From the July 01, 2011 issue of Futures Magazine • Subscribe!

Profits rocket with breadth thrust signals

The approach on this iteration of PTA7 was to turn the computer loose on thrust measurements. It studied not only different time frames but combinations of different time frames. Based on measurements of intermediate market performance, which took into consideration three-, six- and 12-month average and median performance and the numbers of signals generated, the study stumbled onto an optimum breadth thrust indicator.

A PTA7 breadth thrust occurs when: 1) you get an ADT3 of 79.5 or higher, that 2) was preceded in the previous three days by an ADT2 of at least 84.50. This test was performed on S&P 500 tape data going back to 1970. This combination of two measurements has resulted in the 27 tape signals shown in "PTA7 breadth thrust signals" (below).

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The genesis of this research concerned the absence of signals on the original two-to-one NYSE system during the bull market of the 1990s. The PTA7 breadth model produced four signals during that decade. These additional signals were achieved with comparable signal performance to the original two-to-one thrust signal. Note that the median one-year return of 23.21% on the 27 PTA7 signals had three signals still in play as of March 30. After all 27 signals, the S&P 500 was higher either six or 12 months later.

As we alluded, PTA7 gains insight into the tape’s health from an evaluation of price and volume, but also evaluates reverse thrust conditions, lack of thrust conditions and periods with characteristics contrary to thrust environments (confused markets), along with some trend-following safeguards. While the PTA7 system’s signal infrequency may make it somewhat passive for some traders, this same attribute, when paired with its accuracy, makes it an excellent addition to a larger collection of analysis tools and systems.

Wayne Whaley holds a systems engineering degree from Georgia Tech and takes an engineering approach to tape analysis. He is a registered commodity trading advisor (CTA), co-owner of Witter & Lester and the 2010 MTA Charles Dow Award winner for research surveying various tape measures. For more insight see www.witterlester.com.

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