A 20-Day Closing High On A Follow Through Day (FTD) Has Provided A Bullish Edge

One notable bit of evidence that emerged on Wednesday was the fact that it qualified as an IBD Follow Through Day (FTD). I have done a lot of research on FTDs over the years. Much of that research can be found here on the blog. Unusual about this FTD is that it occurred in conjunction with SPX making a new 20-day high. This triggered the study below, which I last discussed in the 10/19/2011 blog.

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Results here are impressive over both the short and intermediate-term. To get a better feel for the short-term returns I have listed the instances below.

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The run-up to drawdown ratio here is quite impressive. I’ll also note that 10 of the 13 instances went on to have “successful” rallies. (“Success” means it either hit a new 200-day high or at least rose 2x as much as it had already risen off the bottom.) The 3 instances whose rallies did not succeed (circled in red) all saw run-ups of at least 2% before they eventually rolled over and made new lows.

 

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Midterm Elections Have Not Provided A Reliable Short-Term Market Edge

Today I decided to look at SPX performance following past mid-term elections. I did not find much that suggested a strong edge. Below is a look at results since 1970 following mid-term elections.

2018-11-04-1

The numbers suggest perhaps a mild inclination for the market to “celebrate” the results on Wednesday. After that there does not appear to be a strong tendency in either direction. Below are the 1-day instances listed out for those that are interested.

2018-11-04-2

 

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This Incredibly Bullish Seasonal Period Has Just Begun

With the calendar moving from October to November, it has now entered its “Best 6 Months”. The “Best 6 Months” tendency was first published by Yale Hirsch, founder of the Stock Trader’s Almanac, in 1986. The concept behind the “Best 6 Months” is simple. Seasonality suggests that over the last several decades the market has made a massive portion of its gains between November and April. And during the remaining 6 months, it has generally struggled to make headway.

Additionally, the market shifted into the 3rd year of the Presidential cycle. Here at Quantifiable Edges we measure the Presidential Cycle years from November – October rather than January – December. That allows the cycle years to better match up with the elections, which take place in early November. It also makes for easy evaluation when combining it with the “Best 6 Months” cycles. The 3rd year of the Presidential Cycle has been a strong one.

When the Best 6 Months and the 3rd Year of the Presidential Cycle have been active at the same time, the results since 1960 have been outstanding. In the table below I have listed out each instance.

2018-11-01

All 14 instances since 1960 have shown gains. Of course there have been drawdowns along the way. The 1974-75 period saw SPX pull back 13.2% from its October closing price before rebounding and finishing April 18.1% above the October closing price. And in 2002-03 there was a 10.85% drawdown from the October close before finishing April 3.5% above it. But overall the stats have been incredibly lopsided. The average 6-month period saw a net gain of 15.5%. The average run-up (from the October close) was 17.7% and the average drawdown just 3.1%. Long-term seasonality does not get any better.

Much more information is available on these indicators in the Quantifiable Edges Market Timing Course. (Get 30% off with the coupon code “November” between now and Monday, 11/5.) Also included in the course are price-based indicators that combine very well with the seasonals, along with possible long-term approaches to utilizing different combinations of price and seasonality. Code, supporting spreadsheets, and access to pages with indicator updates are also included in the course.

 

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Elevated CBI And New SPX Low Carry Bullish Implications

As we approached the close I noted on Twitter (@QuantEdges) that the Quantifiable Edges Capitulative Breadth Index (CBI) was starting to spike. And the closer we got to 4pm EST, the higher it got. At the end of the day, the CBI finished at 10, which is a level I have long considered bullish. The combination of a 10+ CBI and a 50-day closing low is something I have shown in the past to be bullish for both the short and intermediate-term. The study below is taken directly from the CBI Research Paper, which I recommend checking out if you have not read it before, or reviewing some of the tables and charts to get a deeper understanding of market action both during and after such broad, strong, selloffs as we are currently seeing.

