, LastPosition, ‘Sell ‘ + LongSymbol);RestorePrimarySeries;END;PROCEDURE Enter_Positions();BEGINif (ShortSymbol = Stock1) then LongSymbol := Stock2else LongSymbol := Stock1;SetPrimarySeries( ShortSymbol);if ShortSymbol = stock1 thenShortAtMarket( Bar + 1, ‘ShortSell ‘ + ShortSymbol);SetPrimarySeries( LongSymbol);if longsymbol = stock1 thenBuyAtMarket( Bar + 1, ‘Buy ‘ + LongSymbol);RestorePrimarySeries;END;// main loopFOR Bar := MAPeriod + 20 TO BarCount - 1 DOBEGINsetprimaryseries(Stock2);atr2 := ATR(Bar - 1, 125);restoreprimaryseries();atr1 := ATR(Bar - 1, 125);if atr1 / priceclose(Bar - 1) > atr2 / GetSeriesValue(Bar - 1, Close2) * 1.0 thenbegin// applyautostops(Bar);IF LastPositionActive THENBEGINIF ((GetSeriesValue( Bar, DeltaNormSeries) < Exit_Up_Threshold) AND (ShortSymbol= Stock1)) THENBEGINShortSymbol := Stock1;Close_Positions();END; // < Exit_Up_ThresholdIF ((GetSeriesValue( Bar, DeltaNormSeries) > Exit_Down_Threshold) AND(ShortSymbol = Stock2)) THENBEGIN
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How to Play the QQQ-SPY Spread Using Unilateral Pairs TradingShortSymbol := Stock2;Close_Positions();END; // < Exit_Up_ThresholdEND // if LastPositionActiveELSE // no position activeBEGINIF GetSeriesValue( Bar, DeltaNormSeries) > Up_Threshold THENBEGINif (priceclose(Bar)> priceclose(Bar - 1) * 1.02) thenbeginShortSymbol := Stock1;Enter_Positions();end;END; // if > Up_ThresholdIF GetSeriesValue( Bar, DeltaNormSeries) < Down_Threshold THENBEGINShortSymbol := Stock2;if priceclose(bar) < priceclose(Bar - 1) * 0.98 thenEnter_Positions();END; // if < Down_ThresholdEND; // elseEND;END;
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TECHNIQUE 3
BuyingBankruptcies
ome of the best systems are discovered the hard way: by losingmoney. When United Airlines (UAL) went bankrupt on December 9,2002, I was in the process of moving homes, and the next time Ilooked at the market, I noticed UAL had bounced from a low of 64 cents toover a dollar. I assumed that, of course, the market was happy to give mefree money and I shorted at 1.09 only to watch it quickly go up to $2 a fewdays later.When looking at more bankruptcies, I saw this was not an uncommonpattern. In many cases a company will go bankrupt, the stock will gethalted, open much lower after the halt, and then promptly double. So manypeople had anticipated the bankruptcy, with the thought that the shareswould then automatically be worth zero, that immediately after the halt islifted, a short squeeze occurs.Table 3.1 shows some recent large bankruptcies that were liquidenough after filing Technique 11 to trade around. The data are not significant, there being only six occurrences, and bankruptcies are seldom liquidenough to play. That said, I do think high profile bankruptcies will continueto fall under this pattern.
S
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50TABLE 3.1
TRADE LIKE A HEDGE FUND
Recent Bankruptcies
Stock
FAO Schwarz (FAOOQ)UAL Corp. (UAL)Kmart (KMRTQ)Enron (ENRNQ)WorldCom (WCOEQ)US Airways
Date ofTechnique 11Filing
Open AfterHalt Lifted($)
High AfterHalt Lifted($)
Return(%)
1/13/0212/9/021/22/0212/3/017/21/028/14/02
0.250.640.700.260.080.25
0.632.091.631.260.170.75
152226133385113200
EXAMPLESUALUAL filed for Chapter 11 on December 9, 2002. The stock opened that dayat 0.64. By December 13, the stock was at 2.09. (See Figure 3.1.)
