Larry,
Here's an idea, you may have already tested it, but it looks like at first glance that after the market drops below 20% and you take profits on short positions you could go long until the market reaches the 70 DMA. I quickly looked at the Nikkei and the SPX and I don't think there was ever a time that the market didn't rebound at least to the 70 DMA rather quickly after dropping below 20%. If you want to be a little saver you could take profits at the 50 DMA. I looked at the Nikkei and it always returned to the 50 DMA but there was a time or two that it didn't get to the 70 DMA. Also the Nikkei acted more like the Nasdaq and had corrections of up to 30%. All four rebounds for the SPX took about 3-4 weeks and resulted in roughly 5%, 10%, 15% and 15% gains.

Gary

gary,

did you mean 70 RSI? if so, are you using the 5 day RSI for the SPY or what?

thanx.

-ja

No I meant the 70 day moving average. All four rebounds from a severe oversold level reached at least the 70 day moving average very quickly.

Gary

If you were trading the QQQQ's instead of the SPX you would have to use a 65 DMA or to be a little safer maybe the 50 DMA, but the rebounds were considerably larger 19%, 27%, 9% and 15% if you use a 65 DMA. Plus if you were using the SPX level to signal when to take profits on the short side the QQQQ's dropped on average between 30% and 40% during the same time that the SPX only dropped 20%. You get much bigger percentage moves trading the QQQQ's.

Gary

Gary,

When you said, "after the market drops below 20%", did you mean: after the market drops 20% below the 200dma?

Steve

Yes I meant when the SPX drops 20% below the 200 DMA. Not the Nasdaq or Dow. I suspect that the Nasdaq will drop 30-40% below its 200 DMA.

Gary

Larry,
The one drawback that I see with the 20% rule is that after you take profits you have to wait till the market returns to within 5% of the 200 day moving average before you reenter on the short side. There have been several times when the SPX and Nikkei didn't return to that level for quite awhile. The Nikkei in 2000 got severely oversold 3 times (May, Aug, Dec.) but didn't quite get back to within 5% till April of the next year. If you had been waiting you would have missed almost the whole bear move in 2000. Here's any idea. How about go long to take advantage of the rebound from an oversold level. Take profits on the long side whenever the market closes above the 50 day moving average. Go short whenever the market closes below the 50 Day moving average (remove the short position if the market closes back above the 50 DMA and wait for another close below the 50 DMA or within 5% of the 200 DMA which ever comes first). Does this sound like it might have possibilities or am I overlooking something?

Gary

Gary,

As a minimum, I like your suggestion to go long until the market reaches the 50 or 70 DMA (after you cover your short when the market closes 20% below the 200dma.) If the original plan is to re-short at 5% below 200dma, we might as well make some money in the middle.

Steve

gary said:

"The one drawback that I see with the 20% rule is that after you take profits you have to wait till the market returns to within 5% of the 200 day moving average before you reenter on the short side."

how 'bout this - when you get a 20% drop, flop to a long position - hold the long till it bounces back to within 5% of the 200 DMA - then flop back to short as per the strategy.

same basic idea but this way you don't have to mess with extra indicators.

just a tho't.

-ja

Joe,

That sounds good. Now, would you please direct the White House to manipulate the market so we can test this?

Steve

Joe,
The only drawback that I see is that sometimes the market doesn't rebound back to within 5% of the 200 DMA for a long time. If your long and waiting for that to happen you will profit almost nothing or even worse lose money. argh!!! The Nikkei & SPX in the fall of 2002, and the Nikkei in 95 made double bottoms but didn't rebound back to the 5% area for quite awhile, they did rebound up to at least the 50 DMA rather quickly before sinking back down again only to rebound again. My idea would allow you to make a profit on the long side reestablish the short back to the 20% level and go long again on the second rebound. These rebounds are very powerful and happen fairly quickly and it seems like a strategy to take advantage of every one wouldn't be a bad idea. I'm searching for ideas on how to profit on the long side during the bear market. It seems to me that the only way to make good returns over the next however many years the bear lasts, will be by catching the rallys and then getting short at a higher level. Of course the COT may get us in and out of the rallies and make all this redundant. However up to this point their record has been less than stellar. Of course the market may just bounce around in a trading range for the next 10 years and all my brilliant ideas will be for naught

Gary

By the way my mistake I just eyeballed the Nikkei in 2000 and assumed it dropped to the 20% level several times when it actually only dropped to the 15-17% level.

seems like we talked about this before but...

why don't you trade the COT strategy #5 as is using SPY (or DIA), then trade the VTO or BB system using QQQQ? that way you get in the long-term moves AND you get in on the bounces too.

we know these two systems have great track records, they accomplish your objectives & you don't have to work so hard "re-inventing the wheel" so to speak.

again... just a tho't.

