How We Traded the Biggest Market Drop in Years

The recent market moves have been exciting to say the least. We have had some historic moves in the market averages, as well as historic spikes in volatility. How did our mantra of buying weakness hold up in the biggest market drop of the past few years? Looking at the chart below, we see the most recent trade sequence which includes the big sell off on February 27th.

At bar 1 we saw a minor pullback from the few days preceding it. We got a few buy signals on this day and bought one SPY position at 145.17. I divide my trading account into five equal position sizes with the ability to buy up to three more positions on margin if buy signals warrant buying more than our five positions. The next day we saw the big pullback (bar 2) and saw several buy signals which gave us conviction to buy three more positions. I bought 3 SPY positions at a price of 139.50 because of the magnitude of the drop, and the fact that we got so many buy signals. Even thought the market had one of the biggest drops we have seen in recent market history and fear was rampant, the fact that we got over 8 TradingMarkets S&P Market Timing Course buy signals gave me the confidence to enter the market at the close, looking for a mean reverting bounce from such an enormously oversold level.

Again, at Connors Research Group we quantify all of our strategies statistically and back test them for at least ten years. This gives us great confidence to enter trades when the world seems to be unraveling. Over the past ten year period, when seven or more buy signals were triggered on any one day (multiple signals in one day) a long position taken was a successful trade 84% of the time, and the average percentage profit was 1.14%.

On the following day (bar 3) we got a bounce, but it failed to trigger a sell signal. Additionally, we got several additional buy signals so I bought one more SPY position at 140.90. Bar 4 saw a very volatile day with the S&P trading below the February 27th low. By the end of the day, the market was able to rally back quite a bit, and we got several additional buy signals. I bought one more position of the SPY at 140.50 because we got additional buy signals, and I liked the way the market rallied back after making a lower low earlier in the day.

So at this point I have six positions on, and my average price is 140.85. The day after this leads us to bar 5. On this day the market tried to rally in the morning only to give up ground all the way into the close. Again, we got several Market Timing buy signals, and because of the excessive weakness, I bought another position of the SPY at 138.67 to bring me to a total of seven positions. Bar 6 was the following day, and we saw more and more volatility, and the market closed at the lowest low of the whole trade sequence.

This is the point where the greatest fear is in the market. This was an uncomfortable time for me as I was staring at a draw down with a big position size. Again, several Market Timing buy signals triggered on this day, and I had to have faith in the research and the resulting statistics which say that this is a high probability area for a mean reverting bounce. I bought my last position of the SPY at 137.40 (remember, my trading plan allows for 5 positions and an additional 3 if the signals warrant it).

So at this point we are “all in” with eight positions and an average cost of 140.15. Bar 7 we see a rally back which offered some relief from the pain of the last few days, but we failed to get our sell signal. Bar eight actually triggers a sell signal intra-day, but late day weakness drives the market down and we fail to get our sell signal on the close (remember, we get our entry and exit signals on the closing price so we enter or exit the market on the close). Finally bar 9 comes, and we see further follow through on the rally and a sell signal is generated. We end up selling our SPY positions (all eight of them) at the close of bar 9 at 140.65.

The whole trade sequence which saw one of the most historic market drops, especially in light of the recent lack of volatility, ended up being a profitable trade if you stuck with the trading plan. Was this a tough trade? Absolutely! Do I have faith in the statistical research behind the trading strategies? Yes I do, and this sequence again proves that when you take emotion out of the picture and rely on sound statistical research, you stand a better chance of being a profitable trader.

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.

Related Articles

• Market Timing the S&P 500: Up More than 30% Year to Date
• Applying Market Timing Theory To Practice
• An In-Depth Look at How I Trade with the TRIN
• A 2-Month Review of My Trades
• How I Traded Multiple Buy Signals Last Week

More Related Articles >>