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BHP Returns by %B Decile

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26 October 2008
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Decided to throw up a bit of quantitative analysis I did on the weekend.

First of let's start with a chart of BHP, plotted alongside a Bollinger(20,2)

Selection_004.png

So the first step after acquiring the a years worth of daily closing prices for BHP was to calculate daily returns, as well as the 20 day average and 20 day stddev.

From there I calculated the usual Bollinger %B values and lagged them by one period. Charting this will allow me to see what sort of daily returns are associated with different values of yesterdays %B.

I'm not including all of the analysis here, but happy to share the below charts so people can get some ideas.

Selection_003.png

You can see in the top chart the "average one day return in %", split into deciles based on yesterdays reading of %B. "-20" for example, means the average returns for all days where yesterdays %B was > -20 and < -10. "90" for example means the average returns for all days where yesterdays %B was > 90 and < 100 (you can see from the first chart that there were no closes above the upper bollinger for the last year so there were no readings >=100).

The bottom chart displays how many occurrences of each %B decile there were.

Interpretation, a few things seem noteworthy immediately: returns at extreme %B readings tend to correspond on average to overbought/oversold. If yesterday %B was >70 and BHP is in a down-trend then intraday returns to the short side are pretty decent. Alternatively, breakouts of the lower bollinger band (%B <0) have provided good long side returns over the last year. You can also see the high frequency of days in the 20-40% range, a definite indication of long term downtrend if most of the bars over the last year are below the 20SMA.
 
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