DJI Index

SBV signalled the bottom of the crash

In our Market outlook of September 17, 2008 we wrote:

"We will repeat for those who use 60-day the SBV(20) simple trading system what we mentioned on January 23rd of 2008: we recommend that you lower the negative level from minus 20% to minus 60-70% after such a strong Selling volume accumulation. There is no need to wait until the SBV runs to the minus 30-20% level for confirmation of the recovery."

This is one way to improve the system. When the market is heading in one direction for a prolonged period of time and we begin to see the accumulation of Selling or Buying volume grow very significantly, it is reasonable to expect a sharper and stronger reversal than usual. In this case, it could be too late to close a position when the SBV has crossed the 20% level.

This helped to spot the exact bottom of the crash
in January andMarch of 2008
as well as a few days ago.

+10% in last week on crash and recovery

Chart 1. Relationship between the SBV oscillator and index reversal points. S&P 500 index. 60-day view. 1 bar = 1 hour. SBV(20)

Signal Level 1: If the SBV runs above plus 20% or falls below minus 20% and reverses its trend without reaching 33%, use 20% as the signal line.

Signal Level 2: If the SBV runs above plus 33% or falls below minus 33%, use 33% as the signal line.

1. Once the SBV indicator has declined below a negative signal level (the indicator will now show red), we enter a short position (if we are not already short);

2. Once the SBV indicator advances above a negative signal level (after having been below that level), we will enter a long position (the indicator still shows red);

3. Once the SBV indicator rallies above a positive signal level (the indicator will now show green), we enter a long position (if we are not already long);

4. Once the SBV indicator declines below a positive signal level (after having been above that level), we will enter a short position (the indicator still shows green);

5. Additional Stop Loss Rule - If the SBV had fallen into negative territory and has begun to rise without, but has not yet reached the signal line, close the short position when the SBV is back in positive territory, and stay in cash until a new buy signal appears. Do the opposite for a long position.

Table 1: Trades based on the   5-rule (additional stop-loss rule) system.

Note: The 20% level for the SBV indicator was determined in relation to the prevailing market conditions at the time that the trading examples were selected. In order to establish the optimal critical levels for the SBV indicator, traders should consider the current market situation and review the history of prior volume surges, including their magnitude (i.e., the level that the SBV indicator reached).

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