right back into the middle of the range and for basically an unchanged market on the year.