#91: Not such Hot Chocolate

S2N Spotlight

I don’t usually dwell on strategies with indicators I am not that familiar with, but I came across a trading strategy with robust performance that I had to try and replicate. Before I knew it, I had spent about 4 hours on this, and it is too late to turn back, so I will share what I have, but I would like to still do more homework before I give this strategy my blessing. I have always been a fan of mean reversion strategies, so here goes. I will acknowledge the blogger once he has responded to my questions.

The rules:

• Compute the rolling mean of High minus Low over the last 25 days;

• Compute the IBS (internal bar strength) indicator: (Close – Low) / (High – Low);

• Compute a lower band as the rolling High over the last 10 days minus 2.5 x the rolling mean of High mins Low (first bullet);

• Go long whenever price closes under the lower band (3rd bullet), and IBS is lower than 0.3;

• Close the trade whenever the price close is higher than yesterday’s high or

• Close the trade whenever the price is lower than the 300-SMA (new condition).

I always get a little excited when I see a strategy that beats buy and hold over a long period of time on a risk-adjusted basis. So here are the S&P 500 and the Nasdaq 100 backtest results. The Nasdaq outperformance is the more impressive one.

S2N Observations

Take a look at where the reverse-repo market went to last week. So much for quantitative tapering (QT).

The S &P 500 had a very big June up 3.47% it has been 164 days since the last 10% drawdown, I am getting fully defensive at this stage of the bull run.

If you look at the table below, cocoa futures had a shocking month, -19%. I can see things are not looking too hot on this chart. I am expecting this market to drop further. Early subscribers will recall my short call on this future as it was running up in April and May.

Performance Review

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