SPY Broke Out of a Narrow Trading Range on 5/17/2023, but Our Backtest Suggested it Wasn’t Bullish for the Open. [Article] (Point-and-Click NinjaTrader® Strategy)

Trading Strategy Article

Summary: This is the Quagensa N Edition version of the Quagensia T Edition-based article SPY Broke Out of a Narrow Trading Range on 5/17/2023, but Our Backtest Suggests it’s Not Bullish for the Open. [Article] (T Edition) that we published before 2 AM CST on 5/18/2023, and which was meant to be a timely article to aid traders in their decisions regarding what to do when SPY opened this morning. That article included a downloadable Quagensia T Edition strategy that traders could open in Quagensia T Edition, then generate its TradeStation® EasyLanguage® code and backtest the TradeStation® EasyLanguage® strategy in TradeStation® 10. We are now well past the open today so that analysis is now out-of-date, but we wrote this article so that users of Quagensia N Edition and NinjaTrader® would be able to download the Quagensia N Edition version of the strategy. Users can generate its NinjaTrader® NinjaScript® code and backtest it in NinjaTrader®.

This article is written in the past tense because it was written after the market open on 5/18/2023. The details and backtest results are specific to NinjaTrader®. As you will see, the backtest results are comparable to those generated using TradeStation.

SPY’s daily bar on 5/17/2023 clearly broke out of the narrow trading range of its last several bars with multiple factors that made the breakout stand out visually on a chart but readers of our article SPY Broke Out of a Narrow Trading Range on 5/17/2023, but Our Backtest Suggests it’s Not Bullish for the Open. [Article] (T Edition) were advised to beware of buying SPY at the open earlier today with the expectation of riding SPY up for the next several bars. Our analysis in that article was supported by our backtest results in NinjaTrader® as well.

SPY’s breakout on 5/17/2023 had the following characteristics:

• The previous seven bars traded in a narrow range. The highest open or close was only 0.88% higher than the lowest open or close.
• The 5/17/2023 bar opened above the open and the close of the previous bar.
• The 5/17/2023 bar was a clear breakout bar. It closed 1.21% above its previous close and was up 0.70% from its open.

Are the above factors bullish, bearish, or non-predictive? Many technicians would say bullish, but we found that they were actually non-predictive over the last more than 25 years of market data in NinjaTrader®. We created a Quagensia N Edition strategy, generated its NinjaTrader® NinjaScript® code, and backtested the NinjaTrader® NinjaScript® strategy to test a trading idea that enters a long trade on the open of the daily bar that occurs after market action whose characteristics were very similar to those listed above and holds the long trade for the same number of bars as the number of bars in the narrow market range.

Our specific entry criteria were to enter a long trade on the open of the daily bar that occurs directly after the daily bar with the following characteristics:

• Since the seven bars prior to the 5/17/2023 daily bar traded in a narrow range such that the highest open or close was only 0.88% higher than the lowest open or close, we allowed a minimum of 0.48% and a maximum of 1.28% for this metric for the seven bars prior to the daily bar that was the breakout bar.
• The daily bar that was the breakout bar must open above the open and the close of the previous daily bar to match this characteristic of the 5/17/2023 bar.
• The daily bar that was the breakout bar must close between 0.81% and 1.61% above the close of the previous bar since the 5/17/2023 bar’s value for this metric was 1.21%.
• The daily bar that was the breakout bar must close between 0.30% and 1.10% higher than its open since the 5/17/2023 bar’s value for this metric was 0.70%.
• A position is not entered if the strategy is already long.

The strategy closes the long position after seven bars, which was the same number of bars that traded in a narrow range prior to the 5/17/2023 bar.

A backtest of this NinjaTrader® NinjaScript® strategy was done over the entire history of daily bars of SPY in NinjaTrader®, which goes back over 25 years, using a commission of $4.95 per trade and a slippage of $0.02 per share. The entry criteria listed above occurred 26 times, with the first trade in the backtest being entered on 7/2/1996 and the last trade being exited on 6/16/2021.

According to this NinjaTrader® NinjaScript® strategy’s backtest results in the NinjaTrader® Strategy Analyzer, this strategy’s backtest indicated that trading these 26 daily breakouts in the past, using the entry rules and exit rule as described, would have actually led to a small loss. By running a backtest, we were able to determine that the breakout of the 5/17/2023 SPY daily bar should not have been considered particularly bullish and should not have been the main reason why a trader entered a long trade when the market opened on Thursday, 5/18/2023 and exited seven bars later. You may have had other valid reasons why you should have bought SPY on the open, but the breakout that was tested with the assumptions and thresholds described in this article should not have been one of them.

We invite you to download the Quagensia N Edition strategy on this page, open it in Quagensia N Edition, generate its NinjaTrader® NinjaScript® strategy code and test it in NinjaTrader® 8 or NinjaTrader® Desktop where you should be able to verify our results. You can explore the effect of tightening or loosening the thresholds for the entry criteria by changing the values of the strategy’s input parameters in NinjaTrader®. Finally, if you have a valid paid license for Quagensia N Edition you can change the Quagensia N Edition strategy’s logic without code to more closely match how you see the market action of the 5/17/2023 SPY breakout.

This article is an example of algorithmic journalism. We invite content creators to use a Quagensia Desktop Application to create their own articles based on tested trading ideas. And we invite traders to use a Quagensia Desktop Application to test their ideas before they trade them.

This trading idea is subject to the disclaimers in our Terms of Service.