Follow the Trend or Reversion to Mean? You Decide

February 18th, 2010

A few weeks ago I read Paul Kedrosky’s post on how contrarianism is a fad and how he thinks that most contrarians are just posing for the camera. Jason Goepfert wrote a nice rebuttal (with an eye-catching title) about how there’s good reason to be a contrarian in certain situations. He used an example of the S&P 500, but how would the strategy work for individual stocks? You rarely see the types of forceful moves in the overall market that you do in individual stocks almost every day. Surely these types of moves generate some follow through.

I’ve done some backtesting in this area. So given this universe of stocks:

  • Price is between 0.50 and $60
  • Average volume is above 100,000
  • Volume on trigger day is greater than 2,000,000
  • The range on the trigger day is greater than 20% of the stock’s price
  • Volume on the trigger day is at least 50% above average volume
  • Closes at least 10% higher than its 10 day moving average

Here’s an example of ENT a few days ago:

(Chart generated by the StockTickr Trading Journal)

So my question for you: Is there a trading edge on the long side or the short side after these types of moves?

What’s your guess? Let me know in the comments below.

1 Comment »

  1. weijei Said,

    February 19, 2010 @ 2:36 pm

    at least on the ES, have seen other results showing a very high probability of taking out the high, but only 50/50 of closing above the high.

    the context in which this wide range trend bar may help also. this type of bar if following a series of successive higher lows occuring after a large multi day move had already taken place, is probably more likely to reverse, than if it’s the first day of the move.

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