KmartKmart had been in a losing battle for several years to avoid bankruptcy, andfinally on January 22, 2002, it happened. After the halt, the stock reopenedat 70 cents and six trading days later on January 30 it reached a high of 1.63.(See Figure 3.2, page 52.)
WCOMWCOM disintegrated into thin air in the first half of 2002. In February of2002 I had been playing a mean reversion system on stocks and had boughtWCOM in the 6s and sold a week later in the 9s. I was feeling pretty goodabout myself at the time, but there was one moment when I was reading anarticle in Fortune magazine about how the credit derivatives of WCOMwere basically crashing even as the stock was going up. I was thinking tomyself, how could that be? I had perused some of their filings and had determined that although they had a plate full of debt, hardly any of it was duefor at least a year. Corruption explained things pretty quickly, and a shortwhile later the stock was trading near zero. (See Figure 3.3, page 53.)WCOM filed for bankruptcy on July 21, 2002, and the next day the stockopened at 10 cents. A day later it hit a high of 21 cents, over 100 percenthigher.
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51
4.804.604.404.204.003.803.603.403.203.002.802.602.402.202.001.801.60
1.511.401.201.000.80
Volume
50.00M40.00M30.00M20.00M10.00M
FIGURE 3.1
UAL.
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5.004.804.604.404.204.003.803.603.403.203.002.802.602.402.202.001.801.601.401.201.000.990.80120M
Volume
100M80.00M60.00M40.00M20.00M
FIGURE 3.2
Kmart.
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53
0.240.230.220.210.200.190.180.170.160.150.140.140.130.120.110.100.090.080.070.060.050.040.030.02
Volume
80.00M60.00M40.00M20.00M
FIGURE 3.3
WCOM.
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Now, one can argue, 10 cents? How can I make any money on that? Andif you argue that in general, then you are probably right. However, in thiscase, the volume was over 70M shares on both the day the halt was liftedand the day after. The average investor using a direct access broker (andpaying $5 commissions one way) could have easily picked up 100,000shares or more in either direction. Not bad for one day’s work.
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TECHNIQUE 4
Using the TICK
hile there are many sentiment indicators out there—put/call ratio,the VIX, the advance/decline line, and so on—the New York StockExchange (NYSE) TICK indicator is perhaps the rawest expression of investor sentiment at any given second during the day. The TICK canbe used to generate trades designed to profit from intraday shifts in sentiment. In this technique I describe two systems for working such trades.The NYSE TICK indicator represents the number of stocks that tickedupward (within the past second) minus the number of stocks that ticked downward. For instance, if the TICK is at +300, then 300 more stocks uptickedthan downticked within the past second. At that moment, the market ismost likely moving upward, since 300 more stocks are moving up thandown. If the TICK is at –300, then at that moment 300 more stocks had justdownticked than upticked. If the TICK is at –300, the market is probablymoving down at that moment.During a typical day, the TICK ranges from +400 to –400. Extreme readings can get as high as +1,000 and –1,000. In the week after September 11,2001, there were many cases of extreme –1,000 readings. Similarly, in thecomeback period after that week, +1,000 was not uncommon. Readings ofgreater than +1,000 are considered to represent overbought conditions because supposedly too many companies are upticking. Readings of –1,000represent oversold conditions because supposedly too many companies aredownticking. It is at those moments of panic that we look for opportunity.Likewise, if the TICK is steadily negative for an entire half hour withoutany real positive movement, this position also might indicate an oversoldcondition—too many people have sold in panic. Or if the TICK is steadily
W
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positive for an entire half hour without any real negative movement, thatmight indicate an overbought condition. These conditions are what I utilizein the system described immediately following.For all of the tests and charts in my intraday TICK system, I am usingone-half hour data starting at 9:30 AM and continuing throughout the dayuntil 4 PM. The first half hour of the day goes from 9:30 AM to 10 AM, the second goes from 10 AM to 10:30 AM, and so on. You can use various chartingsoftware packages to keep track of the half-hour bars on the TICK andother equities.
