Monday, January 19, 2009

Swing Trading With Weekly Price Targets

I recently wrote about how I use empirically-derived price targets to trade intraday moves in the S&P 500 Index. This approach builds on the pivot-based methods I described two years ago, in that the price targets are a joint function of recent price movement and recent volatility. I have tested these levels going back to 2000, with roughly a 75% hit rate for touching yesterday's pivot level in today's trading and a 75% hit rate for touching *either* the upside R1 or downside S1 levels derived from yesterday's trade. An example of how I use these levels can be found in this recent post.

Although my methods for calculating these levels remain proprietary for now, I post the levels for SPY each morning via Twitter prior to market opens (free Twitter subscription via RSS). Also included in my morning posts are data that capture strength/weakness in the previous day's trade. These data include the percentage of SPX stocks trading above their moving averages; Demand/Supply (an index of the number of stocks trading above/below the volatility envelopes surrounding their moving averages); and the number of stocks making fresh 20-day highs and lows.

As a rule, in a strong and strengthening market, I'll look for price to stay above the pivot level and test R1 and R2 levels. In a weak and weakening market, I'll look for price to stay below the pivot level and test S1 and S2. In a range bound market of mixed strength, I'll look for prices to revert to their pivot levels on moves toward R1 and S1. The idea is to use the ongoing stream of market data (volume/volatility; leading sector behavior; market themes; cumulative TICK) to gauge the odds of hitting these price levels and then enter the market at points that provide favorable risk/reward (e.g., your stop level is closer than your target point).

Often, not always, one level will serve as a target (say, S1) and another (pivot) will serve as my stop. In other words, if we're in a short-term downtrend, my trade says we should hit S1 and stay below the prior day's pivot (which is an approximation of average trading price). Many trade ideas can be crafted by knowing these levels, assessing the market's strength/weakness day over day, and gauging the strength/weakness in the current session's data.

Suppose, however, you are a swing trader looking to trade less frequently and take more out of market moves. Such a trading style is ideal for those that don't want to be married to the screen intraday. I've been working on an adaptation of the above trading methods for the wider timeframe and now have a backtested set of parameters based on weekly data. The weekly pivot has an 80% hit rate (i.e., going back to 2001, the current week has touched last week's pivot 80% of the time), and the odds of hitting either the weekly R1 or S1 levels is about 75%; R2 or S2 is 50%.

Once again, by gauging market strength/weakness day over day, the swing trader can play for multi-day moves to the R1/S1 levels and beyond. The weekly target numbers also enable short-term (intraday) traders to leave a piece of their positions on overnight to take advantage of the moves to the weekly levels.

These weekly levels in SPY will be published Monday before the market open and, again, will be free of charge via Twitter. For traders that prefer to not subscribe via RSS, the last five Twitter posts always appear on the blog page under "Twitter Trader", so you can simply check the blog prior to market opens for the target data. Over time, I plan to expand the targets to other indexes (NASDAQ 100, Russell 2000, sector/international ETFs), as well as other asset classes (bonds, gold, oil, etc.). Stay tuned!