Mean Reverting Into A Long Trade On The Russell 2000
- Posted by ZorTrades
- on June 6th, 2011
Update June 7, 2011 5:45am:
- The Cboe total put to call ratio closed at 1.11, this is the fourth day in a row in which this ratio has closed above 1.00 (closes above 1.00 have bullish implications for the market in the short term). The cboe equity only put to call ratio closed at .79, closes above .70 have bullish implications in the short term.
- The Nyse Trin closed at 3.37, closes above 3.00 have bullish implications for the market in the short term.
- The McClellan Oscillator (telechart) closed at -198, negative 200 readings is where the selling starts to slow down and where bounces occur.
- The Russell 2000, Nasdaq, and SP500 all closed below their lower bollinger band, this is a rare occurrence, and it has paid to get long in the short term when this has happened.
- The Russell 2000 is now down 4 days in a row, and down 6.2% since 5/31 high. Now is not the time to press shorts, wait for the counter trend rally.
- What I am looking for is a 2-3 day counter trend rally, that is it. When I initiate mean reversion trades, I only do it with an index ETF. An ETF makes it much easier than an individual stock, with a stock you have to deal with company, or sector specific risk. Then you have to make sure that you pick the right stock out 5,000 that is going to bounce with the market. We also leg in to these trades, I don’t believe in line in the sand when doing mean reversion trades. The market tends to over shoot on the way up and on the way down. Our plan is to spread out our buys in 4 tranches, with our 1st buy being typically our smallest buy. We only add on weakness, and 90% of the times we don’t get the chance to buy our full line, which is fine. All that means is: that we were right from the start.
- Ideally what we want here is a gap lower, but from looks of it we are not going to get it.
June 6, 2011
- The SP500 is now trading under its lower bollinger band which is a rare occurrence and that should be faded.
- The Russell 2000 is back to the psychological possible support round number 800. SP500 back to potential support at the 1294 level.
- Its not a great oversold reading, but the McClellean Oscillator (telechart) is down to -153, bounces tend to occur from -200 readings.
- Including today the market is down 4 days in a row. Like I said in one of my previous post, this market has become more of mean reversion type market.
- The Total put to call ratio on the cboe has closed above 1.00 for 3 consecutive days. On Friday it close at 1.24, readings above 1.20 have been real bullish in the short term for the market. Cboe equity only put to call ratio has also closed above .70, a level that has been bullish for equities in the very near short term.
- The NYSE Trin closed at 4.35 on 6/1, any closes above 3 in the past has had bullish implications for the market in the short term.
Short term to me means: 2-3 days.
I will only add to the TNA on further weakness, and will sell into strength. In these type of trades we welcome pullbacks, we start small and add on weakness.
Position: long TNA
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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Frank Zorrilla is the founder and chief investment officer of Zor Capital LLC.He began his Wall Street career 10 days after his 20th birthday when he became a Series 7 licensed stock broker. More »