Thursday the SPY managed to close at a 5-day low after 16 days without doing so. This triggered the study below, which I last showed on the blog May 25th.
Results here suggest a moderate upside edge. As I have said before, persistent uptrends normally wither before they die. They rarely just turn on a dime. It appears unlikely that SPY will be faced with a lot more selling before it manages to bounce.
Also, for related research with regards to the overnight, be sure to check out this post at OvernightEdges.
SPY has now gone 12 days without closing below its 5ma. The study below is one I’ve shown a few times over the years. It looks at other instances in which SPY has traded above the 5ma for at least 2 weeks and is now closing at a 10-day high. All results are updated.
In the past this setup has commonly been followed by a short-term pullback. The downside edge doesn’t last long, though. It seems to pretty much play itself out over the first 2 days. It is not an overwhelming edge, but it is still worth noting that SPY has been short-term extended for a while and the normal course of action at this point is a little pullback.
The International Traders Expo is going to be at Caesar’s Palace from November 20-23, 2013.
I’ve been to this expo a few other times and have really enjoyed it. I’m pleased to announce I’ll be back this year and giving a presentation on Friday, November 22 at 2pm.
The topic of my presentation will be “Quantifiable Edges for Short-Term Trading”. I’ll be covering a lot of my favorite studies and setups.
I hope to get the opportunity to meet many readers and subscribers at the Expo.
The VIX most often will trade opposite SPX. But Tuesday it rose along with it. That’s not too unusual for one day, but the same thing also happened Monday. This triggered the study below which was last seen in the 5/16/13 subscriber letter. I discussed the results in some detail in last night’s letter, and have shown the profit curve below assuming a 1-day holding period.
Overall the results appear to suggest a moderate downside edge for Wednesday.
Both the VIX and VXO (which is the old calculation for the VIX) closed well below their 10-day average for the 3rd day in a row on Friday. This action in VXO triggered a study that I last discussed here on the blog on January 7, 2013. The January instance followed the fiscal cliff deal at the end of last year, which was similar to the recent shutdown/debt ceiling debate. The study looks for stretches of 15% or more below the 10ma that have persisted for three days.
Based on the stats table there appears to be a downside inclination. I find the note at the bottom of the study to be especially interesting. Nearly every case has experienced an almost immediate pullback, but those that didn’t went without pulling back for a long time.
Many traders view reversals like Monday as a positive. The fact that the market overcame a gap down and was able to close in the black and near its highs is interpreted as a sign of strength. I’ve looked at days similar to this in the past and found that most often they are actually followed by short-term market weakness. Below is a study that looks at situations like Monday’s. It assumes a 1-day hold.
Eleven of 15 instances have closed down the next day. Of course that is a bit of a small sample size, and another concern is the fact that it has been over 4 years since the last instance. Still, I think the study is worth some consideration.
While the stock market is open on Monday, banks, schools, and the bond market are closed. (Government offices, too, but they are closed all the time these days.) In past years with the bond market closed, the stock market has done quite well on Columbus Day. Of course the most famous Columbus Day rally was in 2008 when the market gained over 11% after having crashed the week before. The last few years I showed that positive momentum leading up to Columbus Day has generally led to a positive Columbus Day. Columbus Day has been celebrated on the 2nd Monday of October since 1971. Below is an updated version of the Columbus Day study.
It is notable that the VIX spiked up 16% on Monday and closed at the highest level since June. In the past when it has closed at a high level on a strong move there has been a tendency for the SPX to bounce over the next few days. This can be seen in the study below from the 5/15/12 blog. (Stats are updated.)
The numbers appear compelling. Below is a profit curve using a 2-day hold.
This study has been persistently bullish for a long time and certainly appears worth consideration.
I took a look this morning to see how the market has typically reacted when faced with a big gap down on a Monday morning. Results below examine all gaps of 0.75% or more and measure the performance from the 9:30 open to the 4pm close.
Going into the day yesterday we had a Turnaround Tuesday setup. When the market is down 3 days in a row going into a Tuesday, it has had a strong tendency to bounce. Of course there have been instances over the years where it hasn’t. And yesterday was one. When it doesn’t rise on Tuesday what does that mean for Wednesday and beyond? Though it has appeared in the Subscriber Letter numerous times over the years, I have not shown the test below on the blog since August of 2012. It answers that “Wednesday & beyond” question.
Results here have been very strong over a long period. It seems the Turnaround Tuesday failure has typically been a temporary setback.
From a seasonality standpoint, there isn’t a more reliable time of the year to have a pullback than this upcoming week. Since 1961 (and over most every time period) the week following the 3rd Friday in September has produced the most bearish results of any week. In the 9/24/12 blog I showed a chart of SPX performance during this week since 1961. I have updated that chart below.
As you can see the bearish tendency has been pretty consistent over the last 52 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, and last year was no exception.
In “The Quantifiable Edges Guide to Fed Days” I discussed Fed Days that close at new highs. The basic finding was that when the market closed at a short-term high on a Fed Day, then it was likely to pull back over the next few days. But when it closed at a long-term high, then the rally was likely to continue. Below is a study from the Guide that last appeared in the 9/14/12 blog.
This suggests further upside is likely over the next 1-2 weeks.
Today’s movement will largely be due to the market’s reaction to the Fed. But I thought I would share a study that triggered yesterday that would perhaps have a bit more influence on a non-news day. It looks at days like Tuesday where the market gaps higher, never fills, and moves higher from open to close without making a higher high.
Implications here appear somewhat bearish, with most of the damage occurring on day 1. Traders may want to keep this pattern in mind for the future.
I am seeing a mix of short-term evidence at the moment. Having not shown anything bearish lately, I decided to share the study below, which triggered at the close on Monday and hints of a downside edge. It looks at times during long-term uptrends that the VIX closes up on the first day of the week while the SPX is closing at a 10-day high. Most of the time the VIX and SPX will trade in opposite directions. The VIX has a natural tendency to fall on Fridays and rise on Mondays. Due to this, Monday is the most common day of the week to see VIX rise in conjunction with SPX. This study appeared in the Quantifinder yesterday afternoon, and I have updated all stats below.
Results here certainly appear to suggest a day or two of weakness.
Of course Wednesday is a Fed Day, which brings about additional considerations. Ahead of this, traders may want to review many of the Quantifiable Edges Fed Day edges using the Fed Study label. Or for a more complete collection of Fed Day studies, check out The Quantifiable Edges Guide to Fed Days.