2018-10-25

These are very 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%. The CBI is suggesting we are in a bottoming process right now, and that the market is likely to move higher in the coming days and weeks.

Update: Below is the full list of instances along with their 20-day returns for those traders that wish to see the details.

2018-10-25-2

 

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Why Tuesday’s Strong Reversal Suggests A Short-Term Edge For The Bulls

The market tested its recent lows on Tuesday, and that may have washed out the sellers, at least temporarily. Tuesday did not see a “turnaround” with a higher close, but it did manage to rally strongly off the lows. And the big gap lower, reversal upwards and higher close triggered a few interesting Quantifinder studies. The study below is one example of what I am seeing.  It simply looks for gaps to 50-day lows and partial reversals.

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These numbers are impressive, especially over the 1st couple of days. Below is a look at a 2-day profit curve.

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The move from lower left to upper right serves as some confirmation of the edge implied by the numbers. This suggests the rebound Tuesday was strong enough, and from a low enough level, that there is a good chance the market will continue to rally over the next few days. Short-term traders may want to take this into consideration when establishing their trading bias.

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A Look At How Fridays Create The Most Reliable Bounces

Friday is generally not terribly reliable in being a day where the market bounces from a low. It is one of the least popular days for this to occur (along with Wednesday). But a potential positive about a Friday bounce is that when they do occur, they tend to be the most reliable moving forward. The below tables look at performance following a bounce from a 50-day low. The 1st table looks at performance 1 day later, and the 2nd table looks at performance 5 days later.

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2018-10-14-2

In both cases we see that Friday is the day of the week that that shows the strongest odds moving forward. This is true whether you are looking at Net Profits, % Profitable, Win/Loss Ratio, Profit Factor, or Avg Trade. While Tuesday is the most likely day to see a bounce occur, Friday is the day where that bounce is most likely to stick. We’ll see if the bounce that started this past Friday can stick this week.

 

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Back to Back 50-day Lows and Extremely Low RSI(2) Readings

Strongly oversold markets often contain a short-term upside edge. Of course oversold can always become more oversold. Wednesday took the SPX down to a 50-day closing low. Additionally, many short-term price oscillators, like the RSI(2) showed extremely low readings. Further selling on Thursday meant another 50-day low and even lower readings. The study below appeared in the Quantifinder on Thursday afternoon. It looked at other times the SPX posted back-to-back 50-day lows and extremely low RSI(2) readings.

2018-10-12

Instances are a little lower than I typically like, but the numbers are incredibly bullish and seem worth noting. I am seeing several studies right now all suggesting a bounce is highly likely in the next few days. This study is just one such example.

 

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The Weakest Week – 2018 update

From a seasonality standpoint, there isn’t a more reliable time of the year to have a selloff than this upcoming week. In the past I have referred to is as “The Weakest Week”. Since 1961 the week following the 3rd Friday in September has produced the most bearish results of any week. Below is a graphic to show how this upcoming week has played out over time.

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As you can see the bearish tendency has been pretty consistent over the last 57 years. There was a stretch in the late 80’s where there was a series of mild up years. Since 1990 it has been pretty much all downhill. Below is a table showing results of buying Sept. op-ex Friday and then selling X days later from 1990 – 2017.

2018-09-24-2

The consistency and net results appear quite strong. I note the only instances that didn’t post a lower close at some point during the following week was in 2001 and 2017. The 9/11 attacks certainly made for unusual circumstances in 2001, and 2017 did not see a decline, but it only rose 2 points, so it was not much of a victory for the bulls.

 

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SPX Near Monthly Highs With RUT Near Monthly Lows

I have spoken a fair amount lately about the “split” market, and how that has historically been followed by declines. But not all kinds of splits are bad. Wednesday we saw the SPX rise while the RUT closed lower. That is not unusual on a 1-day basis. But it has now been several weeks in which they have been heading in opposite directions. RUT closed in the bottom 25% of its 20-day range on Wednesday while SPX closed in the top 25% of its 20-day range. The study below looks at other times where this occurred.

