Large Gaps Down From 50-day Highs

Big gap down from yesterday’s high.  Below is one way to look at it.

These results were similar to a few scenarios I ran.  The evidence suggests no edge in trying to buy the low open.  In fact there may be a bit of a downside edge from open to close today.  Historically, things have gotten worse throughout the day.

When VIX Rises and SPX Closes at a 50-day High

There were a few studies related to VIX action that appeared in the Quantifinder yesterday afternoon. This particular study looks at large mid-week rises in the VIX during times the SPX is closing at a 50-day high. All results are updated.

New readers may wonder why I use a day-of-week filter with this study. The VIX has a natural tendency to fall on Fridays and rise on Mondays. Because of this I typically separate out those days from the rest of the week when conducting VIX-based studies. Implications of the rising VIX and 50-day SPX high appear to be moderately bearish over the next few days, suggesting a pullback.

Applying the QE Buying Power Index to Breakouts

I discussed the QE Buying Power Index a few times in the last week and demonstrated how it could be used as a filter for a mean reversion system. While a good number of people have signed up for the webinar there are many that remain unconvinced of its value. There are likely also a large number of you who after seeing the mean-reversion results thought, “Who cares? I don’t trade mean reversion techniques.”

So I’ll show one more example before I get the blog back to regular programming. This time let’s look at the QE Buying Power Index and its impact on a simple breakout system over the last 4 years.

This first study below looks to buy the SPX any time it closes at a 5-day high and hold for X number of days. I also filtered to exclude any instances where the QE Buying Power Index was 3 or greater. (This is the same level used in the mean-reversion posts.)

As you can see it is red across the board. This would have been a losing strategy and not one with an edge.

Now let’s look at results using the same techniques but this time filter to only include those instances with a QE Buying Power Index of 3 or greater.

Huge difference here. The first couple of days are a bit of a crapshoot, but after that statistics turn strongly bullish. This again would suggest that if you are looking to go long the market you want to have Buying Power on your side.

Let’s look at a simple system designed to trade long when 1) buying power is strong, and 2) price confirms by making a new high.

Results here are very strong. Typical of a breakout strategy vs. the mean reversion approach the % profitable isn’t as strong but the winners far outsize the losers and the big wins bring in some hefty profits.

Learn how to compute the QE Buying Power Index in one of our special upcoming webinars. (Or sign up and view the recording if the times don’t work for you.) And you have nothing to lose, because they are 100% satisfaction guaranteed. (Guarantee relates to quality of the information, and is NOT a performance guarantee.)

Very Low Range In SPY Potentially Short-Term Bearish

The market was down a little and no one seemed to care.  Volume was extremely light, and the range was the lowest in months.  This kind of indifference can sometimes mean that bulls are done (temporarily).  They pushed prices higher leading up to Monday then held a buying strike.  Often this kind of action will be followed by sellers entering the market to fill the vacuum that is being created with the buyers leaving.  A number of studies triggered yesterday that exemplify this concept.  Below is one.
Such extremely low range on a day the SPY dips a little has commonly been followed by a further drop. I will note that the short side does not have the QE Buying Power Index in its favor…but it will soon. 

The QE Buying Power Index for Swing Trading Short

On Friday I introduced the QE Buying Power Index and showed results over the 2008-2011 period when looking to buy pullbacks with a strong QE Buying Power Index reading versus a weak one. Today I’ll show the other side of the coin. Below is a short-side version of the same swing trade system. On Friday the system I used to demonstrate the importance of buying power simply bought the SPX when it closed in the bottom 20% of the 10-day range and then sold it when it closed back in the top half. Today we’ll look at shorting closes in the top 20% of the range and covering in the bottom half.

First let’s look at times when the QE Buying Power Index was positive.

As you can see, when the QE Buying Power Index has been positive, trying to short overbought market readings has been futile and there has been no edge in doing so.

But now let’s examine results when the QE Buying Power Index was NOT positive.

We see here a remarkable difference. Simply taking buying power into consideration changes the results dramatically.

Over the last 4 years buying power has been extremely important in determining market movements. In the special (100% satisfaction guaranteed) webinars later this week I will explain to traders the concept behind the QE Buying Power Index and teach them how to calculate it. I’ll discuss how the it has influenced the intermediate-term over the years and how you can use it to swing trade with a system like those I’ve discussed the last few blog posts.

Click here for more information on the webinars and to register.

QE Buying Power Index & Swing Trading System

A market variable that I rarely see discussed and almost never utilized is Buying Power. And while it has become easily measurable and quantifiable over the last several years, I have found very little information on the concept. In some special webinars next week I will unveil the new QE Buying Power Index. The QE Buying Power Index can be used to help determine whether a reversal or a continuation of a move is likely. Below is a simple swing trading system that demonstrates the value of the QE Buying Power Index.

To see its impact on performance let’s examine a simple swing trading system that looks to buy pullbacks. The pullback approach is very simple. The swing system buys SPX whenever it closes in the bottom 20% of its 10-day range and holds it until it closes in the top half of its (then current) 10-day range. In the performance report below you can see how SPX performed from 2008 – 2011 when pullbacks were bought and the QE Buying Power Index reading was low.

While there were a few more winners, the size of the losers was much higher. Buying pullbacks in this way would have produced more frustration than profits. It was essentially a breakeven strategy over the 4-year period.

