Market regime filter (SPY & QQQ)

Status: testing. This came out of the October 14 session and is being tracked before it gets promoted to a standing rule. Full write-up.

The idea

Most stocks follow the market. Pullbacks and breakouts in individual names work far better when the broad market is healthy. So the first question each day isn't "what should I buy?" but "is this a market I should be buying in at all?"

The check

Look at SPY and QQQ against their daily 8 EMA, 21 EMA, and 50 SMA:

1. Above all three, prior day closed above the 8: green light. Trade breakouts and pullbacks in strong names, or trade the index itself.
2. Below the 8 and the 21: stand down on new individual-stock risk. Watch which names hold up, since they're the leaders for when the market turns.
3. The 21–50 cushion: if the 21 EMA sits only slightly above the 50 SMA, a sharp drop can push the 21 below the 50, and recoveries from that are less clean. Don't buy pullbacks when the cushion is thin. When there's a healthy gap, a pullback to the 38.2% or 50% retracement can be bought, preferably in the index itself, with options to define risk.

Open questions

• How thin is "thin"? It needs a number before this becomes an active rule.
• Does it actually improve results? Trades taken against the filter should show it in the record.