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

Mondays After Large Drops On Fridays

Posted by Rob Hanna in Quantitative Study April 19, 2010

In the November 2, 2009 blog post I examined Monday reactions to very bad Fridays. While Friday didn’t qualify for that study, I did look at large Friday drops another way this weekend. This time I used Average True Range (ATR) to define “large”. If the size of the drop was larger than 1.5 times the 20-day ATR then regardless of the size of the % drop, that was considered “large”. Drops of this magnitude on a Friday have almost always led to a bounce.

An 88% bounce rate the next day is extremely impressive – especially considering the study is only based on 2 simple parameters (day of week and large drop). The Crash of ’87 occurred on a Monday after a sizable drop on Friday. The Crash of ’29 also occurred on a Monday. It seems that Wall St.’s collective consciousness since over the last several years calls for protecting yourself going into the weekend if Friday is bad. This suggests that big drops on Fridays have often been overreactions and have therefore resulted in a consistent propensity to bounce on Monday.

Nasdaq Breadth Hits an Extreme

Posted by Rob Hanna in Nasdaq Up Volume %, Quantitative Study April 15, 2010

I’m seeing mixed indications for the short-term over the last couple of days. One bullish study that the Quantifinder identified last night was from the 11/6/09 blog and examined the exceptionally lopsided Nasdaq Up Volume %. Readings over 90% are quite rare – especially so when the market is in a long-term uptrend. Below I have updated the November study.

Instances are lower than I’d like to see, but with all 8 closing higher in the next day or 2, it appears worth noting this one. Extremely strong volume breadth going into riskier Nasdaq stocks has often led to some follow through when the market is in a long-term uptrend. Below I have listed all 8 instances with a 3-day exit.

Especially notable to me is the fact that the worst drawdown for any instance was only 0.85%. Meanwhile, only 1 instance didn’t see a run-up of at least 1% within the next 3 days. This suggests limited downside potential and solid upside risk/reward.

Quick Notes

Posted by Rob Hanna in Uncategorized April 13, 2010

Hectic morning here. Yesterday the Quantifinder identified numerous studies with bearish implications. Common themes were low volume, low put/call ratios, and low VIX:VXV Ratio. Below is a link to a post from January:

https://quantifiableedges.blogspot.com/2010/01/declining-spy-volume-at-new-highs.html

For those who may have missed it, below is a link to my chat last Friday with Charles Kirk.

https://kirkreport.com/tkr/ScQB

Lastly, a reminder that today is the webinar by Scott Andrews that will look at using opening gaps to enhance swing trade entries/exits. I haven’t seen a preview yet but I’m told he has some interesting numbers to show.

https://quantifiableedges.blogspot.com/2010/04/using-opening-gap-to-time-swing-trade.html

Some Early-Stage Volume Research

Posted by Rob Hanna in Quantitative Study, volume April 12, 2010

The Subscriber Letter has shown several studies lately that have suggested some of the low-volume rallies we are seeing will often lead to a pullback. It struck me that perhaps it might be worth looking at low-volume rallies in a slightly different way.

One tool that some analysts use is the concept of Distribution Days. Distribution days are basically days where the market sells off on relatively high volume. The theory is that when clusters of these days are seen near a market high it suggests an intermediate-term selloff is likely to ensue. Back in August I posted a study that examined this. It found the concept to be dead wrong. It is most often better to buy into these clusters of high-volume selloffs rather than looking for further selling.

Below I re-ran the results of that August study back to 1988 using the same parameters.

Recall that this study looks to go short, rather than buy. Therefore you are looking at a market that typically rose following such clusters.

Next, instead of looking for clusters of distribution days, I decided to substitute days that rose on volume that was lower than the pervious day’s volume. Here’s how those results came out.

It’s interesting to see here that results are mixed rather than suggestive of upside as the distribution day clusters were. This isn’t terribly surprising since many of the volume-related studies we see suggesting downside are due to low-volume rises rather than high-volume declines.

At this point the research is a bit half-baked, but I plan on expanding on this line of thought in the future.

