This morning on Tyler’s Trading he noted the mild reaction the VIX has had during this 6-day selloff.  He notes it’s an odd situation but not one that is clearly predictable.

A measure of fear that I use here is the Quantifiable Edges Capitulative Breadth Indicator (CBI).  The CBI looks for capitulative selling among S&P 100 stocks.  During market pullbacks it is common to see the CBI rise.  Very strong pullbacks will see higher readings, and as I have discussed many time before, readings of 10 or higher generally suggest a bounce is very near.  But with the market down 6 days in a row the CBI is still at 0.

I looked back at other times the SPX closed down 6 days in a row.  There have only been 3 of them, which is just another example of how odd recent market action has been.  The other occurrences took place on 3/2/99, 8/1/11, and 11/23/11.  With only 3 instances it would be dangerous to try and draw a conclusion about the meaning, but the instances couldn’t be much different anyway.  The ’99 instance was quickly followed by solid gains.  The 8/11 instance was followed by a massive selloff that only ended after the CBI did spike, and the 11/11 instance was immediately followed by a very sharp rally.

Not everything I look at is predictive, but that doesn’t mean it is useless information.  While much of what I have been seeing suggests a bounce, knowing how unusual the setup is alerts you that the market is capable of just about anything, and the CBI example demonstrates that.

I’ve updated the Quantifiable Edges Big Time Swing System overview page with results through July 2nd when the most recent trade closed out. There is not a trade currently open. Since the system only averages about 1 trade per month, I typically update the results bi-annually. The 1st half of 2012 produced a net return of 2.6% for SPY (including dividends, commissions of $0.01/share, and an assumed interest rate on cash of 0.1%).  This was achieved with 1 short trade and 4 long trades.  Four of the five trades made money.

For those 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.

And if system development isn’t your thing, the Big Time Swing System provides easy to follow mechanical rules that you can follow. The standard parameters have performed quite well. There are only about 11 trades per year averaging 7 trading days per trade. 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 shows all SPY signals and possible entry/exit levels. This service is free for 12 months from the date of purchase.

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).

After spiking up to 11 last Friday the Quantifiable Edges Capitulative Breadth Indicator (CBI) dropped back down to 1 on Thursday’s close.  (I noted this on Twitter https://twitter.com/qerob ) I’ve discussed for years how buying selloffs when the CBI reaches 10 or higher and then selling when it returns to 3 or lower is a reasonable approach to taking advantage of the CBI.  In Monday’s blog I listed all 26 instances and the results of taking this approach.  We now have one more to add to the list.  Buying on the spike to 11 on Friday the 18th and exiting the trade at yesterday’s close would have meant about a 2% gain.

So now that the CBI is back to neutral, what might traders want to be on the lookout for?  One obvious answer is an IBD Follow Through Day (FTD).  There are many, many FTD studies on the blog, and if one arrives I will be sure to note and discuss it.