A SPY Setup Suggesting A Short-Term Upside Edge

Friday’s action caused SPY to close in an interesting position. Traders could look at the chart and say it is “short-term oversold” due to the fact that it closed at a 5-day low for the 1st time in a while. They might also say it is “short-term overbought” since it closed above its 10-day moving average. I have found that edges often arise when something is overdone in one timeframe, but overdone in another direction in another timeframe. The study below looks at the current discrepancy along with the fact that it was the 1st 5-day low in at least 2 weeks.

2018-04-22

Results here suggest a solid edge over the next 1-10 days. And half of the gains have been realized in just the 1st 3 days. Traders may want to keep this in mind as they establish their bias over the next few days.

 

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April Opex Week’s Bullish Tendency

Last month I shared a table that showed performance of opex weeks by month. April was one of the most bullish. The study below looks specifically at April opex week. I last showed it on the blog in 2016. Results are all updated.

2018-04-15

The numbers are impressive, and suggest a bullish edge. Traders may want to keep this in mind the first few days of this week.

 

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CBI To Remain At 0. No Edge Apparent Despite Potential 50-Day Low Close.

The Quantifiable Edges Capitulative Breadth Indicator (CBI) is a tool I have spoken about quite a bit lately, since we have seen a few recent spikes in the CBI. In the Quantifiable Edges CBI Research Paper I published last month (download information here) I examined the CBI a multitude of ways. Below is an excerpt from a section of the paper where I looked at 50-day lows and different CBI levels.

 

By combining CBI readings with a market that is hitting new lows, the results are often even more interesting. Let’s consider some studies that examine how the market has performed after hitting new lows, and break down those returns by CBI readings. The first one looks at performance following 50-day low closes when the CBI is 0.

2018-04-02

Other than perhaps a very quick bounce this has not been a favorable setup for the bulls. From 1-4 weeks out the results have nearly all been net negative…Lastly, let’s look at high CBI readings of 10 or above.  {Note: I removed a couple of studies here on the blog for brevity. The full suite can be seen in the report.}

2018-04-021

These are by far the most appealing results, from Day 1 right through day 20. And 20 days out there was just one loser and it only lost 0.2%. Meanwhile, the average gain of the other 18 instances was a sizable 5.7%.

Unfortunately for bulls, today is highly likely to finish with a CBI of 0. So no strong edge is suggested if we do finish at a 50-day low. I do see some other indications of a possible bounce, but the CBI certainly is not one of them. I will be sure to alert readers if it does spike in the coming days.

 

To learn more about the CBI, check out the CBI Research Paper.

 

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CBI Returning To Neutral & What That Suggests

The Quantifiable Edges Capitulative Breadth Indicator (CBI) has been in play lately, but todays Holy Thursday rally is taking it down from 7 yesterday to likely 0 at the close this afternoon.

 

After alerting followers of the move to zero, I received a few questions asking about SPX performance following such drops in the CBI. I looked at it a number of ways. Results are pretty much what I expected, but some of you might find them disappointing. Below is an example of one test I ran looking for an edge.

2018-03-29

I don’t find the numbers here to be compelling for either the bulls or the bears. This is not terribly surprising, since 0 is considered “neutral”. This does not mean that there is no edge to be found in the market at the moment. It does mean that traders will need to use tools other than the CBI to identify an edge. Capitulative selling that was evident a few days ago has been exhausted. We’ll need to wait a while until the CBI comes back into focus.  In the meantime, I’m sure we will find hints elsewhere.

 

To learn more about the CBI, check out the CBI Research Paper.

 

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Holy Bullish Thursday!!

Stock market performance leading up to and around many holidays has often been bullish. This is something I have written about several times over the years. Holy Thursday is one such day that has done quite well. I have shown Holy Thursday stats a few times in the past. The chart and statistics below are all updated through last year.

2018-03-28

Despite the last 2 years losing some ground, the stats remain impressive, and so does the overall curve.  Perhaps the most impressive stat to me is that the up days have been 2.3x the size of the down days.  This suggests people will often go into the long Easter weekend with enthusiasm. It will be interesting to see if Holy Thursday bullishness starts to reassert itself in 2018.

