Mouthwash Strategy Signals Short

This Strategy based on the proprietary Mouthwash breadth indicator fired off a short signal today. I have been trading and using this strategy for two years quite profitably, and with the performance statistics shown below, I take the signals with no hesitation.

This system uses a breath indicator to enter positions Long and Short on SPY. Back testing and subsequent trading has shown this orthogonal indicator (it is not derived from the price action on SPY) to be a considerably more reliable Overbought/Oversold indicator then traditional OBOS indicators. The indicator continued to perform brilliantly in the out of sample trading that included the 2008 market meltdown. The chart below shows the indicator and some recent trades.

I took a partial position short at the close, and will use a scale-in strategy to build a full position over the next few days. The system will exit based on either volatility based target, a volatility based stop, or a close below the 8 day moving average (on short trades). There is also a time stop of 7 trading days (on short trades).

The bottom line is there high probability of a large down day in the near future. Historically, many of these signals turn into larger moves. For now the indicator says get positioned short, and why argue with performance...

Good Trading,
KW