The S&P 500 has shown strong mean reversion tendencies for many decades. One reason for this is the tailwind in the form of 0.04% average return from the close until the next day open, so-called night trading, the lowest hang fruit in the tock market.
This article looks at the performance of the overnight session when the S&P 500 opens at a 5-day low but at the same time, the close is higher than the open.
Let’s turn this into a testable trading strategy:
The 5-day low overnight trading strategy
Here is the testable trading strategy in plain English:
- SPY must open at a 5 day low.
- The close must be higher than the open.
- If 1 and 2 are true, then enter on the close.
- Exit tomorrow’s open.
I have previously written about a 5-day low strategy in SPY.
Here are the stats:
|P/L in %||#Fills||Avg.|
Test period from 2005 until July 2013. Here is the profit curve:
The biggest winner is 6% (in October 2008). Excluding that one still gives an average of 0.17%.
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