But now let’s look at results when the QE Buying Power Index was providing strong readings.

The numbers here are outstanding. With strong buying power present pullbacks provided high probability opportunities. Let’s take a quick look at a profit curve to see how the steady the gains were.

Profit curves don’t get much more appealing than that.

So what is the secret, and how can you compute the QE Buying Power Index yourself? Register for one of the webinars and find out! The cost is only $25.00, and while performance is never guaranteed, your satisfaction with the information presented is – 100%. For more information and to register for an upcoming webinar click here.

A Long-Term Look At Employment Days

Employment days have an interesting history and they have contributed to some worthwhile studies over the years. Below is a chart of SPY performance on Employment Days. For this equity curve I filtered to only include days where SPY was > its 200ma. Each trade was a fictional $100k.

What I find so interesting about the chart is that for a long time Employment Days in uptrends showed a strong propensity for gains. But in 2000 this edge vanished. Since then there has been no apparent advantage – bullish or bearish.

Strong Breadth & a Down SPX

When breadth posts solid numbers and the SPX declines (during an uptrend) that has often been followed by a rebound in the next few days. The study below triggered at Tuesday’s close. It is one I have shown several times in the Subscriber Letter.

The edge isn’t huge, but it does appear to be fairly reliable. Much of the edge is realized within the 1st 2 days.

The Odds That Turnaround Tuesday Lives Up To Its’ Name…

I’ve shown before that of all days Tuesday has historically shown the highest propensity to halt a short-term pullback. The study below is one from the larger Turnaround Tuesday study. All stats are updated..

As you can see the market has strongly favored a quick move higher. And when that move hasn’t happened on Tuesday it has often happened in the next few days.

When SPX Closes Just Under a 50-day High Prior to a Fed Day

Yesterday I showed that Fed Days typically carry a bullish edge, but that edge failed to hold when the SPX closed at a 20-day high just prior to the Fed Day. By closing down 0.1% Tuesday the SPX narrowly missed closing at a 20-day high. So are we now safe because the market just missed a new high by 0.1% on Tuesday? Last night I suspected not. And so I ran the below test. Since we are near a 50-day high I used that as the filter rather than a 20-day high. I looked at times where the SPX did NOT close at a 50-day high, but in fact closed less than 0.5% below it. So although it is not a new high, the environment still appears positive. Let’s look at the results.

Twenty-five instances and the result is nearly dead-even. This is very similar to what we saw with yesterday’s study. I’m not viewing today as a typical strongly-bullish Fed Day.

Intermediate-Term Highs Prior to Fed Days

Wednesday is a Fed Day.  As I have discussed many times, Fed Days generally carry an upside tendency.  But this tendency is greatly impacted by certain variables.  A large collection of these variables may be found here on the blog under the “Fed Day”label.  And many more may be found in the “Quantifiable Edges Guide to Fed Days”.
One variable I briefly discussed in the 11/3/10 blog was whether the market was already at an intermediate-term high.  Today I thought I would illustrate that study graphically.
First, let’s take an updated look at SPX performance on Fed Days when the SPX has NOT closed at a 20-day high the day before.
That’s basically 30 years of bullishness.
But now let’s see performance at times when the SPX did close at a 20-day high the day before.
No consistency and no pronounced edge in this sample of 36 instances.
Traders looking to play for a short-term Fed Day bump should be hoping the SPX does not close up and at a new high again today.

When the Market Closes Strong Just Prior to Op-Ex Day

Despite the negative seasonality that is typical during January op-ex and MLK week (which are often the same) the market has continued to rise and closed Thursday at a new rally high. The study below was last seen in the 2/18/11 subscriber letter. It examines performance when the SPX closes in the top 10% of its 10-day range on the Thursday before op-ex. Stats have been updated.

The numbers here are fairly compelling and suggest a possible downside edge.  Prior to 2003 the edge was less pronounced but still negative.

January Op-ex Week’s Recent Struggles

January op-ex week has been a tough week for the market since 1999. Interesting about January op-ex week is that it often occurs in conjunction with Martin Luther King Day. Below is a list of the last 13 January op-ex weeks with their performance results. Note that some of these weeks contained four trading days and some contained five. In either case the market was assumed to have been “bought” the Friday before op-ex Friday and “sold” on op-ex Friday.

As you can see there has been a decided downside tendency over the last 13 years. The drawdown / run-up stats at the bottom are especially compelling for the bears.

New High, Unfilled Up Gaps, but Weak Finishes

While the final numbers were good and the SPY left an unfilled upside gap, some traders may have been disappointed yesterday that the SPY finished in the lower part of its daily range. Historically, unfilled gaps and 20-day intraday highs as was put in on Tuesday have been followed by much more positive action when the rally closed meekly. Tuesday’s action actually appears bullish. This is something I examined just last week in the 1/4/12 Subscriber Letter. Below is an excerpt from that letter.

I ran a test of performance following unfilled upside gaps that make a 20-day high. Below I’ve broken out the results by times the SPY closed above the open versus times where it closed below the open.


First let’s look at those times where the finish was relatively strong:



There doesn’t appear to be any edge in either direction here. Now let’s examine times like the present where SPY closed below the open.



These results are substantially better than earlier where the finish was good. Rather than worrying about the weak finish bulls should be excited by it.