Blog | Quantifiable Edges | Assessing Market Action With Indicators & History

Short-term Implications of Breadth on a Follow Through Day

The strong move higher on increased volume meant that Tuesday was a Follow Through Day (FTD). FTDs are a concept that was created by William O’Neil, founder of Investors’ Business Daily. I have written about them extensively on the blog. In June for the 1st time I showed that FTD’s have a better chance of success when they are also accompanied by strong breadth. Tonight I also examined the short-term implications to FTDs with strong breadth vs. FTDs without. This first study below looks at performance following FTDs that came along with an Up Issue % reading that was among the top 5% of all readings over the previous year.

As you can see there appears to be an tendency for the market to continue higher after these strong-breadth FTDs. Now let’s examine performance after FTDs on days that did not show exceptional breadth strength.

Here there appears to be no edge or short-term upside inclination whatsoever. With Tuesday’s FTD coming on breadth that put it in the top 2% of all days for the last year the short-term outlook appears better.

Big Gaps Up After 2 Strong Days of Selling

Posted by Rob Hanna in gaps, Quantitative Study August 22, 2011

After 2 hard days of selling the SPY looks to be gapping up strong this morning. I looked back at other times that the SPY gapped up big after 2 large down days. Below are the results since 2003 of buying all instances at the open and then selling at the close.

There appears to be a bit of an inclination to follow through on the gap to the upside. Most of the instances were quite volatile, and all of them pulled back at least 0.4% below the open at some point during the day. Most of them also took place during 2008 when volatility (both intraday and overnight) was elevated.

A Post-QE2 POMO Indicator Update

Posted by Rob Hanna in POMO August 19, 2011

I haven’t shown an updated POMO chart on the blog in a while, and with QE2 now in the rearview mirror for the calculations I thought readers might find it interesting.

POMO stands for Permanent Open Market Operations and it is how the Fed goes into the open market to buy securities. The net effect of this buying is an influx of cash into the system. It appears a portion of that cash makes its way to the stock market and works as a bullish influence. A “POMO Day” is simply a day where these operations take place. The chart below shows my POMO Volume indicator. The top pane is the S&P 500. The bottom pane is the total amount of money infused into the system (POMO buying) over the previous 20 days.

The obvious takeaway here is that periods of heightened POMO buying have led to strong stock market rallies. Periods of weak or negative stimulus have been followed by market drops. This chart only goes back to 2008. For a longer view back to 2005 you may use the link below.

https://quantifiableedges.blogspot.com/2011/05/long-term-look-at-pomo-stock-market.html

Looking at the far right side of the chart you can see POMO volume has dipped substantially since the end of QE2 (end of June). It has now reached a level where it is expected to be maintained for the foreseeable future. In the past when POMO stimulus ended – it ended. This time the end of QE2 has led to a period of substantially less stimulus, rather than none. This made it tricky in determining whether the end of QE2 would be followed by a sharp market drop. (It was.) While there IS still liquidity pumping going on, it appears the reduced level is akin to providing a heroin addict a couple of aspirin to try and get high.

The link below shows the POMO activity schedule on the Fed’s website.

https://www.newyorkfed.org/markets/tot_operation_schedule.html

If you click it you will notice there is a tab on the page where you can see “All Schedules” rather than just the “Current Schedule”. Clicking that tab you will see that the monthly estimate of POMO activity for last month and this month is about $14 billion. During QE2 the level was normally around $100 billion/month. So is the market capable of mounting a serious new bull move with the modest amount of stimulus currently being provided? So far I have seen no evidence of that, but I suspect it could if it starts from a “low enough” level…

Large Gaps Down After 3 Up Days

Posted by Rob Hanna in gaps, Quantitative Study August 16, 2011

This volatility continues this morning with a big gap down. The study below shows performance for the day following large gaps that occur after 3 consecutive up days.

These stats do not appear encouraging for the bulls. Below I have listed all instances.

This view isn’t any better. It appears there is some potential for another ugly day. I’d use caution buying today.

