The MVCI Indicator Mystery is Solved

  • SumoMe

In a recent article I wrote about an indicator that I read about somewhere that I had written down only as “MVCI”.  Well, thanks to alert reader Gary, I have come to learn that I read about in the March 2013 issue of one of my favorite magazines, “Technical Analysis of Stocks and Commodities.”

MVCI stands for Modified Chartmill Value Indicator (if you try to say that three times fast you will come to learn why someone had the good sense to shorten it to MVCI.  But I digress).  I don’t know if he invested the indicator or not, but the article (actually it was a series of 3 articles) was written by Dirk Vandycke.  So kudos to him.

The first article was in the January 2013 issue which would have come out sometime in December 2012.  So let’s take a look at “real-time” performance since then.  First a quick (“quick” in this instance is roughly defined as “approximately 256 steps and calculations, give or take”) review of how MVCI is calculated.

The MVCI Indicator Calculations

OK, what follows is a list of a fairly lengthy set of calculations.  If you are not a “numbers geek” you might consider skipping down to the actual results.

A = Daily High

B = Daily Low

C  = Daily Close

D = 200-day moving average of daily closing prices

E = Daily True High

F = Daily True Low

G = Daily True Range (E-F)

H = Average Daily Price (A + B) / 2

I  = 15-day Average of H

J = 15-day Average of G

K = MVCI = (C-I) / (J * Square Root of 2))

L = Buy Signal Cutoff Value

M = # days to hold a long position

In (slightly long-winded) English, the indicator is calculated by:

1) Subtracting the 15-day average of the average daily price (defined as( [high]+[low]/2)) from today’s closing price, and dividing that result by;

2) The 15-day average of the Average True Range times the square root of 2

The default value for variable L is -0.51.  The default value for M is 22 days.

A “Buy Signal” occurs when:

1) The closing price for SPY is above its 200-day simple moving average AND;

2) The MVCI value for that day is -0.51 or less.  So when a buy signal occurs the trader buys SPY and holds it for 22 trading days.

If MVCI drops below -0.51 during these 22 days then the 22 day holding period starts again at 22, i.e., positions can be held for longer than 22 days.

MVCI Real Time

For this test we will start with the first buy signal after the article would have appeared.  That signal occurred on 12/28/2012. We will assume a long position in SPX when the indicator is on a buy signal and that no interest is earned while out of the market.  We will also compare these results to buying and holding SPX.

A graph showing the percentage growth of an initial equal investment in both the “system” I jut described and SPX buy-and-hold appears in Figure 1.  This chart extends from 12/28/2012 through 3/6/2015.1Figure 1 – % Growth using MVCI (blue) versus SPX Buy-and-hold (red) since 12/28/12

For the record:

MVCI % growth = +62.2%

SPX % Growth = 51.7%

Also, it is worth noting that at 11 buy signals (FYI: a “new” buy signal that occurs before an existing 22 day holding period is up is NOT considered a new signal, only an extension of the existing signal.  In other words, there were far more than 11 dates that triggered a “Buy” signal, but for our purposes they simply extend the existing position another 22 trading days) since 12/28/2012 have generated a profit.

Summary

So can we draw any conclusions regarding these of MVCI?  Maybe not.  Other than to say “so far so good” or “I like what I see.”  In any event, it looks to me like there my be something “there.”

And in the world of trading, “There” can be a pretty good place to be.

Jay Kaeppel

7 thoughts on “The MVCI Indicator Mystery is Solved

  1. Jay,
    I was wondering if you could clarify one thing about the 22-day extension upon a subsequent signal. From your write-up it looks like the 22-day holding period is extended as long as MVCI is less than -.51 on that day. In other words, even though the original signal has to satisfy the dual condition of MVCI less than -.51 and closing price is greater than the 200-day SMA, the extension signal only has to satisfy the former. Is that correct?
    Thx.

    1. That is correct, as long as MVCI is -0.51 or below the holding period is extended another 22 days.

      1. Ah, that had been one of the questions I wanted to ask you. In your original post you seem to imply that dual conditions need to be true for an extension. I would think when the market takes a dive, you wouldn’t want to be extending that 22-day period when the Close<MA200.

        By the way, since this is called the Modified Chartmill Value Indicator, you should be abbreviating it "MCVI", not "MVCI". :)

  2. Jay,

    Thanks for sharing this. It looks like a promising “buy the dip in an uptrend” system. I plan to code the indicators into Excel and test it. I have a couple of questions about the rules you tested, though:

    1) If the price falls below the 200 day MA, do you close the trade? Or is that only a concern when you enter the trade?

    2) Since the 22-day holding period can be extended indefinitely (i.e., any new occurrence of MVCI dropping below -0.51), do you see a danger of holding a trade into a big correction or bear market? It seems like you’d get repeated readings below -0.51 during a major fall. Of course, I haven’t tested it, so maybe it doesn’t behave like I think. I’m thinking of times like April 2000 and November 2007, where a bull market suddenly and violently turned into a bear.

    Thanks again.

    1. There are a few “issues” with a system like this and it is wise to address them in advance. In answer to your questions:

      1) The way I have it written in the spreadsheet the answer is “No”. In other words, as spelled out in the article the only exit method is for the holding period to expire. While the results are quite good overall you are correct in identifying his as a potential trouble spot. I have not experimented much with this system beyond the original version, but tightening up with some sort of stop-loss or “fail safe” exit seems like a good area for exploration.

      2) Essentially the same answer, i.e., yes there is a danger. The months you mentioned both saw drops of roughly 8% to 9+% in a month. Tough to take in the short-term, although in both of those cases a rebound occurred fairly quickly. Still, the key to using any trading method is to be comfortable in using it. Part of that comfort level comes from asking and answering the question “what is my worst case scenario and what do I plan to do about it.”

      Best to address these questions before starting to trade. Jay

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