Nasdaq Model

The Nasdaq model is an intermediate LONG-SHORT model which uses the Nasdaq’s breadth indicators to generate Buy and Sell Signals. I have backtested two different approaches of using the model: 1) Long Only and 2) Long-Short. The following analysis presents the data for both of these approaches.

MODEL SIGNALS

The chart above shows the Nasdaq ETF QQQ and the Model signals.I have backtested the model since January 01, 2007.

LONG ONLY RESULTS

According to the backtest data, the best way to use the Nasdaq model is to take long positions when the model flips LONG and stay in cash when the model is SHORT.

The results of this approach are shown in the summary below. The strategy yielded an impressive 400% return since 2007. While the win rate is only 52%, the strategy is still profitable because the average winning trade is 5.2% compared to the -2.0% of the average losing trade. The strategy’s profit factor of 3.1, which is quite outstanding. Also, the strategy’s maximum drawdown is 17.8% (which is much better compared to the sell off recorded during the 2008 or 2020 crashes).

The Back-Test Results: Long Only Strategy

The Long-only Strategy Equity Curve

LONG-SHORT RESULTS

Using the strategy to enter both long and short trades is also profitable, however, generates much weaker results compared to the long only approach.

The long-short strategy return since January 3, 2007 is 113% compared to the 400% return of the long-only strategy. This is not surprising since the market has been mostly in a bull market since 2009.

The Back-Test Results: Long-Short Strategy

The Long-Short Strategy Equity Curve

Model Performance During Major Corrections

2008 Bear Market

2015 Flash Crash

2018 Correction

2020 Crash