S&P 500 and the bullish percent chart continued...

I was just sitting in front of the fire as the temperature has started to drop outside, toastie. I picked up the laptop and decided to run a quick historical test using the S&P 500 index as a base to determine entry points in related ETFs. I was surprised to find so many large cap ETFs out there.

I entered them all into Esignal in a quote window and sorted them by 12 month performance as a percentage relative to their respective price at that start point. Taking the top 10 and placing them into a relative performance chart, relative to each other, resulted in the top three. The top one was far ahead of the rest by enough to be a little odd, so I might take the second best but I will test all three.

I started on January 1st 2009 as a starting point figuring that the Bullish Percent Index (BPI) should definitely get low enough to trigger all sorts of entries in the continues spring drop.

Method, seeing as I don't want to enter on the way down I would follow these steps to capture the best possible entry price.

1) When the BPI hits 30% on the way down I flag the sector and check the representative ETFs to choose the top three relative performers in the sector, S&P 500 and large caps in general in this case.

2) If the BPI crosses 30% on the way back up, enter a long trade in one of the ETFs. This could be options or straight ETF units.

3) If the BPI does not recross 30% but heads farther down then use the 20% as the next recross target, again, enter a long trade after the BPI is above 20%.

4) If the BPI does not recross 20% but heads farther down then use the 10% as the next recross target, again, enter a long trade after the BPI is above 10%. Alternately I might just enter a long trade once the BPI is below the 10% mark as this is so low that it almost cannot stay there long.

Using these four entry steps:

Feb 20th, 30% is broken, no trade, check performance, QQQQ, IVW and IWF are the three best performers even though they are losers they lost the last of a few timeframes.

Feb 28th, 20% is broken, QQQQ remains the top performer even with a loss over all timeframes up to 200 days.

March 6th, unbeknownst to any at the time 2009 just posted the lowest S&P 500 level for the year at 666.79 points.

March 9th, QQQQ posts it's lowest for 2009 as well at $25.63.

Mar 11th, the 20% is broken on the way up, QQQQ is still number one and is posting some positive performance over the shorter time frames. Trade entered March 12th at a limit of the previous day's close of $27.75 or just at the open, I am not sure which to go with. 50 shares stopped at $24.75.

March 13th, the 30% is broken on the way up, March 16th (Monday) 50 more shares bought at the previous day's close (limit again) for $28.74. 100 shares with ACB of $28.24. Stop os at $25.24. $3 stops set for now, I will adjust to some ATR method or use the P&F or reversal of the BPI to get out or to help determine how much space to give.

Today, if using a $3 stop I would still be in for a current price of $44.12. A $15.88 gain over the 8 month period. That is a 56% gain.

Also worth noting for today I should be readying my list of potential shorts as the exact same entry criteria and method could be applied on the way down using 70% as the first trigger. 70% with downward recross to short the poorest performing ETF, then 80% recross and 90% recross.

This could be considered a conservative measurement as using other sectors that are performing well against the SPX and better performing ETFs from within those indices. Also, using options could allow for not needing to place stops, provide leverage and using spreads against some of the positions in certain ways could also produce premium income. Then there is playing the downside moves as well which I would most likely do with either buying puts instead of short selling anything or just running bear call spreads to take advantage of the weakness even without a defined drop.

All in all I think that this is a nice workable and easy to execute plan. I may redirect some funds into my margin account in order to run some live trades in this methodology. I might luck out and hit a market downturn soon as the SPX has crossed 70% and 80% on the way up. This should affect my long only option trades heavily, although I am selling a few of them as they show strength right now.

Jeff.