Using The Opening Gap To Time Swing Trade Entries And Exits

Posted by Rob Hanna in Uncategorized April 9, 2010

Scott Andrews of “Master the Gap” will be conducting a webinar on Tuesday April 13th at 4:30pm EST that is especially designed for readers of Quantifiable Edges. Scott and I became acquainted within the last year and found it interesting that we utilize very similar approaches for trading very different time frames. While much of the focus with Quantifiable Edges is on swing trading with some discussion of day and intermediate-term edges, Scott uses his quantitative research primarily to trade the opening gaps. His service also covers some other daytrading approaches for times when gap trades are not active.

We’ve had several discussions about how our research tends to be quite complimentary and on a whole can often provide a greater edge for those who may look to incorporate it. Scott’s webinar will show how his gap-focused research can possibly aid traders who are typically more swing-oriented (like me). You may use the link below to see more information on the webinar and to sign up. (It’s free.) If you trade intraday and like the quantitative approach used at Quantifiable Edges, then there’s a good chance you’ll find the webinar interesting.

https://www.masterthegap.com/public/mgcal.cfm?calID=1&caldate=4/13/2010

Charles Kirk Will Be Interviewing Me Live Today At Noon

Posted by Rob Hanna in Uncategorized April 9, 2010

I’m excited to be speaking with Charles Kirk and his readers today at noon EST. Some of the focus of what we’ll be discussing will be system trading, including some of the systems available here at Quantifiable Edges. If you’d like to attend and perhaps ask some questions then please come by.

https://kirkreport.com/tkr/ScQB

The session will also be archived and I’ll provide a link after it’s all done.

Relatively Strong Drops From Highs

Posted by Rob Hanna in Quantitative Study April 8, 2010

Last night the Quantifinder identified a study that looked at relatively strong drops from highs when the market was in a long-term uptrend. That study last appeared in the 1/19/10 Subscriber Letter. I’ve updated the results table below:

This isn’t the most high-powered edge we’ve seen but it does provided a subtle hint that there may be a bearish edge present over the next few days. I also filtered the results a few different ways, such as using a 50-day high or a 200-day high. No matter how I sliced it results remained fairly similar to these.

What Bonds Rates Are Suggesting For The Intermediate-Term

Posted by Rob Hanna in Quantitative Study April 6, 2010

The fact that bond rates were hitting a new high along with stocks on Monday is notable. Below is a study that last appeared in the 12/23/09 Subscriber Letter that examined this.

Generally, higher interest rates make bonds a more attractive investment. This may lead people to forsake stocks in favor of lower risk returns with improved yield. Implications of this study appear to be longer-term in nature than we usually see. Traders may want to keep this study in mind in the coming weeks.

Should You Apply Fed Day Edges To Today’s Special Meeting?

Posted by Rob Hanna in Uncategorized April 5, 2010

The Fed will be holding a special meeting today that was just announced last week. (Hat tip Market Rewind.) Below is a link to the announcement.

https://www.federalreserve.gov/boarddocs/meetings/2010/20100405/advancedexp.htm

I’ve published a substantial number of studies related to Fed Days and the action that takes place following them. Most of the studies I’ve published have only looked at scheduled Fed meetings.

Unscheduled Fed meetings have been typically been surprises where the announcement came out of the blue – and the time of day was not consistent. Monday is the first unscheduled Fed meeting that I can recall that has been announced beforehand. While behavior may fall in line with other scheduled Fed meetings, I believe it would be dangerous to make any assumptions in this unique case.

Traders should be aware that news will likely hit in the afternoon that may affect the market.

Lowest Volume In Over A Month Suggesting a Pullback

Posted by Rob Hanna in Uncategorized March 31, 2010

I’ve noted before how extremely low volume during an upmove can lead to a pullback. Below is a study the Quantifinder identified from the 11/16/09 weekly subscriber letter.

Implications seems to be that there is a downside edge over the next few days – especially days 1 and 2. Below is an equity curve using a 2-day exit strategy.

