The last 3 days have created an interesting setup.  Thursday SPY made a new 50-day closing high.  Friday SPY posted an inside day.  And then Monday was another 50-day closing high.  This has only happened 16 other times since 1999.  Below is a list of all the instances along with their performance the next day.

Risk/reward here heavily favors the short side. The average drawdown is nearly 4 times the size the average run-up. Also notable is that every instance saw drawdown of at least 0.35% the next day, but only 1 of the 16 instances saw run-up of at least 0.35%.  Futures are up 2.5 points right now about an hour before the open, but there may be some headwinds based on this pattern.

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.