Thursday marked the 2nd day in a row that SPY posted an unfilled gap up.  It also closed at a 50-day high.  The unfilled up-gaps are considered a sign of strength.  Unfilled up gaps can sometimes be seen as a sign of strength.  The study below examines whether this may be the case when the market is at an intermediate-term high.

The size of the follow-through isn’t terribly large, but it has been very, very consistent that some follow through was achieved.  This suggests a good chance at more upside in the next few days.

I will note that not every study I am seeing is bullish right now.  There is a bit of a mix.

When the market begins to get overbought it will often suggest a pullback is likely.  When overbought gets powered through then odds will sometimes shift from a pullback to a continuation of that move.  The last two nights I have seen some studies suggesting this scenario.  The study below is on that I have showed a few times in the past.  All stats are updated.

These results appear to suggest a pretty consistent upside edge over the next 1-3 weeks.  In fact, below is a profit curve showing just how consistent it has been over the years using a 10-day exit.

The first day of a bounce from an oversold condition can often provide strong hints about how the next several days are likely to perform. Weak bounces like we saw on Friday tend to have a much lower success rate over the following days.  The study below appeared in Friday’s Quantifinder.  It exemplifies this concept.

The numbers here suggest a decent downside edge that has generally played out over the next 3 days.

Thursday’s big drop moved the SPX strongly down through its 50-day moving average.  And it did so with both breadth and volume providing exclamation marks.  Such breaks of highly public support lines like the 50-day moving average can be notable (and it certainly drew attention on Thursday).  Some traders may view it as a change in trend.  And while it may be when looking out over a period of days, weeks, or months, the immediate 1-day reaction to such moving average breaks has typically been to bounce.  This can be seen in the study below.

The 15 for 16 record is very impressive, and suggests a good chance of the market closing higher today.  The average instance gained about 0.6% on the day.

After being strongly oversold the market has bounced back quite nicely the last 1½  days.  The effect has basically been to work off the oversold condition and leave several indices just a little above their 10-day moving averages.  In other words, it has been a quick trip from near-panic to fairly neutral.  Had the reversal not been so strong then the current upside potential would be a little better.  But since the move was so good (and I’m not complaining), it took out much of the upside edge.  I demonstrated this in last night’s subscriber letter.

There I looked at patterns similar to the current one where SPY made a 10-day intraday low on day 1 and then posted an unfilled gap up along with a close above the open (and above the 200ma) the next day, as it did on Friday.  I broke it down by instances that closed above the 10ma versus instances that closed below it.

So the current situation falls into the 2nd category.  Wins & losses are basically breakeven but the losses were a bit bigger.  I don’t view this as a bearish edge, but I think it demonstrates my point fairly well.  Had we not bounced so much, we would have a better chance of seeing more follow-though.  As is, it appears some caution and perhaps some profit-taking is warranted.

During long-term uptrends, reversals from 20-day lows like we saw on Thursday often succeed in delivering further gains.  This can be seen in the study below.

Results here seem to suggest a solid upside edge.  Have a great weekend!

The study below is one I last showed in the October 22, 2012 blog.  It examines large drops on Fridays.  Both the Crash of ’29 and the Crash of ’87 happened on Monday.  The Crash of ’87 is still remembered by many traders that are active today.  There was a strong selloff on Friday and then all hell broke loose on Monday.  But since then strong Friday selloffs have commonly been followed by bounces on Mondays.  Perhaps this is due to the fact that fear of a crash causes what might otherwise be an ordinary selloff to become exaggerated and overdone on Fridays.  Or perhaps it is just that people don’t want to hold over the weekend (and end up paying a premium not to).  Whatever the reason, the tendency to bounce has been very strong.  I’ve updated that 10/22/12 study below.

The numbers here are all very impressive and suggest a strong bullish bias.  Traders may also want to take notice of the note at the bottom of the table.  A failure to bounce today could be a warning that the market is not following historical norms and the environment is becoming more dangerous.

One indicator now providing some extreme readings that are typically followed by bounce is the TICK Tomoscillator.  The TICK Tomoscillator is the brain child of my friend and fellow market analyst, Tom McClellan of McClellan Financial Publications (click for Tom’s article on the indicator).  It uses the NYSE closing TICK readings to measure recent end-of-day sentiment.  I first introduced the TICK Tomoscillator in the 4/19/11 subscriber letter. For those that are not familiar with the TICK Tomoscillator, you may find a detailed description in the May 13, 2011 blog.  The TICK Tomoscillator posted an extremely low reading of -236.82 on Wednesday.  This pushed the Tomoscillator % Rank down below 1%, meaning Wednesday’s reading is among the lowest 1% in the last year. Subscribers may find Tomoscillator readings on the charts page every night.  Below you can see the Oscillator reading from Wednesday’s chart page:

The TICK Tomoscillator is also included in the QE Indicators/Functions for Tradestation package which can be downloaded by all subscribers for free.

The study below uses the Tomoscillator % Rank reading rather than just the raw reading. It was last seen in the 6/13/11 Letter.  I updated the results.

While instances are a little low we see what appears to be a strong inclination for the market to bounce immediately, and then eventually follow through with more upside.

For more TICK related research from Quantifiable Edges, you may use the link below:
https://quantifiableedges.blogspot.com/search?q=TICK

On Tuesday the SPY closed at a 5-day low for the 1st time in over 4 weeks.  This triggered the study below, which I last showed on the blog in December.

I also did a 4-week filter and though instances were greatly reduced the numbers looked much the same.  This study suggests a moderate upside edge and hints that persistent uptrends normally wither before they die, rather than turn on a dime.