Larry,
I have been trying to get some idea of returns if you only buy the Bollinger band strat when the stock is above its 200 DMA and only shorting when the stock is below the 200 DMA. I get roughly 86% for going long and 93% for shorting (give or take a few percent for error). The one thing I noticed was most of the losses for the long side occured in Jan. when the market suddenly changed direction. I also noticed that the COT had been building a large short position all month. Was there anything else in your experience that might have sent warning flags of a sharp sell off?
The commercials had their most extreme short position for the previous 18 months on Jan. 18. Also, the big rally we saw at the end of 2004 looked to me like the kind of year-end rally that you often get in Nov. and Dec. If you think of this – as I do – as nothing more than a big, long reactionary rally in a secular bear market and when you look at the history of what happens in the first and second year of a second presidential term, then there seems to be an edge for a sell off in January.
Other than the fact that the commercials had an extreme short position, I don’t think there was anything that you could turn into a mechanical rule.