TrendExhaustion is founded on the observation that the financial markets and their components tend to gyrate up and down in the short term, overshooting a true, valuation-based trend in both directions. TrendExhaustion seeks to quantify and capture those short term movements that best indicate an exhaustion or reversal of movement. By combining technical pricing analysis, market sentiment, and volatility indicators, TrendExhaustion is a ranking system that helps identify overextended short term price movements.
Exhaustion
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Being able to label the movement “overextended” or “exhausted” is very important to profiting from the strategy. If you think of price movement like the stretching of a rubber band, as the move extends, it takes more force to continue to expand at the same rate. That force is supply and demand, and TrendExhaustion exposes “taunt” trends, ready to snap back.
By entering a position at a this point of “taunt-ness” (a high Trend Exhaustion Score) we can expect our win-percentage to be higher, and average returns to be reliably positive – the stocks have less room to stretch against us, and more room to move in our favor. Both theoretical backtesting and real-money trading has proved this theory to be successful.
TrendExhaustion generates a preliminary score based on these components:
- Relative Price. Where is the stock in relation to its past trading range? This component is sensitive to technical price floors and ceilings that exist in the stock’s history.
- Sustained Direction. Gradually trending stocks are prone to stalls and reversals due to profit-taking (for upward-trending stocks) and value-buying (for downward-trending stocks). In combination with the other factors, a long-winded trend can mean it has run it’s course.
- Extreme Movement. Looking at a stock’s price volatility across a number of periods, Trend Exhaustion highlights uncharacteristic price movement that is likely to end.
- Volume. One key to a lasting price trend is strong volume. When the trading volume dwindles in the presence of these other components, a reversal is very likely.
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Then, these factors are weighted comparatively across the TrendExhaustion stock universe (just under 3,000 stocks) to determine a stock’s actual TrendExhaustion Score on a scale of 10 (strong buy) to -10 (strong sell). This normalization minimizes the impact of broader market movements (stocks just along for the ride), and allows us to compare a diverse range of stocks on the same scale.
The resulting TrendExhaustion Score range would roughly resemble a bell curve, with about half of all rated stocks receiving a 1 or -1 rating, and only 0.1% labeled with a 10 or -10.
End-of-day TrendExhaustion scores and rankings are available for free, but you can GO PRO today to get LIVE intra-day scores as well as advanced screens to help you find the right play. Add Market Neutral Stock Trade Alerts to receive daily emails with our hand-picked Market Neutral trades as we place them, so you can follow this lucrative strategy in your own brokerage account.
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