This is a very simple phenomenon that all investors should be on the watch for. It doesn't happen often, but when it does, this strategy allows you to get in the market very early and at a low price.
The logic behind this strategy has been around for a long time and is detailed in the book "Trade like a Hedge Fund" by James Altucher. He makes a common mistake of using repeat signals in his analysis, so I use a hybrid of this strategy.
When the S&P 500 closes 20% below the S&P 500 200 day moving average, the investor places a buy order in an S&P 500 exchange traded fund (ETF). Hold the position for 20 trading days.
This strategy will fire a buy signal in the midst of panic selling. Therefore, this strategy is perfect for call options as it will generate a buy signal when almost no other system will. Everyone will be bearish and buying put options to protect themselves against further weakness.
I ran a historical analysis dating back to 1960 and the results are as follows:
Total Trades: 16
Winning Trades: 75%
Largest Gain: 14.34%
Largest Loss: -9.73%
Percent Invested: 2.67%
