When SPY/S&P 500 Closes In the Bottom of Today’s Range

One of my favourite “formulas” to look at in mean reverting instruments is this formula:

(HIGH-CLOSE)/(HIGH-LOW)

This simple formula increases the odds a lot, in my experience.

Here is an example: Enter at close if the above formula is less than 0.5:

The blue line is the accumulated return in percent buying every close and holding until tomorrows close. The pink line is buying every close and holding until tomorrows close if the formula is below 0.5. It’s a a lot better, and certainly in bear markets. The period covered is from 1. January 2010 until July 2012. Neither slippage nor commission is considered.

If the daily range ends below 0.33, we get this chart:

The number of trades is reduced to 175 (from 640 if buy every close) and the drawdown is also reduced a lot.

What happens if we include a moving average? Let’s buy at the close if yesterdays close was under the 10 day moving average and the formula was below 0.5:

 

The number of fills are 145 trades. In total that gives 37% return, an average of 0.25% per trade! That is more than enough to offset slippage and commission. SPY can be bought as an opening order and a exit on market on close.

Testing further back it seems to hold up pretty well. Testing back to 1.1.2005 until October 2012, there are only 24 losing months (of 93 months). Average annual return is a respectable 10.6%.

Worth noting is that all strategies mentioned here come from CLOSE to CLOSE. OPEN to CLOSE does not work.