Trading the EWA Pain Index

Trading the EWA - ETF Pain Index

Continuing the previous blog, we now want to look at the Australian Markets ETF code EWA.

Data output is used by modifying and creating data points within the Zephyr Associates Pain Index.

Below we will analyze the EWA historical data to come up with a trading strategy.

What we can see from the below chart is that at the time of writing the current draw-down is 25% due to the recent pullback. As we can see from the chart of EWA from a technical analysis point of view we can note the formation of a technical base pattern and also in a sideways consolidation pattern. As traders we accept the market can breakout any way, but let’s look at the numbers behind accumulating a position.

If we go through the data we can see that if we bought a contract at today’s price we have a risk of 67%-25% (current draw-down) = 42% based on historical data.

Changing the current price, to the high used in this data set, which is 3/9/2014 of $27.38 it provides us with the following data;

As we are currently trading at $19 and change this puts us in the third contract area of buying within the draw-down area.

Using the zephyr pain index from the high on the 3/9/2014 we can see that mean draw-down sits at 13%.

So now we move onto the numbers;

We can see from the data set below that at 25% and greater draw-down there is a probability of 7.86% that it will not reach or draw-down to that price.

Said differently the market has a 92% probability of rising from these levels based on historical data sets.

And all that can only be good news. So any pull back in this trading range is a highly probable buying opportunity or at the very least selling premium on the put side.