Editor’s note: This material was originally published in the October 13, 2016 issue of Bloomberg Brief: Technical Strategies. Below are extracts from that Brief.

In a previous edition of the Technicals Strategies Quarterly,  a profitable strategy using a Z score on the implied volatility skew for the FTSE 100 was explained. The strategy assumes spikes in the skew represent extremes in sentiment, and hence mean reversion opportunities. The strategy goes long the FTSE when the Skew Z Score crosses below +2 standard deviation and short at -2 (positions liquidated at 0).   Over the last three years the strategy would have generated a 214% return, with a winning ratio of 88% and a Sharpe ratio of 2.27, the back test shows.

On a pure price basis, a technical indicator that tends to perform well in such environments is the Williams %R, developed by Larry Williams. The image below, from the BTST scatter plot tab,

The book begins with a provocative point:

With unlimited money, it would be hard to lose trading commodities.

Carley explains, “Knowing the nature of commodity boom and bust cycles, a trader with immense pain tolerance, financial capital, patience, and discipline to accept massive drawdowns in exchange for nearly certain trading success might “never” lose money trading commodities.”

 This is a bold statement but it is true and it is unique to commodity trading. It does not apply to any other investment. Stock markets provide investors with ample opportunities to find long-term losers as do corporate or municipal bond markets. In extreme cases, sovereign debt has been wiped out and currency traders have also been bankrupted by government decisions. Commodities are unique in that they exhibit a boom and bust cycle that has repeated

Editor’s note: this was originally published by KCG at KCG.com. KCG offers services designed to address trading needs across asset classes, product types and time zones. The firm is one of the world’s largest independent market makers.

Crib Sheet:

The US Equity market is the most liquid and arguably the cheapest in the world for long-term investors. It is also a market where ETFs and hedge funds thrive. No single event got us here – it’s been a process of constant refinement and learning. Three consistent factors have contributed:

1. Innovation
2. Competition
3. Regulation

Since the invention of the telegraph in 1832, technology has had a disruptive influence on market structure. Often, regulators have had to step in to require incumbents to adopt technology, spend on productivity enhancements and break down exclusive access.

Now nearly all trading is done electronically, which has changed how trading is done as well as who can do it. Those who have

The Charles H. Dow Award is presented annually for outstanding research in technical analysis. As the 2014 winners, Michael Gayed, CFA, and Charles Bilello, J.D., CPA, CMT, demonstrated, research can be put to practical use. They have used the analysis presented in their paper to manage mutual funds and separately managed accounts and have now created an index to track the results of their analysis.

In their 2014 Charles H. Dow Award winning paper “An Intermarket Approach to Beta Rotation,” they outlined an indicator that switches in and out of the S&P 500 based on the recent price action of the utilities index. The chart below demonstrates that this idea could be used to time the market and also demonstrates Gayed and Bilello’s idea continues to work in the current market environment.