-ja

Joe,
I am still trading the BB system with my COT money. I've desided to trade the QQQQ's instead of SPY because I think the percentage moves will be bigger. I don't think the BB or VTO will catch these large and quick rebound moves will they? Or if they do it will only be a very small piece of the move. I have looked at the VTO during 2000-2003 and it appears that the VTO has quite a few large losses during a severe bear move. I'm not comfortable trading the VTO with my COT capital. I do trade the VTO, usually a small front month option position. Hey when its raining and I can't go climbing I got to do something to keep busy. Reinventing the wheel is as good as the next thing I guess

Gary

gary,

i think vto WILL catch those bear mkt bounces. if you go back & look at the results during the years you mentioned, 2000-2002, i think you'll see that the largest % moves were during those years, up & down. but the win/loss ratio still looks favorable to me. i.e. the number of wins vs. losses AND the % gains vs. % losses.

what i really like about the combination of the two is, they are different fundamentally. COT is a sentiment strat, VTO is a counter-trend strat. when you trade them together it's like hedging your bets. the performance of one may zig while the other zags. add a long/short trend-following strat to the mix & you've got a full trading system that's good to go in virtually ANY environment. i think larry's parabolic SAR system has promise... but i think there are still bugs to be worked out (maybe a stop/loss that's tighter?) for now i like my version of the CANSLIM strategy. i call it a swing strat but i can hold a stock forever if it keeps going my way.

keep up the good work - but don't forget to actually TRADE once in while!



-ja

Joe,
I just quickly calculated 40 trades (not exact mind you) during 2000-2003 and I come up with a win ratio of about 55% give or take. I just went back and reread the SMR were Larry introduced the VTO system and he shows a win ratio of about 78%, so I'm obviously off quite a bit with my quick calculations, I think I also neglected to close the trade after 15 days. I still don't think I'm comfortable commiting my COT positions to the system though, there were several large losses. If we get a severe move down like the Nikkei did in 93 you will have a major loss and miss most of the bear move. Although if we get a similar move the BB system will also produce a similar large loss...now you've got me rethinking my BB strategy...thanks a lot Joe. I'm begining to think that I might just be better off trading the VTO separate with my front month option strategy. I feel pretty confident that somewhere in this bear market we're going to get another nasty move down and I will be kicking myself if I miss it.

Gary

Gary's concern about big losses in a crash still concern me from when I voiced them last year. I modeled my idea about 1/2 portions and it wouldn't do better at all. It's much better to buy the first day and ride it out. Does anyone know how 1987 crash went. It would be terrible to lose 2 years of profits for the system in one trade.
h

Howard,

I use it as a supplement to COT. A way pick up extra income and offset COT drawdowns. You would have made money in 1987. You would have lost on the VTO or QQQQ/BB. But you would have made big money on the COT.

Larry

Larry,
you're right of course. It's funny that I was thinking just yesterday how cool it is that my account is only loosing little bits when it looses and get big bits when it wins. It used to be the other way around. It's because of just such hedging. It helps to look at it that way.
h

i tho't this was interesting...

xxxxxxxxxxxxxxx COT xxxxxxxxxxxxxxxxxxxxxx VTO
xxxxxxxxxxxxxxx strat #5 xxxxxxxxxxxxxxxxx
1997 xxxxxxxxxx 86.7 xxxxxxxxxxxxxxxxxxxxx 21.7
1998 xxxxxxxxxx 23.7 xxxxxxxxxxxxxxxxxxxxx 12.2
1999 xxxxxxxxxx 25.9 xxxxxxxxxxxxxxxxxxxxx 15.1
2000 xxxxxxxxxx 38.2 xxxxxxxxxxxxxxxxxxxxx 63.8
2001 xxxxxxxxxx 73.8 xxxxxxxxxxxxxxxxxxxxx 14.1
2002 xxxxxxxxxx 50.5 xxxxxxxxxxxxxxxxxxxxx 18.8
2003 xxxxxxxxxx 18.5 xxxxxxxxxxxxxxxxxxxxx 21.6
2004 xxxxxxxxxx -7.5 xxxxxxxxxxxxxxxxxxxxx 3.1


1997-99 were bull years, 2000-02 were bear years - both strategies held up well in both environments. notice 2000 - VTO, a long only counter-trend strat, did great. better than in 1999, a bull mkt. looks like QQQQ bounces well during DOWN years. i'm glad to have both of these strats in my tookkit!

-ja

Yep, I got to agree those are pretty good numbers. Now if you had gone long with COT capital on the rebounds in 2001 you could have added another 29-30% and 2002 would have tacked on another 36-37%. That's without leverage. The rebounds have occured 100% of the time at least back to the 50 DMA in the SPX, Nasdaq & Nikkei. I think Larry used the analogy of a rubber band being streched to tight. Add this to the COT and the VTO and I think you have a darn good strategy to earn returns similar to what happened from 1982-2000. The COT strategy earned great returns for the last 20 years by staying mostly long in the greatest bull market of the century and catching the first leg down of the bear market. The mostly short bias for the last 5 years suggests that we are indeed in a long term bear market. However the COT hasn't really shown the ability to catch many of the sharp rallies that occur in bear markets. Of course this may change as the commercial traders become more adept at trading this market. I'm operating under the assumption that a bear market is a whole different ballgame than the long bull market and the historical returns for the COT may not hold up during this period. If we don't take advantage of these rallies I don't think returns over the next 5-10 years are going to be all that stellar.
Hey, and at the rate our dollar is declining we're going to have to earn about 10% a year just to stay even. Russell says that in a bear market everybody loses, the winner is the one who loses the least. I guess thats a good reason to be in the bull market for commodities!!

Gary