THE INTRADAY TICK SYSTEM• Buy when in any half-hour bar, the high of the TICK is –50, then waituntil the next half-hour bar begins and buy QQQ when it goes lowerthan the low of the previous half-hour bar.• Sell immediately when the trade is 2 percent profitable. Or when theTICK has hit a high of at least 400, sell at the end of the half-hour bar.Or if 10 hours have passed (during which the market is open—ignoreovernight hours) without either of the previous two conditions havingoccurred, then sell immediately.
ExamplesOn August 8, 2002, the market was not in good shape. It had made a multiyearlow on July 24, 2002, and then bounced—but the worst was yet to come. Everyother week new economic reports were showing global economic collapse,deflation, inflation, and so on. I would wake up at 3 in the morning to checkthe Nikkei only to see it making another 17-year low. (I can’t even rememberback 17 years let alone think about the horror of a market that is breakingeven with where it was 17 years ago.) I would then check Stephen Roach’s latest column on the Morgan Stanley Web site only to see him proclaim yet againthat the economic condition of the United States was similar to where it wasin 1931 (despite the fact that we had 25 percent unemployment then.)Meanwhile, Pakistan and India were dancing around the issue of nuclear war, people were obsessed with when the next terrorist attack wouldoccur on U.S. soil, and George Soros was saying the U.S. dollar was goingto go into a death spiral. So what did people do for fun during these headytimes? They sold stocks—by the truckload.Trading QQQ (August 2, 2002) Figure 4.1 shows the behavior ofQQQ over the course of August 2, 2002. The line in the top pane represents
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600
400
330.00200
0.00
22.8022.7022.6022.5022.4022.3022.2022.1022.00
21.97
22.9021.80
Volume5.00M
FIGURE 4.1
Trading QQQ, August 2002.
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the high point for each half hour in the NYSE TICK. The bars in the bottompane are the volume during the half-hour bars on QQQ. (The bars go from10:30 AM to 4 PM.) The middle pane represents the high and low price onQQQ during each half hour. You will notice that QQQ goes from about 22.60to 21.90, while the high for each half hour on the TICK goes back and forthbetween +600 and –100.For the half hour between 12:00 and 12:30, all the remaining buyersapparently went to lunch and the TICK never caught its breath above –100for that period. At 12:30 it continued to dip and the system bought at 21.94.Between 1:00 and 1:30 the TICK reached a high of +400 without the QQQshitting the profit target. This condition means that on the next bar we takeour profits at the open, 22.07, for a 0.59 percent profit in an hour.Things went from bad to worse after August, and by October 7, 2002,we were heading into another multiyear low.Trading QQQ (October 7, 2002) As you can see in Figure 4.2 (seepage 60), on October 7, 2002, from 3:00 to 3:30 the TICK did not movehigher than –100. From 3:30 to 4:00 we bought the continued dip at 20.00.The market continued to spike down another half percent (probably thepanic induced by weak holders once the round number was broken) beforebouncing back. The next day, on October 8, shortly after the open, and before the market went on to make a new daily low, the QQQ hit our target at20.40 and we were out of the position. See the results in Table 4.1. As itturned out, 80 percent of the trades were successful, with an average profitof 0.88 percent per trade.
TABLE 4.1
Intraday TICK System: Trading QQQ, March 24,1999 to June 30, 2003All Trades
Total Number of TradesAverage Profit/Loss %Average Bars Held
460.88%5.61
Winning TradesAverage Profit %Average Bars HeldMaximum Consecutive Winning Trades
37 (80.43%)1.51%4.4313
Losing TradesAverage Loss %Average Bars HeldMaximum Consecutive Losing Trades
9 (19.57%)–1.73%10.443
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Trading NVDA (October 7, 2002) This system can also be used withvolatile stocks, such as NVDA. The chart in Figure 4.3 (see page 61) is thesame day as the previous trade, but instead of analyzing QQQ, it chartsNvidia (NVDA:Nasdaq). As you can see, the system catches NVDA in thebar between 3:30 and 4:00 PM at $7.70. The next day it gaps up in the morning at 7.96. We are out by 8:30 AM. See the results in Table 4.2.
