Friday, July 27, 2007

Weekly Bollinger Band Crash Trade

Quite often you can apply the rules of a daily trade to the weekly charts. We got a great example at the close today. The Bollinger Band crash trade can also be taken as a weekly signal. You apply the same rules as for the daily charts only use them on the weekly charts. Here are the rules for a weekly signal. Buy on the open Monday whenever the SPX closes below the lower 10 week Bollinger Band. Sell on any Friday close that's profitable or after three weeks which ever comes first. Over the last 27 years the trade has been profitable 93.7% of the time if you eliminate the 2001 and 2002 bear market years when the 200 DMA was declining. The trade sets up rarely. When it does its typically a sign of an extremely oversold market. BTW I'm inclined to believe you could also apply the VTO rules to the weekly charts in which case we also have a weekly VTO trade. After a quick look the weekly VTO has roughly the same winning % as the weekly Bollinger Band. The profits are much larger of course but the trade off is you have to hold much longer. Sometimes up to 4 months.

I tested the weekly Bollinger band system and it appears that closing at the end of the second week is the better play than waiting one more week for a profitable close. There were two winners and two losers in the third week. Basically a coin flip. No odds in that.