The trading pattern we will discuss here is inspired by a book with a remarkably cheesy title: “Trading Secrets of the Inner Circle” by Andrew Goodwin. I read this book years ago when I was first learning about pattern-based trading. After reading this book, I went through each chapter and backtested every single pattern that the book outlines. My findings were that most all of the patterns were (at the time I evaluated them) utterly useless. However, I did learn some very important concepts from this exercise, and discovered a few patterns that so far have had staying-power.
The pattern we will be evaluating is a concept called “Turnaround Tuesday,” which is a pattern that reflects the stock markets inordinate tendency to experience price reversals on Tuesday. This pattern is hardly a well-kept secret. Indeed, I have seen it discussed on a number of blogs over the years, and I myself have used it as a second-tier trading factor in stock indexes for something around 10 years.
Let’s evaluate a specific variation of this pattern that includes both a “buying on a dip” and the “turnaround Tuesday” factor. We will be using S&P 500 stock index futures data, however the idea is also directly applicable to the SPDR S&P 500 ETF (NYSEARCA:SPY).
We will define a “dip” as a close on Monday that occurs in the bottom 20% of the three day trading range. Here is a graphical representation of this concept:
The exact rules we will be evaluating are:
- Monday closes in the bottom 20% of the three day range
- On Tuesday, buy on the open
- Sell on the close of Wednesday
Here are the results of the of the “Turnaround Tuesday” system compared to the return of using the same strategy but with different days of the week being used as the trading signal:
Based on this data, it appears that the “Turnaround Tuesday” pattern has continued to have merit. It can be difficult to present a visual depiction of performance when using futures contracts because of the leverage inherent in these markets. To get around this, I am presenting a graph of the compounded return on the notional value of the contract (The underlying contract value, which in the S&P 500 contract is 50 * the index price). The “Turnaround Tuesday” idea is in the market only 4% of the time and is not intended as a stand-alone system. Will he Turn around Tuesday effect continue to work? I honestly don’t know. Perhaps this article will be the straw that breaks the camels back, though I doubt it. I usually keep using factors until there is consistent evidence that they have degraded.
If you have found this study interesting, I have posted an additional study here. We look at buying after the “Tuesday” pattern sets up on a dip below the open and on an intraday breakout above the open. By the way, when I post this type of study I often get comments and questions about my method for evaluating trading strategies. Most all I care to say on this topic can be found here. In the near future our most valuable, actionable trading and investing ideas will be available only to NAS Trading members. Sign up for the email list to stay informed.
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