TABLE 4.2
Intraday TICK System: Trading NVDA, January 1,1999 to June 30, 1999All Trades
Total Number of TradesAverage Profit/Loss %Average Bars Held
341.28%3.74
Winning TradesAverage Profit %Average Bars HeldMaximum Consecutive Winning Trades
29 (85.29%)1.86%2.9316
Losing TradesAverage Loss %Average Bars HeldMaximum Consecutive Losing Trades
5 (14.71%)–2.12%8.42
THE INTRADAY TICK SYSTEM VARIATION:THE LOW-GRADE PANIC ATTACKSometimes the market does not spike down but, instead, does a steady selloff that lasts for hours. Being long at those points and staring at the quotescreen is beyond painful. Better to get a basketball and shoot hoops for afew hours. Then come back to your desk. If the market has been steadilyselling off the entire time, then there might be an opportunity to play the following system.• Buy when five half-hour bars in a row on the TICK chart have a lowTICK reading below –400, then wait until the next half hour bar and buywhen the QQQ hits a five-bar low.• Sell when the position is 1 percent profitable, then sell immediately,or when the TICK goes greater than 400, then sell at the end of that
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1,000900800700600500400300200180.001000.00–100.0020.8020.7520.7020.6520.6020.5520.5020.4520.4020.3520.3020.2520.2020.1520.1020.0520.0019.95
19.9119.9019.8519.8019.7519.70
Volume
10.00M7.50M5.00M2.50M
FIGURE 4.2
Trading QQQ, October 2002.
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7006005004003002001000.00
–78.00–100.00
8.007.957.907.857.807.757.707.657.607.557.507.457.40
7.39
7.357.30
Volume400K200K
FIGURE 4.3
Trading NVDA, October 2002.
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half-hour bar or, if four days have passed without either of the otherconditions occurring, then sell at the end of the day.The basic idea is that we are looking for times when there has been relentless selling for two hours. Every time the market tries to rally, it gets hitdown again, and again, and again. Finally, the only longs left on the day aresomewhat stronger than the weak longs who sold earlier. This circumstance does not mean the market is going up, but it does increase ourchances of getting a favorable bounce.
ExampleTrading QQQ (March 25, 2002) The top line in the first panel of Figure 4.4 (see page 64) represents the high TICK reading for each half hour; thebottom line represents the low TICK reading for each half hour. As you cansee, at 12 noon the market had just had five bars in a row of extreme lowTICK readings. This condition means that at least once every half hour therewas heavy selling. Enough to make a grown man cry if you were long techstocks.The system picks up a potential trade between after the end of the fivebars between 10 AM and 12:30 PM. It sets the buy price at $35.77, the five-barlow (i.e., the low between 10:00 and 12:30). That order gets filled. Holdingfor the 1 percent profit takes us to $36.13 less than two hours later (between 2:00 and 2:30).Altogether, this system succeeds close to 80 percent of the time withan average expected value of 0.50 percent per trade, as you can see fromTable 4.3.
TABLE 4.3
Intraday TICK System 2: Trading QQQ(March 1999 to June 2003)All Trades
Total Number of TradesAverage Profit/Loss %Average Bars Held
1740.50%4.82
Winning TradesAverage Bars HeldMaximum Consecutive Winning Trades
136 (78.16%)3.5921
Losing TradesAverage Bars HeldMaximum Consecutive Losing Trades
38 (21.84%)9.215
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TABLE 4.4
Intraday TICK System 2: Trading QQQ with TICKBar < –600 (March 1999 to June 2003)All Trades
Total Number of TradesAverage Profit/Loss %Average Bars Held
330.85%4.12
Winning TradesAverage Profit %Average Bars HeldMaximum Consecutive Winning Trades
31 (93.94%)0.97%3.2615
Losing TradesAverage Loss %Average Bars HeldMaximum Consecutive Losing Trades
2 (6.06%)–1.1217.51
To increase both the odds of success and the expected value per trade,you can do any of three things:1. Lower the TICK bar. Instead of looking for multiple –400 readings, look
for multiple –600 readings.2. Wait for more confirming bars. Instead of buying after five bars of lowreadings, wait for six or more bars. Or wait until these readings occurafter an already negative day.3. Buy on the sixth bar at a 10-bar low instead of a 5-bar low.For example, executing the system just described—except looking formultiple TICK readings less than –600 instead of –400—has the result onQQQ shown in Table 4.4. The odds increase to 94 percent, and the expectedvalue per trade goes to 0.85 percent. The downside is that you get far fewertrades.