Historical Extremes

Posted by Rob Hanna in Quantitative Study August 9, 2011

This selloff is setting new extremes. Whether you look at volatility, price action, breadth, or volume, recent readings are off the charts. The table below is from last night’s subscriber letter. It highlights some of the extremes I noted in these areas on Monday.

Mondays 2% Gap Down

Posted by Rob Hanna in gaps, Quantitative Study August 8, 2011

I’ve shown before that 2%+ gaps down almost always bounce at some point in the next few days. The last time I reviewed this can be found here:

https://quantifiableedges.blogspot.com/2011/03/2-gaps-down-other-disasters.html

This morning I added a few filters and looked at just what might be expected on the day of the gap. This first study shows what has happened when the 2% gap down occured after a 100-day low.

Low instances but a possbile upside tendency. But next is the bad news. The study below looks at 2% gaps down on Mondays.

Tough call this morning. I think we should see a bounce in the next few days, but it may not be immediate.

A Look At This Mornings Gap Probabilities

Posted by Rob Hanna in gaps, Quantitative Study August 4, 2011

The gap down this morning is coming after a recovery attempt yesterday. I ran a few tests to see how the day has played out in the past under similar circumstances. The market has been moving around quite a bit this morning so I am showing 2 sets of results below.

The 1st one looks at times the market gapped down at least 1%.

Winners outnumber losers 7-3 but the losers are so much larger on average that the net expectation is about flat.

This next one looks at gaps between 0.5% and 1%.

Here again the odds appear to favor a rise over the course of the day. Losers were a bit larger here as well, but not nearly to the same degree.

Bottom line is that it appears likely the gap down will be bought up during the day, but if it isn’t then this could turn into another huge down day.

"Turnaround Tuesday" After 5+ Lower Closes

Posted by Rob Hanna in Quantitative Study August 2, 2011

I’ve discussed before the propensity for Tuesday to serve as a day where short-term selloffs reverse. Historically it has outperformed every other day of the week in this regard. Last night I examined SPY performance following at least 5 straight down days going into Tuesday. Those results are below.

Instances are low but the stats are overwhelmingly bullish over the 1st 3 days. Of further note, all 10 instances managed to close above the entry price at some point in the next 3 days. So even when Tuesday failed, it was made up for on Wednesday or Thursday.

Gaps Up From A 20-Day Low

Posted by Rob Hanna in gaps, Quantitative Study August 1, 2011

Debt ceiling progress has the market gapping up this morning. As I type the SPY is up between 1% and 1.5% pre-market. Below I take a look at gaps up from a 20-day low based on the size of the gap. First are gaps between 0.75% and 1.5%.

12 of the last 13 have been losers with the 1 winner only posting a gain of 0.1%.

Next is a look at gaps of 1.5% or more.

It appears the larger the gap the higher the propensity for it to run after the open.

One other factor that traders may want to consider about the potential of today’s gap is the 1st of the month seasonality. I looked at this in combination with large gaps last December.

Gaps Down After 4 Lower Lows

Posted by Rob Hanna in gaps, Quantitative Study July 29, 2011

The market is already short-term oversold and now SPY is gapping down large this morning. I looked at other times there were 4 lower lows followed by a gap down below the previous day’s low. Below are results looking back to 2006.

Not a ton of instances but the stats lean quite heavily to the long side. Between 2003 and 2006 the upside tendency was not apparent. I was unable to look back past 2003 this morning. Below are all instances from 2006 – present.

If you find morning gap analysis like this useful, you may want to check the work of my friend, Scott Andrews over at MasterTheGap.com. I look at studies like this occassionally, but it is his primary focus.

Very Low Volume At A New Short-Term High

Posted by Rob Hanna in Quantitative Study, volume July 25, 2011

I have been away for a while. When I’m away subscriber services continue pretty much as normal but blog posts tend to suffer. I’m back and will have a couple of posts this week and then get back to the 3 or so per week starting next week.

Very light volume at new highs as we saw on Friday often indicates a rally is running out of buyers. Frequently such light volume is followed by a pullback in the next few days. There were several studies that appeared in the Quantifinder Friday that demonstrated this point. I’ve chosen one that was also in the Subscriber Letter to highlight below. Blog readers last saw this study on April 5, 2011.

