This article will show also our long term Time patterns model, suited for longer term investors. A very interesting pattern is at work.
Furthermore we will evaluate our shorter term models and indicators, show results of our option time model on real historic CBOE option data and introduce a newly found acceleration pattern for traders.
DeLorean Opening prediction
Again an excellent result on all markets. DAX January + 151, February + 109 and March +182 points. SPX January + 63, February + 33, March + 26 points. The recovery and high volatility in January explains the extra points gained.
Back to the future- based on DeLorean indicator monthly
Predictions in last article (Time’s up) made the following predictions. Take a seat in DeLorean and we will travel to the future and back. Every day and week there will be trends up and down, small and large. Look at indicator going up or down at the predicted date.
Long term Time patterns-Another correction
Actually this analysis is a must for longer term investors to have some idea of what the future will bring. Back in 2014 we have already wrote an article about some of characteristics. Meanwhile we have developed a pattern recognition that finds matching patterns in the past and future. Next step is to compare trends and performance for this pattern as found in the past. Right now a very specific long term pattern has been forecasted from our time cycles, see the top indicator represented as a green line. Using this approach we can look into the future when a time pattern will be there and how it looks. Since history repeats itself, patterns do as well and thereby give a good approximation of what markets will do in the future if the time pattern has the same effect on markets.
The pattern displayed here from half of 2018 till beginning of 2020 highly resembles the pattern at work in from 2001 till 2003, which is why it got our attention. Back then it was part of a bear market, including the 9/11 terrorist event, resulting in a decline overall of around 30%.
The performance of the best matching patterns are displayed in the chart below. When performance is alike markets could witness another strong correction in 2019. Since this is a long term pattern, it needs a larger time band width of around 3 months.
Typically during the 1st green wave up, also in 2001-3, the correction starts with a sharp decline, when the indicator at the bottom of the chart (black line) below starts to decline from its maximum above 2. The red line indicator is a volatility indicator, above 1 and rising means high volatility.
When the green indicator is in the middle of its high above 1, historic performance shows that normally a decline will happen, therefore pointing to the period June- September. History also shows that if the indicator on the bottom has a reading above 2, making several tops, that the occurrence of a larger bear market is more likely, pointing to a level in the Dow of around 21000-22000 points.
Historic performance with same pattern displayed in chart above. Time pattern circled in RED, that coincides with corrections. Green line is Pattern and direction, red line is volatility when rising and nearing 1, black line is strong correction when above 2. The colored lines in the chart itself are historic perfomances when sam pattern active.
UPDATE Trading system using options.
A mentioned in our previous article , we have developed a directional tradings system for options using DeLorean Monthly. This means that we follow the direction of the indicator to trade long or short using options. Additionally mention that we use SPX options because of liquidity, diversification, pricing and expiration every 2 days. Short term options are most advantageous.
Now we have extended our research and simulated the results of our trading strategy using DeLorean indicator with historic real time 15 minute option prices of CBOE. Our software automatically selects out of the money options for writing calls or puts at a 0.5% (this can be changed to any %) out of the money excercise price compared to spx at the moment of trading. Stop level is at 0.9%, reducing this to 0.6% still gives around 80% hitratio.
Consequently there is always a leaway of 1 % for the position in case the market does not follow the DeLorean indicator immediately.
Trading is based upon the swings in the indicator from top to bottom and vice versa. So a short trade (red arrow)-writing calls- will appear when the indicator starts to decline. A long trade (green arrow)-writing puts- when indicator rises again from a bottom. The strike price is 1% above the SPX price when writing calls and 1% below the market price when writing puts. This way a trade will still have full profit as long as it stays within this bandwidth. If not the trade is stopped out.
With a capital of 150k 3 years trading options resulted in a profit of 144k, almost 100% with a max drawdown of ca. 5,5%.
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