Friday, January 3, 2014

ABC Indicator Flashes S&P 500 ‘Sell’ Signal: Jan. 3

The ABC Indicator of movements in the S&P 500 (INDEXSP:.INX) introduced in a J.J.’s Risky Business blog post Dec. 20 is flashing a Sell signal this Friday morning. In forecasting the short-term direction of the U.S. large-capitalization index on a closing basis since July 6, 2009, this indicator’s signals have been correct on 95 occasions, or 71.43 percent of the time, and incorrect on 38 occasions, or 28.57 percent of the time (as indicated by Figure 1).

Figure 1: Percentages of Successful and Unsuccessful
ABC Indicator Signals Before Jan. 3, 2014

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ABCIndicatorArt-AllSignalsBeforeJan32014_zpsfcd73bba.png

Source: This chart is based on J.J.’s Risky Business proprietary data.

However, there have been important differences between the behaviors of the ABC Indicator’s Buy and Sell signals during the above-referenced period, when the S&P 500 more than doubled on a closing basis to 1,848.36 on Dec. 31, 2013, from 896.42 on July 2, 2009, the last trading day before the inception of this incarnation of the indicator. Taking these differences into account has helped in my trading of derivatives of the index, including options on the SPDR S&P 500 ETF Trust (SPY), ProShares Ultra S&P500 ETF (SSO), and ProShares UltraShort S&P500 ETF (SDS).

Most significant, the ABC Indicator’s Buy signals have been right on 54 occasions, or 80.60 percent of the time, and wrong on 13 occasions, or 19.40 percent of the time (as indicated by Figure 2), while its Sell signals have been right on 41 occasions, or 62.12 percent of the time, and wrong on 25 occasions, or 37.88 percent of the time (as indicated by Figure 3).

Figure 2: Percentages of Successful and Unsuccessful
ABC Indicator ‘Buy’ Signals Before Jan. 3, 2014

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ABCIndicatorArt-BuySignalsBeforeJan32014_zps69de40e6.png

Source: This chart is based on J.J.’s Risky Business proprietary data.

Figure 3: Percentages of Successful and Unsuccessful
ABC Indicator ‘Sell’ Signals Before Jan. 3, 2014

 photo
ABCIndicatorArt-SellSignalsBeforeJan32014_zps7e0ae36a.png

Source: This chart is based on J.J.’s Risky Business proprietary data.

Meanwhile, I am happy to note the first public test of the ABC Indicator has had a nice beginning at J.J.’s Risky Business: The Buy signal flashing the morning of Dec. 20 was successful as the S&P 500 on a closing basis rose to as high as 1,848.36 on Dec. 31 from 1,809.60 on Dec. 19. The test will encompass 10 signals, and history suggests the indicator will be right between six and eight times and wrong between two and four times.

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Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.