09.03.2022
This article wonders, how has WTIC responded after previous Death Crosses?
Key Takeaways
The results of initiating a short position on WTIC using The Death Cross as a trigger is highly dependant on holding period.
Even returns generated using the optimal holding period are not great.
The Death Cross, on WTIC, is not as deadly as its name portends.
Introduction
Yesterday, 09/07/2022, the chart of West Texas Intermediate Crude (WTIC) had its 50-day simple moving average cross below its 200-day simple moving average. See the chart below.This event is commonly referred to as “The Death Cross.” What does signal testing reveal about the historical price action following this signal?
WTIC Daily. Click to enlarge.
The Test
The test is simple. It had two pieces
Get short at the open following the Death Cross, if it has not been triggered in the last 63 days.
Hold for 63 days.
Frankly, the results were horrible. They do not justify using the Death Cross as a trade signal. Going back to 1983, using Optuma's data, there have been 27 previous Death Cross signals on the chart of WTIC. Holding for 63 days after these signals have resulting in the following:
Roughly 56% of the time, 15 of 27 times, price finished lower 63 days from the Death Cross.
Roughly 44% of the time, 12 of 27 times, price finished higher 63 days from the Death Cross.
The mean return of all 27 signals was -3.05%, and the median return of all 27 signals was +1.65%. Yes, shorting after a Death Cross had a positive median return after 63-days.
The standard deviation of the mean return was 19.05%.
The risk adjusted mean (the mean divided by standard deviation) was 8.68%
The above results are not much better than the flip of a coin. The mean return was not much, and a positive median return does not inspire confidence. Changing the holding period to 21 or 126 days did not improve the results at all, in fact the results were worse.
Using Optuma's Signal Tester to visualize the mean returns over the 63-day holding period, there is something worth noting. See the chart below. I have highlighted day 38 with an orange line.
Signal Test Mean Return Through the 63-day Holding Period. Click to enlarge.
Of the 27 previous signals, on average, the most profitable part of the 63-day hold was day 38. This begs the question, "What do the test results show when we get short following the Death Cross and hold for 38 instead of 63 days? Here are the results:
Test Result Tables. Click to enlarge.
The table on the left shows all 27 triggers with a holding time of 63 days. The table on the right shows all 27 triggers with a holding time of 38 days. The change does offer some improvement.
Holding for 38 days improves the win rate to 63%, 17 of 27.
Holding for 38 days improves the mean return and the median return to -10.96% and -3.08%.
The issue here is holding for 38 days increases the standard deviation significantly.
Why the big jump in volatility? It is strictly from signal 27. WTIC had that massive drop in 2020. In this instance, the volatility was in the direction of our trade, but it is still considered an outlier. Changing the outlier to the mean value with the outlier is removed brings the test results to approximately:
Mean return: -4.64%. Slightly better than the longer holding period.
Median return: -3.08%. Much better than the positive value from the longer holding period.
Standard deviation: 13.64%. Better than the the longer holding period.
Risk adjusted return: 33.99%.
Conclusion
All in all, assuming we will not have another crash in WTIC, initiating a short at the open following The Death Cross - if it has not occurred in the previous 63 days - and holding for 38 days has shown a 63% chance of price finishing, on average, 3% lower. These results lead to the conclusion that The Death Cross perhaps is not so deadly on WTIC, though the risk adjusted return might deserve some attention.
As always, thank you for reading. This article is for educational and informational purposes only. The author may or may not have a position in the securities mentioned. Read our full disclaimer here. Please reach out with any feedback or comments. I would love to know if you agree, disagree, or don't care at all. Louis@eastcoastcharts.com
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