Once Again, Extremely Strong Percent R Readings For The Broad Market Prove Very Bullish

Percent R (Williams %R) Trend Strength System Continues To Perform Well 

We previously examined this in 2012 and here (as well as before then)  — when the market gives an extremely strong Daily reading on Williams Percent R (using the BigTrends inputs and method for %R), it actually is usually a bullish signal for further upside to continue.  This is logical given that a very strong reading on this indicator shows the strength of the current trend — but goes against many investors & traders out there who look for a reversal using “overbought” or “oversold” strategies — we know that overbought can go more overbought and of course “the trend is your friend”.

With both the Daily and the Weekly Percent R readings on the S&P 500 Index ETF (SPY) hitting 100.00 max readings on the last trading day of 2013, we did a new optimization of the S&P 500 Index (SPX) Daily chart over the past 10 years, January 1 2004 to January 1 2014.  Previously we had found that daily close readings over 99 on Percent R were a good Buy signal over the next 17 trading days (a bit over 3 weeks).  On the SPX over this particular time frame, the optimal reading was over 98.8 over 19 trading days (a similar result both on level and duration) — over the past 10 years, this system with these settings is 78.6% winners with a win/loss size ratio of 1.39  (33 winners vs 9 losers with winning trades about 1.4x as big as losing trades).

In general the past 10 years has been a bullish one, but remember that we saw a giant plunge in the market from October 2007 to March 2009.  A nice thing about this system is that it largely avoided the losses of that time period (because it didn’t generate many Buy signals during that time frame).  For example here is the year-by-year results:

Percent R High Readings System Equity Curve

moby 1 eq-curve

You can see that there were only 2 down years for this system based on these settings (2008 and 2011), and both of those where very small losses — and there was only 1 signal in all of 2008, compared to as many as 8 in the strongest years of 2012 and 2013 (remember that this is on a 19 trading day holding period, basically a month — with no concurrent signals — so there is a maximum of about 12 trading signals a year).

The Equity Curve of this system when compared to the market since 2004 shows the smooth nature of the gains and how it largely avoided the big losses/drawdowns that the market had:

Percent R System Equity Curve, 2004 to 2014
moby 2 eq-curve-smoothed

SPY 2004 to 2014 Chart

moby 3 spy-since-2004

Here you can see all of the signals for 2013 — also how we currently are in a “buy” signal in effect from 12/26/13:

SPX Daily Chart

moby 4 spx-2013-d

The nice thing with the signals in strong years like 2012 & 2013 is that it kept you in the market much of the time during these strong bull runs.  The only losing signal in 2013 was the most recently closed one and was actually basically a breakeven — Nov 14 to Dec 11, SPX was down 0.50 from 1782.75 to 1782.22.

Also remember that a strong January (and we’ve tested this before, as well as the “first 6 weeks” indicator), portends well for a strong year in general for the market … but that’s another analysis/story.

Bottom line is that extremely strong Daily Percent R (Williams %R) readings using the BigTrends method and inputs have been a good indicator for further market upside when we’ve tested this mutiple times in the past over multiple time frames — and continued to work well in 2013.  Don’t be afraid of jumping on board a strong trend.

Moby Waller co-Portfolio Manager, ETFTRADR & Rapid Options Income