Today I want to talk about the market activity over the past two months and summarize what our trading strategies have done. If we look at chart 1 we see a bar chart of the market from early February through this week. Visually when we look at this chart, what do we see? We see a market that has made a series of impulse moves up or down followed by corrections, or mean reverting bounces, in the opposite direction. Let me clarify what I am talking about and relate each impulse/ correction move to our trading strategies.

At trade sequence 1 we see a market that was moving up gradually and then had a quick 2 day pullback. If we look at chart 2 we see this trade sequence in greater detail. At bar 1a we get 7 Trading Markets Market Timing signals that trigger. Statistically we have seen that when 7 or more Market Timing signals trigger on any one trading day, the probability of a successful trade is 84%, and the average profit per trade is 1.14%. We aggressively buy the market (in this case the SPY ETF) at the close of bar 1a. The very next day we get a mean reverting bounce and exit our trade. This was an easy one day trade sequence.

If we go back to chart 1, we can see trade sequence 2 which was an enormous sell off. On chart 3 we see this sequence in greater detail. Listed on this chart are bars labeled 2a through 2f with the corresponding Market Timing signals that triggered on each day labeled at the top of the chart. I wrote about this trade sequence in great detail on March 9th, so I am not going to spend a lot of time on it now. Anyway, we bought partial positions starting at bar 2a through bar 2f and exited the entire position on the bar labeled “Exit”. Again, this was one of the worst sell offs we have had in years, and we ended up with a money-making trade.

If we go back to chart 1 we see the next trade sequence that develops as the market bounces off of the low of sequence 2, moves up and then pulls back again to retest the low made at sequence 2. This sets up trade sequence 3. Moving to chart 4 we see a detail of this trade sequence. At bar 3a we get a big pullback where 4 Market Timing signals trigger (3 Trin signals and 1 DMI signal). We buy an aggressive position here on the close of bar 3a as several signals have triggered and the magnitude of the pullback was great. Bar 3b trades at a lower low than bar 3a and then trades higher into the close. We get 3 more Market Timing signals to trigger on this day and, we buy additional positions at the close of bar 3b. We are in this trade holding for 2 more days and finally get our sell signal on the 3rd day where we exit the entire long position at the close of the bar labeled “Exit”.

Going back to chart 1, we see that the market continues its rally after sequence 3, and then a pullback occurs, which sets up trade sequence 4. Looking on chart 5, we see a detail of this trade sequence where the market pulls back for several days in a row, which triggers Market Timing buy signals on four consecutive trading days. Bars 4a through 4d are labeled on the bar chart with each day’s signals listed at the top of the chart. We allocate partial positions to each of the days that signals are triggered based on what signals are triggering, and how many cumulative signals are being generated on each trading day. At bar 4d on this chart we have bought partial positions for 4 consecutive days and end up with a full position size. The market then pauses for a day and then we get our big mean reverting bounce back where we successfully exit our entire position.

Looking back on chart 1 again, we can see the trading for the past 2 months with each trade sequence that was picked up by the TradingMarkets Market Timing course. Again, our mantra is to buy weakness and take advantage of the mean-reverting bounce back that occurs after the market has pulled back too far, too fast. Again, it is at this area of “extreme stretch" from the mean that we look for the mean-reverting bounce back. On chart 1 we can see each pullback (labeled as sequence 1, 2, 3, and 4) that occurs and the resultant bounce back. At Connors Research Group, we use several trading strategies based on the VIX, TRIN, DMI, and RSI etc. to measure this area of when a stock or market has stretched too far and too fast from its mean. We use these tools to statistically quantify where the probabilities are the greatest for the mean reverting bounce to occur and trade accordingly. Most importantly, these are trading strategies that Larry Connors, myself and several others at TradingMarkets trade. We just don’t write about these trades, we actually are putting our own money into these signals.

Paul Sabo has been a professional trader for over 18 years. During this time he has worked as a market maker in both New York City and San Francisco for some of Wall Street's most prestigious investment banks, commercial banks and brokerage houses. Paul later became the head trader for a top-ranked investment advisor and hedge fund based in San Francisco. Paul recently left his position at the hedge fund to trade his own money as a full time business as well as working with Connors Research Group on various proprietary projects.

Learn more about trading extended levels in the "TradingMarkets S&P Market Timing Course". To listen to a free Market Timing presentation led by Paul Sabo and Larry Connors, click here.