Why TA May Not Be Working
If your TA-based system is not performing as you think it should, perhaps you should consider this...
“Last night I was reading a bi-weekly newsletter written by Tom McClellan, a well-known and respected technician, and something he discussed smacked me square in the forehead. This is something I should have been thinking about over the past 6 months.
On July 5, 2007 the SEC eliminated the Uptick Rule. The rule stated that you could not sell a stock short unless and until there had been an upward change in price, an uptick, which would keep the sellers from driving the stock down simply by shorting it. That rule had been in effect since 1934, and was intended to help prevent some of the kinds of dislocations that occurred in the crash of 1929.
Subsequent to July 5, 2007, we have had a very different stock market than the one seen during the entire look-back period of my studies, dating back to 1993. For example, from 1993 through July 5, 2007, there were 11 "rare one-day buy signals," which pop up on my screen when the market internals wash out to an extreme. That's less than one washout day per year. But since July 5, 2007 there have been 10 more of those rare one-day washout sessions. That's a rate of almost 20 per year, more than 20 times the rate during the prior 14 years.
I have been aware that the efficacy of the System's signals had deteriorated since last July, which is why we have been less active in trading the System's signals. But this new, if tardy, recognition of the Uptick Rule is terrifically important. It means that there is reason to expect that the change in the market since July will be ongoing, and that, unless the Uptick Rule is re-established, we can expect the market NOT to revert to its former behavior.
Re-establishing more positive trading performance will now likely require re-vamping our methodologies with an eye toward understanding how the market is likely to behave in the absence of the Uptick Rule.”
AI