2018-09-20-1

It appears the lagging RUT in similar circumstances has not been a drag going forward, and that SPX has continued to flourish. Below is a look at a profit curve with a 40-day holding period.

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The strong, steady upslope serves as some confirmation of the upside edge. This adds to the crosswinds I am currently seeing for the intermediate-term. Evidence seems to be piling up on both sides of the bull/bear debate. But this study is one for the bulls.

 

 

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Our Extremely Split Market & What That Has Meant Historically

One indicator that has gotten some play in the news lately is the Hindenburg Omen. In last weekend’s subscriber letter I discussed the Hindenburg Omen signal in detail. (Click here for a free trial.) A core premise behind the Hindenburg Omen is that there are a large number of stocks hitting both new highs and new lows. This indicates a split market. When this has happened for multiple days within a short time period, it has often led to market declines. Friday marked the 9th day in a row that NYSE new highs and new lows both exceeded 2.4% of total issues traded. The study below is from the Thursday night subscriber letter, and it looked at streaks of 8 days or more. (I’ll note I also took a quick look this weekend at streaks of 9 days, rather than 8. It barely changed anything.)

… But tonight I simply wanted to look at streaks of these type of split market conditions on their own. With data going back to 1970, I looked for other instances of 8 consecutive days with both new highs and new lows exceeding 2.4% of total issues. Results are below.

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There have not been many instances, but the returns after the ones so far have been quite bearish. Below is a list of all the instances assuming a 25-day holding period.

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Three of the six instances occurred in 1972. So with just 3 instances since 1972, I am not using this study to generate short-term expectations. But I thought results were intriguing enough to merit a mention. I also reduced the % requirement to see if that would provide some additional instances. Below are the 25 day-results for a 2.2% minimum.

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This does not look any better. How about a 2.0% requirement?

2018-09-16-4

Even the lone winner here had an 8.4% decline before turning slightly positive. Bottom line appears to be that having such a split market as we are currently seeing is quite rare. And historically it has not been a good thing for the market.

 

 

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New Highs On Low Volume During August

SPX closed at a new all-time high on Friday. But NYSE volume came in at the lowest level since mid-July. Low volume at new highs can sometimes be a negative. Of course August frequently has low volume as many market participants are on vacation and not trading as actively. So I decided to look back at other times the SPX made a long-term high on light volume during the month of August. Results were bearish from 1-15 days out. The downside was generally realized over the next 3 days, though. Below is the list of instances along with their 3-day results.

2018-08-24

It appears these low-volume August moves to new highs have not seen short-term follow-through momentum in the past. The number of instances is low, but all 6 saw the market lower 3 days later. So perhaps it is worth some consideration when determining your market bias over the next few days.

 

 

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Pullbacks Heading Into Opex Week

Opex week often carries some bullish seasonality. Pullbacks into strong seasonal periods will often offer substantial edges. The study below utilizes this concept and examines pullbacks of at least 3 days just prior to opex week.

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Numbers here are strong, and suggest a possible upside edge. Of course, August opex week has NOT been great. (Click here to see opex week broken down by month.) So that generates the question of whether the above study would be effective in August. Below are the instances that have previously occurred during August.

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There are only 3 instances, so you cannot draw any solid conclusions. But they do not suggest that August offers any kind of problem for the 1st study.

Traders may want to keep this information in mind as they consider their market bias over the next couple of days.

 

 

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NDX Leader Performance Over Several Weeks After Large Gaps Down (FB Follow-Up)

This is a follow-up from my FB post last night. Traders that looked to take advantage of a possible bounce from today’s open have seen moderate gains so far today. So what are the chances FB continues to bounce over the next several days and weeks? I re-looked at the study from last night, and examined how the other 9 instances performed over the next month.