An Old Reliable SPY Setup

Posted by Rob Hanna in Quantitative Study March 29, 2010

SPY pulled back for the 3rd day in a row on Friday. The action also qualified it for the below study which was was published in the 10/28/09 blog.

“Rate of decline” simply refers to the fact that the losses have been smaller each of the last 2 days on a percentage basis.

Unfortunately the study is not being confirmed by the SPX, which closed up slightly on Friday. It will be interesting to see how it turns out, but I’ve discounted the study in this instance due to the SPX non-confirmation.

Back To Back Outside Days In QQQQ

Posted by Rob Hanna in Quantitative Study March 23, 2010

On Monday QQQQ posted a higher high and a lower low than Friday. This is often referred to as an “outside day”. Interestingly, Friday was also an outside day. Two outside days in a row is quite rare. This was only the 19th time it’s been done since 2000. Looking at performance following the other 18 times shows some compelling results.

These appear to be quite positive implications. They also confirm the December study where I looked at back to back outside days in SPY.

After Down Fridays Over The Past Year…

Posted by Rob Hanna in Quantitative Study March 22, 2010

One place there has been an edge over the last year is in buying Fridays that closed down. Below is a study that illustrates this.

These are some fairly incredible results for just looking to buy a down Friday. Even if you eliminate the 7% winner, which was actually the 1st instance from 3/20/09, results are still very strong. The average trade would be 0.7% instead of 0.9%.

I also looked at how the market has performed over the same time period when Friday has closed up.

It appears the edge has only been on down Fridays.

It is important to understand that this is what I often refer to as an “environmental edge”. In other words, it is something that has worked in the recent past and seems to be a result of the current market environment. It is not an edge that has persisted over a long period of time nor do I expect it to continue to persist for a long period of time from now. That doesn’t mean it isn’t a useful observation, though. In such cases where I believe a setup contains an environmental edge I will look to use it to my advantage until it appears to be losing its effectiveness. Of course I do this with all edges, but environmental edges are on a tighter leash than others.

Mild Pullbacks From Strongly Overbought Conditions

Posted by Rob Hanna in Quantitative Study March 19, 2010

I’ve shown many times before how strong selloffs rarely end when the 1st day of the bounce is meek. Most of the time to get a strong multi-day move off a low, you need a convincing day-1 bounce. Tonight I decided to flip this concept on its head a little bit and examine what happens after a small pullback day during a strong upmove. For this study I used the 2-day RSI. The 2-day RSI is a very sensitive indicator so it would take a very small decline from a very overbought position in order for it to remain above 90 on a down day. This is what happened on Thursday and what I examined below.

There appears to be a fairly strong upside tendency over the last 13 years based on these results. The edge pretty much plays itself out within the first two days though. Looking further out in time did not showing significant results.

Fed Day Readings

Posted by Rob Hanna in Uncategorized March 16, 2010

Today is a Fed Day. I’ve shown in the past how Fed Days have had a substantial upside bias. This was illustrated most clearly in my September 23, 2009 post showing a chart of all Fed Days. Of course at this point in time the market is strongly overbought. For those wondering whether this negatively impacts the chances of a positive Fed Day, it doesn’t appear to based on this post from March 18, 2009.

With trading conditions likely to be slow mid-day as the announcement approaches, traders may want to review some of my other Fed Day studies as well.

I’d also like to point out some recent work by others on the subject. This past Friday Tom McClellan reproduced my September 23rd Fed Day chart for his “Chart In Focus” and added his own observations and commentary. Tom’s chart actually went back a bit further than mine and he breaks it down by fed chairman, which I found interesting. You can see Tom’s take on it here:

https://www.mcoscillator.com/learning_center/weekly_chart/fomc_announcement_days_tend_to_close_up/

And last night in his “Gap Wrap” video, Scott Andrews of Master the Gap showed some interesting research that discussed the probabilities associated with gaps filling on Fed Days. He showed both gaps up and gaps down statistics, and the results were quite interesting. You may view his video here:

https://www.masterthegap.com/public/410.cfm