Dr. Brett Steenbarger is a great source for ideas that can be modeled in Trade-Ideas. For his insight and plain speaking way of revealing statistically significant patterns in trading, we are grateful. The Doctor’s recent post about the behavior of stocks reaching 10-day highs is the kind of example we like to make into a Strategy Session.

In a nutshell his theory and evidence suggest that the days following a 10-day high in a strong overall uptrending market will do better than a 10-day high in a weak or flat overall market. He gets even more precise with this observation,

“Markets that make 10 day highs but show 10-day rates of change of less than 2% have underperformed those that make 10 day highs with stronger momentum.”

The Strategy
I tried modeling a simple strategy of filtering for stocks on good volume, trending upward, and reaching 10-day highs. This was going to be the settings for this post – delivered with the caveat that you shouldn’t use this unless the overall market is bullish.

However it occurred to me that if everyone is looking to see what will happen after a 10-day high relative to the market, why not get in front of this statistical observation and look for stocks reaching 8-day highs? In other words can stocks that reach 8 day highs with momentum continue to 10 days? The context/direction of the overall market is still very important, but already in this mornings choppy market I like what I am seeing.

How Its Modeled
The set-up includes these filtering conditions:

• Average daily volume > 0.4M Shares
• Share price > $5
• Current volume relative to historical average volume must be at least 50% higher
• Stock must be up at least 2 days prior to today
• Stock must be up at least $0.05 from yesterday’s close
• Stock must be in a noticeable linear regression over the last 8 days (i.e., following a line)

The alerts we select as triggers within this filtered universe are stocks that: increase by more than 2% in price from the opening OR cross daily highs of the last 8 days or more.

Who Could Benefit
This strategy can be used by short term momentum traders (i.e., positions from intraday to 2-3 days max) who know what kind of cycle the market is in for the last 8-10 days. This strategy is sensitive to overall direction of the market. If the market is riding high, these settings will spot ideal candidates with enough momentum. If the market is tanking, there simply won’t be much that this strategy reports.

For extra credit you could design the opposite of this strategy for use in more bear markets. Read the Online Help definitions to get started.

Footnotes:

• Dr. Brett Steenbarger’s blog here.
• Configure this strategy for your own use here.
• Link to other Strategy Sessions here.
• Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this ‘as is’ or modify it to your own liking as many others do. Know, however, that Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice.