Using strength of recent closes to time SPY
I recently read a post by QUSMA (great blog, btw) that inspired some research. The author’s post was on the predictive power of a stock’s closing price in relation to its daily range. The author defines a measure, CRT DR, that is calculated as (close – low)/(high-low). It turns out to be a fairly useful mean reversion indicator for stock indexes such as the S&P 500 and Nasdaq.
I’ve been playing around a bit with this measure. One thing I’ve found useful is to create a moving average of daily CRT DR values. Below is a chart comparing 2 strategies for SPY.
Strategy 1: Hold SPY when the 4 day simple moving average of CRT DR is below 50%, else hold cash.
Strategy 2: Hold SPY when the 4 day simple moving average of CRT DR is above 50%, else hold cash.
As you can see, the first strategy captured most of the gains while the second captured a majority of the losses. Holding SPY when the measure was less than 50% performed remarkably well during both bull and bear periods. There’s decent drawdown in there but the strategy tended to bounce back pretty quickly.
I’m sure there are ways to improve on this and I plan to continue to search for smart ways to incorporate it in my trading.