The market had gone quite a while without a pullback before the last 2 days. Monday, for the 1st time in a while, SPY closed at a 5-day low. The study below looks at at other instances of SPY closing at a 5-day low after going at least 2 weeks without one.
Results here suggest a decent upside edge.
It looks like we should see some strong action on Monday. News out of Cyprus has S&P futures down about 1.5% as I type this late at night. I decided to look back at other times that SPY was trading near a 200-day high and then gapped down over 1% overnight.
There have not been a whole lot of instances, but early indications suggest there could be more selling after the open. Below is a list of all the instances.
November 2009 was the only instance that put in much of a gain. And even that one failed to fill it gap at any point during the day. None of the others even bounced back as much as 0.6% on an intraday basis. If the market does open as weak as it appears it may at this point, then chances of a strong upside reversal don’t appear very good.
The study below looks at times the market closed at a high level just before options expiration. I last showed it on the blog last June. It generally has been a bad time for an overbought market.
The numbers here are fairly compelling and suggestive of a possible downside edge over the next week.
I’ve often spoke in the past of the importance of putting smaller patterns into proper context based on larger patterns or trends. In Sunday night’s Gold & Silver Subscriber Letters I showed some studies that exemplified this concept nicely.
The studies looked at the possible impact of 5 consecutive days of SPY making an intraday high. (This triggered at the close on Friday.) I broke it down to see all times the 5 higher highs were accompanied by a 50-day high versus times they weren’t. First let’s look at times where 5 higher highs occurred without a 50-day high.
Stats over the 1st few days suggest a possible downside edge. After 5 higher highs the market will often need a breather.
But what of times (like Friday) when a strong uptrend exists and the market is also making a 50-day high? Those stats can be found below.
Interestingly, the number of instances was exactly the same. But with an intermediate-term rally also occurring the tendency to pull back no longer exists. So 5 higher highs do not appear to suggest a bearish edge in situations like the one that set up a few days ago.
There is a possible seasonal influence that could have a bullish impact on the market this week. 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 on the blog the last few years in March. It goes back to 1984 and shows op-ex week performance broken down by month. All statistics are updated.
While December has been more reliable, total gains have been the largest during April and then March op-ex.
After the big reversal down last Monday the market has recovered quite a bit. What is interesting though is that it has closed within the range of that 1 bar every day for the last week. The bears failed to follow through on that selloff, but the bulls have not managed to move the SPX back out of the range either. This triggered the study below, which I last discussed a couple of years ago.
Over the last 24 years or so the SPX has burst higher out of this “failed selloff” and consolidation on a fairly consistent basis. But the implications are only bullish for a few short days. After that there does not appear to be a decided edge for either the bulls or the bears. I have a bit of a concern, though. Technically, the current setup does qualify. But the last 5 days have been a fairly nice rally. SPX just barely has missed breaking out of the range, and it has not “felt” like a 5-day consolidation. So while the study suggests a likely pop higher in the next few days, the likelihood may not be quite as strong as suggested.
A while back I did a study of major market tops for Quantifiable Edges Gold & Silver subscribers. The study goes back to 1970 and considers every SPX top that was followed by a decline of at least 20%. I identified two indicators that I found especially useful in determining when conditions may be ripe for a possible top. I recently updated the QE Study of Tops, and received a lot of positive feedback on it. A primary reason that I was inspired to update the study is that one of the indicators is currently flashing a warning sign. So I decided I would also make the study available to non-subscribers for a small fee.
The Study of Tops can now be purchased on the Quantifiable Edges website for $5.99. If you purchase a Quantifiable Edges subscription within two weeks of your Study of Tops purchase, your $5.99 will be refunded.
I certainly hope everyone finds it interesting and valuable. If you purchase it and don’t feel it was worth the $5.99, then simply send me a note explaining why (relatively nicely), and I will refund your money.
Lastly, I also included a coupon (good through March 31) for a free trial of any Overnight Edges subscription as part of the Study of Tops.
You may purchase the Quantifiable Edges Study of Tops by clicking here.
On Monday the bulls tried to make a move higher and failed, making for a higher high and a lower close. On Tuesday the opposite happened with a lower low and a higher close signifying a failure by the bears. This action triggered the below study in the Quantifinder. It was last seen in the 3/3/11 Subscriber Letter. I have updated the results.
Odds across the board, from Win % to Win/Loss Ratio and Profit Factor are all impressive, and suggestive of a short-term upside edge.
Monday saw some unusually strong action. One index that showed a real extreme move was the VIX. It spiked up 34% as fear struck options traders. In the past I have shown how 1-day spikes of 20% or greater have generally suggested an upside edge. I’ve rerun that study tonight. I did also look at moves of greater than 25% and 30%, but that did little to change the odds and just made instances fewer. So I simply stuck with the old 20% parameter for the study below.
Next day stats suggest a solid upside tendency. I would also note that the size of both the “Avg Winning” and “Avg Losing” trading is quite large for a 1-day move. So regardless of whether the market moves higher or lower, we could see some strong action today.
I am starting to see more evidence pointing towards a bounce. The pullback over the last couple of days, while not large based on historical standards, has been relatively sharp compared to recent action. Relatively sharp pullbacks from intermediate-term highs have had a tendency to bounce over years. This is exemplified in the study below.
The stats all suggest an upside edge over the next 1-4 days.
Short-term evidence I am currently looking at is mixed with both bullish and bearish studies triggering. The study below is one that favors the bearish case. It examines SPY performance after posting an unfilled gap down from a high level immediately after an unfilled gap up.
Instances are a bit low, but the consistency and magnitude of the moves lower are strong. I found this study compelling enough to take under consideration.
Also, Overnight Edges earlier today looked at overnight performance during the State of the Union.
After closing at a new high on Friday, SPY reversed so hard on Monday that it closed at a 7-day low. Way back in the 6/19/09 blog I looked at 1-day moves from a 7-day high to a 7-day low. I have updated those results below and also incorporated a 200-day moving average filter.
There appears to be a bit of a downside edge over the next few days, and much of that edge has played out during days one and two. Perhaps the quick move through 7 days of resistance causes weak hands to bail and further selling to ensue.
It will be interesting to see how it plays out today because it appears SPY may have a large gap up when the market opens in about an hour. Gaps up from low areas are less likely to fill, leaving shorts stuck and chasing the markets upwards. If the gap can hold, then we may avoid the further selling suggested by the study. If the gap up fills, then the move lower could quickly accelerate.