Sunday, April 22, 2007

A New Approach

It was too nice a weekend to sit and update the old BLog so I hope you all did something special with family and friends as did I.

But while I was enjoying the weather and continuing my quest to get my veggie garden ready I came up with a new idea.

Some months ago I showed you all a filter that captured stocks when the MACD first crossed below the 0 line rather than waiting for it to reappear in positive territory. I suggested at that time that by the time you caught the MACD on the upswing most of the move was probably done and you would only be getting the leavings.

This filter is much the same except I'm using the linear regression slope (LRS) coupled with an RSI(2). Again my preference for filters is to use indicators that are as close to real-time as I can get them and the linear regression slope is one of those critters. Also the RSI(2) is about as close to real-time as you can get and still have an indicator of some kind.

Instead of picking a single point in time for either of the indicators I'm looking for a process - I want the RSI(2) to be descending and I don't care what the values are and I want the linear regression slope to be ascending with the only caveat that it was less than zero 5 days ago. In other words the stock is showing some momentum slowdown (RSI) but at the same time it is reversing its course (LRS). As readers of this log know - stocks slow down and stop before they reverse course - in both directions.

The LRS takes a bit to move it - it is a large boat and large boats require a lot of time and water to turn around. The RSI on the other hand is a speedster and it moves pretty quickly up and down. Here is the filter -

Show stocks where close is between 15 and 35
and Average Volume(90) is above 500000
and rsi(2) has been decreasing over the last 1 week
and linear regression slope(45) has been increasing over the last 1 week
and linear regression slope(45) < 0 5 days ago
and draw cma(pp,4)

The line regarding the cma(pp,4) can be ignored for now - it is just something else that I'm working on. Generally speaking from observation only it can be used to enter the stock (close > custom moving average(pp,4)) and as an exit method - (close < cma(pp,4). I didn't test that, I only observed it.

A typical selection looks like this -

It back tests nicely as a good swing trade selector - short term it is merely adequate. The numbers were 61% win ratio, 1.52 reward/risk and 39.11% ROI short term. But where it excelled was in the 30 day region where it returned a 6.94% net and that is fantastic.

So if you are looking for a filter that finds depressed stocks that are on the mend - this is it. It doesn't pick very many - about 1 every other day or so - but those it selects are generally green at the end of a week.


Bullish Jim said...

That's awesome, Marlyn. I'm writing a post as we speak about my need to find some longer term setups and this screen is exactly what I'm looking for. I can't wait to give it a try. Thanks for sharing.

Red Hue said...

Hey Marlyn,

I use something similar to this on 60 min charts of the ETF's...not same indicators exactly...but similar idea with a moving average of a CCI...and then a shorter term CCI.

Marlyn Trades said...

I have not done any filters with the CCI yet. It is on a very long list of items to look at.