Quazimoto’s Market Direction Indicator was recently put through the paces to determine its accuracy and also to investigate possible alternatives to the current system. The indicator is based on advancing and declining volume and is based on much of Richard Arms’ research regarding the TRIN or Arms Index.
Market direction is vital to the success of any trader. Not many individual stocks have a life of their own and swim against the tide. Knowing where the market is headed prior to making a trade will almost always put you on the right side of the trade.
Reviewing the last nine months, it is quite apparent that this indicator is extremely useful for forecasting market downturns. 75% of this year’s bear markets were picked up on the long term side of the indicator. This is referred to us as the sell zones. The buy zones were not nearly as useful, possible due to the downward trend of this market. Buy zones did pick up the majority of the consolidation areas but the bottom line is that only 20% of these buy zones ended with the market higher in the end. The long term buy and sell zones are indicated by the stop light on the right sidebar. This will be changed to give all that follow a more precise indication of market direction. Reasons for this are apparent in the following analysis.
When number crunching nine months of data, it became obvious that using the short term indicator resulted in more successful trades. This has more to do with knowing the success rate of the short term indicator rather than its accuracy.
We use daily points gained and lost on the NYSE as our measure of success. The overall point gain during buy and sell periods, or zones, were used in favor of the number of “up” days versus “down” days in the same period. Reasons for this are apparent when you consider that one period consisting of the three days may include two “point gain” days and one “point loss” day. This would be considered a successful buy zone if calculated this way. But looking within this zone reveals that, for example, Monday was a 23 point gain day, Tuesday was a 50 point gain day, and Wednesday was a 300 point loss day. Holding a stock during this short cycle could easily wipe out earlier gains due to the massive downdraft on the final day.
To be fair, we also included in our buy zone, the first day of the new sell zone (and vice versa…also include with a sell zone the first day of a new buy zone) because this transition is not predictable on a day to day basis although a reasonable guess can be made based on the convergence, or divergence of our daily numbers and graph lines.
The next post will detail the most important results and revelations, including the best use of this market direction indicator.