You can see many more seasonal studies like this by clicking on the “Seasonality” category on the blog. Another great source of seasonal ideas is @JayKaeppel‘s book, “Seasonal Stock Market Trends”.
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A CBI of 9 & SPX at a 20-day Low

Over the weekend, I decided to run some new studies based on the Quantifiable Edges Capitulative Breadth Indicator (CBI). As I tweeted out near the close, the CBI reached 9 on Friday. Historically, I have viewed 10+ as the level that really gets me excited about a potential bounce. I decided to examine market performance other times the SPX closed at a 20-day low and the CBI reached a level of X of higher. In the study below I hold the market position until the CBI returns to 3 or lower.

2018-03-25

As you can see, results when it hits anywhere 7 or higher are fairly reliable. I have highlighted 9 above since that is the current setup. I also generated a profit curve using 9+ as the entry trigger.

2018-03-26

The curve certainly seems to support the idea of a bullish edge. I noted the last loser on the chart, which occurred in June of 2011. While historical odds would look a bit better with a slightly higher CBI, the current reading of 9 has been enough that a bounce was often seen. We may already be seeing that bounce begin this morning. For those that would like to learn more about the CBI, I recently wrote a detailed research paper about it. Additionally, there are a large number of studies about the CBI that can be found on the blog.

 

 

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When NDX Has Closed At A Multi-Week Low On A Fed Day

As far as Fed Days go, Wednesday was a disappointment. Not only did it fail to rally, but it also left SPX and NDX at 10-day lows. With Fed Days typically bullish, finishing at a 10-day low is quite unusual. The results table below is part of a larger examination I did in last night’s Subscriber Letter (click here for free trial). It looks at prior Fed Day instances of 10-day low closes for NDX when it was in a long-term uptrend.

2018-03-22

The numbers are quite impressive, and point to a move higher over the next several days. The suggestion is that the Fed Day decline is often an overreaction, and that the market is likely to bounce. NDX looks like it is going to get off to a rough start on Thursday, so it is going to take a momentum shift if we are going to see historical odds play out this time. But seeing some additional selling is not unusual. Every one of the 16 instances saw a pullback of at least 0.6% from the entry price at some point over the next 7 days. I’ll also note that every instance saw a run-up of at least 0.8% over the next 7 days. And the lone loser after 7 days actually experienced a run-up of over 3% before turning down. This study, though limited in its scope, suggests the NDX is setting up for a bounce over the next several days.

 

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Fed Day Performance In Rising vs Falling Rate Environments

The Fed holds policy meetings 8 times per year. Many times since starting Quantifiable Edges in 2008, I have discussed the (primarily bullish) edge that exists on the final day of these meetings when the Fed releases its statement and announces any new policy changes. One question I often get about Fed Days is whether it matters if we are in a rising-rate environment, or a declining-rate environment? This is something I explored in the Quantifiable Edges Guide to Fed Days several years ago. And when it comes to actual Fed-Announcement Day performance, I found the results to be somewhat surprising. The 2 studies below are updated from the book. They break down Fed Day performance by environment.

2018-03-20-1

2018-03-20

It does not seem to matter one bit whether the Fed has been accommodative or not. Fed Days have shown a bullish bias either way. You’ll note the “% Profitable” and “Average Trade” numbers above are almost identical!

A lot of different factors DO matter when examining Fed Day performance. And you can learn about many of them on the blog or in the book. Interestingly, one factor that does NOT seem to matter, is whether the Fed is generally dovish or hawkish.

Have a happy Fed Day tomorrow!

 

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When Bullish Opex Weeks Fail To Play Out

I discussed last weekend that monthly option expiration (opex) week is typically a bullish week, especially during the months of March, April, October, and December. Obviously, the bullish tendency did not play out this past week. So does this mean the bullish tendency may be delayed a week? Or is the market not doing what it is “supposed” to a sign that it is likely to continue lower? Or neither? I constructed some studies to find out. This 1st one looks at instances like we are currently experiencing where typically bullish opex weeks fail to deliver.

2018-03-18

The numbers here all point towards an upside edge. The edge improves as we look out from 1 to 5 days. But how does this differ from performance following instances that saw the bullish opex week tendency play out? For comparison, I flipped that requirement and have shared those results below.

2018-03-18-2

So without the opex-week selloff, the following week has not shown a bullish tendency. Based on all this, it appears the bullish tendency has typically arrived late, and it portends a bounce this upcoming week.

Hat-tip to @McClellanOsc for the idea to test!

 

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Introducing The Quantifiable Edges CBI Research Paper!

When volatility spikes and the market goes into a freefall, anticipating a reversal can be very difficult, but also very rewarding. My favorite tool for capturing potentially monster reversals under such stressful market conditions is the Quantifiable Edges Capitulative Breadth Indicator (CBI).

