Reposted from the Members Only TMG Board...
One explanation about what might be wrong with backtested TA systems...
“Last night I was reading a bi-weekly newsletter written by Tom McClellan, a well known and respect 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.” - Credits to the author, Unknown
My take is that in the absence of the Uptick Rule, the bears' short orders can go through unimpeded, which means that when a stock or ETF has reached whatever level they think is high enough, they can Short at will, and unless there is unusually heavy Short covering going on by them taking their profits if a true rally seems to be materializing, that can quickly overcome any upward momentum by the Long buyers, and also that if they are looking to Short a stock, they don't have to wait for the rollover when the buyers diminish and/or start taking profits to jump in with both feet.
In view of this, I guess TMG isn't the only TA-based system that is having its problems. It always seems like a no-brainer in hindsight, but intial testing of TMG with tighter Stops and lower OB and OS thresholds (since the absence of the Uptick Rule favors the Bears) shows some significant improvements since last July.
Market Data 
Markets 