This study looks back to the inception of the SPY in 1993. The numbers above look fairly compelling. I also found the edge to be quite steady over the tested period. Of course with the gap down in the futures, much of the downside edge may be realized quicker than usual today. It’s possible it won’t persist for as long. Nonetheless, as I’ve shown many times before, volume does matter and traders should pay attention to it.

Edges After Poor Employment Days

Posted by Rob Hanna in Quantitative Study, Using Quantifiable Edges July 11, 2011

The gap down on Friday occurred in reaction to the release of the employment report. The employment report is typically released on the first Friday of the month, though in some cases such as this month it occurs on a different day. This weekend I spent a good amount of time going through the BLS website and programming in all the employment days from 1993-present.

I looked at Friday’s action a few different ways with regards to employment days. I found it was only the 10th time that the SPY has gapped down over 1% and failed to fill that opening gap. While I didn’t find the results significant, below I have listed the other 9 instances along with their 1-day returns.

These results seem to imply a mild inclination towards further selling the next day. Another way that I looked at employment day gaps was by using a 200ma filter and eliminating the 1% size requirement. Overall the results of doing this didn’t suggest much. I did find it interesting though that there have been three instances since the March 2009 bottom and all three instances were followed by further declines ranging from 2.4% to 4.3% during the course of the following week. Those three instances occurred on 7/2/09, 8/6/10, and 6/3/11.

I don’t believe either of these employment day studies is worth heavy consideration. My main take away is that the reaction to the employment report is not necessarily an overreaction. As the employment day results showed there does not appear to be an inclination for an immediate reversal. In fact, downside follow-through may be more likely.

Employment day seasonalities aren’t typically as pronounced as Fed Day seasonalities, but they can be worth examining on occasion. Therefore I went ahead and incorporated the employment day code into the QE Tradestation Indicators & Functions Package. This way package purchasers or Quantifiable Edges subscribers may explore employment days further on their own. (Those who previously purchased the package may download this updated version at no additional charge.)

When the VXO is Extremely Low for 3 Days in a Row

Posted by Rob Hanna in Quantitative Study, VIX July 5, 2011

I continue to see a good mix of studies. The one below is bearish but I could also point to some bullish evidence that is perhaps just as compelling. Anyway, when the VXO has remained extremelely stretched for multiple days, it typically signals the SPX is about to pull back. You can see this in the study below, which triggered on Friday at the close, and could be found in the intraday Quantifinder prior to that.

I find the note at the bottom of the table to be especially interesting. It implies that the current setup provides a high probability of a quick pullback, but if that pullback doesn’t appear quickly that there is a good chance that the market will continue to power higher.

QE Big Time Swing System 1st Half Results Update

Posted by Rob Hanna in Uncategorized July 3, 2011

I’ve updated the Quantifiable Edges Big Time Swing System overview page with results through June 30th. There is not a trade currently open. I don’t update results that often since the system only trades about once per month on average. The 1st half of 2011 produced a tame but still positive return of 3.00% for SPY (including dividends, commissions of $0.01/share, and an assumed interest rate on cash of 0.18%). This was achieved with 1 short trade and 5 long trades.

While the SPY return was mild, it’s encouraging to see that most other ETFs did quite well. In the system manual I discuss how I tested the system for robustness using a list of 29 ETFs other than SPY. Statistics for each ETFs full history can be seen on the Quantifiable Edges Big Time Swing overview page. 2011 statistics can be seen in the table below:

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 12 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).

3 Unfilled Up Gaps for SPY

Posted by Rob Hanna in Quantitative Study July 1, 2011

Short-term direction is unclear at the moment. There is a mix of studies suggesting both bullish and bearish inclinations. Here is an interesting one from last night’s letter with bearish inclinations.

The fact that the gaps up each day went unfilled could suggest that a good portion of the buying may have been done by shorts who were forced to cover as prices began to get away from them. The number of instances has been quite low. On average we’ve only seen this setup occur about once every 2 years. In every case there has been a move lower in the next day or two. Statistics strongly favor the downside.

Note: for this study (and most others related to SPY gaps) I consider the gap to be from the previous day’s close – not the previous day’s high.