 

Now, after sharing studies for 10+ years about the CBI, I have put together a detailed research paper on it! The paper includes updated and new studies, as well as comprehensive stats and charts of every significant CBI spike since 1995.

 

The research paper is available for free download by all registered users at Quantifiable Edges. (Anyone that has ever bought anything or signed up for a free trial or registered for our free downloads. In other words, anyone with a username and login.) If you do NOT qualify, but would like to get a copy of the CBI research paper, you may sign up for a Free Trial, or register for our Free Downloads.

 

If you already have a username and login at Quantifiable Edges, just login and follow the simple instructions below to download the Quantifiable Edges CBI Research Paper. I hope you find it to be a useful resource as we monitor CBI readings and market action going forward!

2018-03-11

Today’s Employment-Sparked NASDAQ Rally Appears To Be A Short-Term Bullish Indication

The employment report has helped to spark a big rally today, and the NASDAQ is hitting new all-time highs. I looked back at other instances where the NASDAQ spiked higher and closed at a new high on the day of an employment report. The results I saw were compelling. Here are the list of instances along with their 5-day returns:

2018-03-10

With the only loser closing down 0.06%, the stats are completely lopsided for the bulls. Employment-sparked momentum leading to new highs like we are seeing today has seen positive short-term follow through in the past. This certainly appears worth keeping in mind as traders ready for next week.

Hat-tip to @McClellanOsc for the idea to test!

 

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Options Expiration Week Performance By Month – 2018 Update

Next week is monthly options expiration week. I’ve noted several times over the years that Op-ex week in general is pretty bullish. March, April, October, and December it has been especially so. S&P 500 options began trading in mid-1983. The table below is one I have showed in March each of the last several years. It goes back to 1984 and shows op-ex week performance broken down by month. All statistics are updated.

2018-03-09

While December has been the most reliable, March op-ex week has seen the most in total gains. Traders may want to keep this in mind for next week, and perhaps in future months as well.

 

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A look at the February selloff and the Quantifiable Edges CBI

As the early February volatility explosion unfolded, it was difficult to anticipate when the selling would reach a level that the market would find a bottom (at least temporarily). The selloff exceeded historical levels based on % changes in range and volatility increases. One indicator that once again demonstrated its worth was the Quantifiable Edges Capitualtive Breadth Indicator (CBI). The CBI quickly spiked to 25 and then continued up as high as 31 in the ensuing days. I noted the initial spike here on the blog, and tweeted (@QuantEdges) updates over the following days and weeks.

 

One CBI-based strategy I have shown in the past involves going long the S&P 500 when the CBI spikes to 10 or higher, and then exiting the position on a return to a “neutral” CBI level of 3 or lower. The chart below shows how this approach would have worked out during the February market.

2018-03-04-1

In this case, the selling was not over, and another brief leg down would have had to be endured to take advantage of the strategy. But those that utilized the edge and showed the fortitude to hold until the CBI again turned neutral were again rewarded.

 

Below are updated hypothetical stats for the strategy.  ($0 commissions assumed.)

2018-03-04-2

Numbers here are quite impressive and suggest a strong bullish edge. Lastly, the profit curve:

2018-03-04-3

The strong, steady upslope serves as some confirmation of the bullish edge suggested by the numbers.

 

Even before starting Quantifiable Edges in 2008, the CBI was one of my favorite indicators for identifying selling capitulation that is highly likely to be followed by short to intermediate-term market rallies. And it has always been a staple at Quantifiable Edges. In fact, the 3rd post I ever did was about the CBI.

 

Later this week I will be releasing the most detailed analysis I have ever done of the CBI. I will show charts of market action during and after every spike since 1995. I will share a detailed spreadsheet with breakdown and stats of all such CBI spikes. And I will show many additional studies as well as strategies traders can incorporate into their own methods. And it will all be free of charge. I’d encourage traders to keep an eye out for it.

 

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SPX Performance After Three 1% Down Days

Last night I looked at 3-day pullbacks a number of ways in relation to current market conditions. I thought blog readers might find the following interesting.

 

I noted that SPX closed lower by greater than 1% for the 3rd day in a row on Thursday. In the past, that has often been followed by gains the next day. But times where is wasn’t…well, take a look at the chart below.

2018-03-02-1

Good chance we bounce in the next few days. Some chance things get a whole lot worse.

 

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