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The chances for a continued bounce do not appear very good. Based on the small sample of 9 instances, gains for the next month actually topped out by the end of the entry date. You can see total gains and most stats above are strongest by simply selling the 1st bar. Of course these results should be taken with a grain of salt, since they were generated on a small sample size, in a different market, and in different stocks. But this one admittedly narrow view is not encouraging. And while it is not enough information to make a trade decision on, I thought traders would find it interesting.

 

Note: Tests were run on Amibroker using Norgate data.

 

 

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A Look At Past NDX Leaders That Gapped Down Big (For FB Traders)

After the market close on Wednesday, Facebook (FB) released earnings, and the news and future outlook was not viewed well. After closing at an all-time high on Wednesday, it traded down in excess of 25% in the after-hours. So it seems certain it will be opening Thursday with a sizable gap lower. I decided to take a look back at other leading NDX stocks that suffered large gaps down. I first checked for all stocks that:

  1. Closed at a 252-day (1-year) high yesterday
  2. Were a NDX constituent at the time
  3. Opened over 15% below yesterday’s close

Looking back to 1993, I found only 2 examples. They are shown below with results of buying at the open and selling the close the same day as the gap down.

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Amazingly, there have been only 2 instances in the last 25 years. Both saw sizable intraday bounces. Loosening the criteria to require only a 10% gap down yielded the following results.

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Most of the gains here were thanks to the COMS and VRTX trades from above. I also decided loosen the criteria further and require just a 5% gap down from a 1-year high. Below is a results summary.

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Exactly 100 instances and about even as to whether the stock bounced or sold off further. But winners outweighed losers by a sizable amount, making for strong net gains for the study.

Lastly, I went back to the 15% gap down requirement, but I loosened the other criteria so that a stock simply had to close above its 250-day moving average and within 5% of its 252-day high. Those instances are all listed below.

2018-07-26-4

It appears the overall tendency when a leading NDX stock gaps down a sizable amount from a high area is for the stock to rebound some between the open and the close. But volatility and variance is very high. Traders need to decide whether the upside edge and the potential reward are worth the risk when considering trades in FB on Thursday.

Note: Tests were run on Amibroker using Norgate data.

 

 

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Quantifiable Edges Big Time Swing System Posts Moderate Gain For 1st Half Of 2018

Despite a difficult trading environment in the 1st half of 2018, the Quantifiable Edges Big Time Swing System has managed to continue its winning ways utilizing SPY signals. I’ve updated the Quantifiable Edges Big Time Swing System overview page with results through 7/6/2018. The system only averages about 1 trade per month, so I generally only update it on a semi-annual basis. Through 7/6, there were only 4 trades triggered for SPY. Two of them closed positive and two down for a net gain of about 1.0% (including dividends, commissions of $0.01/share, and an assumed interest rate on cash of 0.1%). While that is well off the average pace for the system, it is nice to see it continue to make new highs even when it underperforms its norms. The QE Big Time Swing System has yet to post a losing year in SPY.

The system provides easy to follow mechanical rules, with no black box component. The standard parameters are not optimized, and have never been changed since the system’s release in 2009. There are only about 11 trades per year averaging 7 trading days per trade. To make it even easier, all entries and exits are either at the open or the close. And to be sure you have everything set up properly, traders may follow the private purchasers-only blog that tracks SPY signals and possible entry/exit levels.

For system developers looking for a system that they can use as a base to build their own system from, the Big Time Swing is an attractive option. It is all open-coded and comes complete with a substantial amount of background historical research. And since it is only in the market about ¼ of the time, it can easily be combined with other systems to provide greater efficiency of capital. Once you’re ready to try and improve the system yourself you can also refer to the system manual or the August 2010 purchaser-only webinar – both of which discuss numerous ideas for customization.

The system has proven its worth since its release over 8 1/2 years ago. Don’t wait another year to determine if the QE Big Time Swing System is appropriate for you. For more information and to see the updated overview sheet, click here.

If you’d like additional information about the system, or have questions, you may email BigTimeSwing @ Quantifiable Edges.com (no spaces).