CONCLUSIONOne thing to note is that applying the rules described in this technique inreverse does not work for shorting. Why? I don’t know. Maybe it is just nothealthy to fade too much happiness. It could also be that at moments whenthe TICK is greater than, say, 1,000 (representing an extreme in buying), toomany people are already shorting, and when the next highs are reached in
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20010025.000.00–200.00–400.00
–527.00–600.00
37.00
36.80
36.60
36.40
36.20
36.00
35.80
35.64
35.60
35.40
Volume10.00M
FIGURE 4.4
Trading QQQ, March 2002.
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65
the market the shortsellers begin to get squeezed, propelling the market further. Whatever the case, the TICK is best used to measure fear rather thangreed. These extreme moments of fear do not just occur in bear markets. In1994, 1997, 1998, and 1999, the market hit extreme low points. Volatility andpanic are facts of life, not just outliers inside of bear markets.The TICK is the rawest measure of panic we can possibly have in themarket. Every second it boils down the fear in the marketplace into a single number. Buying those extreme moments can pay off.
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TECHNIQUE 5
Playingthe Bands
ollinger bands, named after John Bollinger who was the first towidely use and write about them, are trading bands around the moving average of a stock that are commonly used to determine oversoldor overbought conditions. They are calculated by taking the moving average of a stock (10 for short-term periods, 20 for intermediate-term, 100 or200 for longer-term) and then surrounding that moving average with anupper band and lower band signifying x number of standard deviationsaround the moving average.As an example, Figure 5.1 shows the Bollinger bands for CHKP usingthe 20-day moving average and 2 standard deviations.The basic idea for using Bollinger bands is that when a stock hits theupper band, it is usually overbought so you should short, and when a stockhits the lower band, it is usually oversold, so you should buy. The rationaleis that price tends to revert to its moving average.
B
BOLLINGER BAND SYSTEM #1• Buy when a stock hits the lower band using a 20-day moving averageand 2 standard deviations.• Sell when a stock returns to its moving average.
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Bollinger bands for CHKP.
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FIGURE 5.1
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Playing the Bands
Example: CHKP, 7/11/2001On July 7, 2001, CHKP (shown in Figure 5.2) gapped down and proceededto hit its lower Bollinger Band at 40.45. The system held the position untilJuly 27 at 42.69 for a 5.51 percent profit. (See Table 5.1 for results.)
TABLE 5.1
Basic Bollinger Band System: Nasdaq 100 Stocks,January 1, 1998 to June 1, 2003All Trades
All TradesAverage Profit/Loss %Average Bars Held
3,3521.96%9.38
Winning TradesAverage Profit %Average Bars HeldMaximum Consecutive Winning Trades
2428 (72.43%)7.32%5.2163
Losing TradesAverage Loss %Average Bars HeldMaximum Consecutive Losing Trades
924 (27.57%)–12.12%20.3515
The basic idea holds up and delivers a fairly consistent return with ahigh probability. There are several twists that I do on the basic system toimprove both the odds of success and the percent return per trade. For onething, I do not like to wait for the stock to return to its moving average.Even if a company is in big trouble, even going bankrupt (and see Technique 3 on bankruptcies for an example of what I am about to say), stocksdo not move in a straight line. The faster the spike down, the more likely thestock is to do a quick bounce up. However, if the company is truly in trouble, over time the stock will do its little spike up and then drift down, bringing the moving average, and the potential for profit, down with it.
SHORT-TERM BOLLINGER BANDSYSTEM WITH PROFIT TARGETNot only am I interested in if the stock simply touches the Bollinger band,but if it decisively breaks through it, which introduces the concept of “percent b.” Percent b (%b) is the percent level the stock price is at relative toits bands. If the stock is dead center between the bands, then the %b = 50.
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