Follow Through Days Above vs. Below the 200ma

I discussed on Friday that Thursday’s action qualified as a follow through day (FTD) under Investors Business Daily’s classic definition in which a higher volume rise of 1% or more in one of the major indices is required. Apparently IBD didn’t count it since it didn’t quite meet their new 1.7% rise definition. I’m not a big fan of the new rule and believe the 1% requirement is more useful that the new 1.7%. For details on why I feel this way you may refer to this old blog post on the subject:

https://quantifiableedges.blogspot.com/2008/01/follow-through-days-pt-2-does-every.html

I thought it might be interesting to examine a few new ideas with regards to FTD’s today. Before I do that I’ll first point you to the post where I defined the rules of the tests. I basically followed all of the rules as IBD laid them out. Two rules that IBD has never clearly defined are what entails “success” or “failure”. I defined “failure” to be a close below the intraday low of the bottom prior to the FTD. I defined “success” as a move either 1) twice a large as the distance from the low of the potential bottom to the close of the FTD, or 2) a new 52-week high. More detailed explanations of the rules may be found using the link below:

https://quantifiableedges.blogspot.com/2008/01/ibd-follow-through-days-pt-1-are-they.html

Under these rules, and requiring an 8% pullback before looking for a FTD, there have now been 71 FTD’s since 1971. 37 have been “successes” and 34 have been “failures” for a winning % of 52%. One of the findings I published during the 2008 series on FTDs was that FTD’s coming after smaller pullback had a better success rate than FTD’s coming after larger pullbacks. It was this research that led me to ponder whether this FTD may have a better chance of success because the rally attempt is occurring while the SPX is above its 200ma. It would seem to make sense that there might be a better chance of success since the long-term uptrend has not clearly turned down at this point.

What I found when examining the 71 follow through days that now qualify based on the original study was that only 23 closed above the 200ma. Of those 23, 14 turned out to be winners and 9 losers. This 61% success rate is better than the 48% success rate that has occurred below the 200ma with 23 winners and 25 losers. It isn’t overwhelmingly better, though. I’m not sure the distinction is worth making.

Revisting Short-term Performance After FTD’s

With the markets rising more than 1% on higher volume exactly 4 days after a potential bottom, Thursday can be labeled a Follow Through Day (FTD). As I mentioned last night I did an extensive study of FTD’s on the blog back in 2008. A summary page with links may be found here:

https://quantifiableedges.blogspot.com/2008/07/follow-through-days-quantified.html

Among the links found on that page, traders might be especially interested in the study of short-term implications from Feb 1, 2008. In that post I point out that while intermediate-term traders often view the FTD with bullish optimism, swing traders may see it as a short setup since the market is now “overbought in a downtrend”. We’ve seen many, many times before that overbought doesn’t necessarily mean a downside edge and oversold doesn’t’ necessarily mean an upside edge. This is why two lines are incorporated in the Aggregator and why confirmation is needed with both lines before a position is taken. So below I’ve updated the stats showing SPX performance in the days following a FTD.


Results are solidly, though not overwhelmingly, bullish. In any case the edge appears to be to the upside and it is certainly an environment that you typically want to be cautious if trying to short.

A Follow Through Day Research Reminder

It’s now been a few days since we hit the lows. With a potential bottom in place IBD followers and some other intermediate-term traders are eagerly awaiting a Follow Through Day (FTD) signal to start putting money to work again. FTD’s get a lot of press but they are largely overrated as a predictive indicator and many reports on them from IBD and others are filled with lore rather than facts. Back in 2008 I did a series on FTD’s. I examined many claims about them and quantified them in detail. Traders who would like to learn more about FTD’s or who would like a refresher may want to check out that series starting with the overview at the link below:

https://quantifiableedges.blogspot.com/2008/07/follow-through-days-quantified.html

The Difference Between These Breadth Indicators Is Large And Bullish

Two useful breadth statistics that are tracked by Worden Bros. are the % of Stocks Trading Above the 200ma (T2107) and the % of Stocks Trading Above the 40ma (T2108). At the current time the difference between these two readings is very large. 72% of stocks remain above their 200ma, but only 24% stocks are above their 40ma. The only other time since 1986 when Worden Bros. began tracking these statistics that the difference has been this large was late October / early November of 2009. To get such a large difference between the readings you would need to have a strong pullback occur in a strong uptrend. I was curious to see whether such a strong pullback was likely to derail the long-term uptrend and lead to further selling. To get a better sense I lowered the required difference between the two to 40. Below are those results.

In general, returns were positive from day 1. From a long-term perspective, such sharp pullbacks have been followed by additional buying. Any uptrend strong enough that such a large number of stocks were trading above their 200ma that the difference could be as large as 40 simply didn’t fall apart when a strong selloff occurred. The 2004 instance saw a retest of the highs before the market underwent a lengthy but shallow selloff. The other instances all rallied through their old highs and kept rising. Instances are definitely low but results couldn’t be any more bullish.

While we are now way above a difference of 35, I also ran that to get a few more instances.

This seems to confirm the previous findings and suggests the current breadth differential is indicative of not a market about to fall apart, but rather a market that is likely to resume its uptrend – or at least test its recent highs.

What A Very Weak Early TICK Has Led To In The Past

The market is off to a horrible start today. Back in November I looked at days that started off strong and did not register a negative TICK reading for the entire first half-hour. Strong starts often led to strong finishes. Today there were no positive TICK readings for the 1st half-hour. This kind of weakness happens quite rarely. When it has occurred in the past, it’s made for some very rough days. Below are statistics showing the 10am – 4pm EST performance after such weak starts.


Certainly not a knife you want to normally try and catch.

For those who would rather view it as a short-selling opportunity, here’s how it looks from the short side.


No matter how you view it, very weak starts like today tend to carry big risk and little reward for the bulls for the remainder of the day.

Low Volume Bounces Since July

Yesterday I showed a study that demonstrated how Monday’s low volume at the beginning of the bounce was in fact bullish, and not bearish. This is something that many people have difficulty believing. For the more visually inclined I’ve created a chart below that examines many of the moves up since July.

(click chart to enlarge)

Note that in basically every instance where the market was coming off a strong pullback, technicians could’ve complained about the volume. Volume can be a useful indicator, but it is constantly overvalued and misinterpreted. It’s certainly possible that this bounce could roll right over and substantial downmove could ensue. If it happens it isn’t because of the relatively low volume the last 2 days.

How Does Monday’s Low Volume Affect The Bounce Chances?

NYSE volume came in at the lowest level in over 2 weeks as the market rallied on Monday. Conventional wisdom suggests this low volume is a bad sign and it hurts the chances for a further bounce/rally. I’ve seen many comments in the last 24 hours stating the bounce cannot be trusted because of the low volume. So below is one test I ran examining this theory.


I compared these stats to days when volume was not at a 10-day low and they are quite a bit better here. From this standpoint it doesn’t seem the low volume is any kind of a warning sign. In fact it appears this setup provides a bullish edge. Perhaps very weak volume leaves just enough doubters that they end up chasing the market higher over the next several days as they become more convinced.

4 Lower Lows Above The 200ma

The SPX has now made 4 lower lows. In the May 9, 2008 blog I showed a study that examined 4 lower lows. It broke it out above and below the 200ma. Updated results above the 200ma are below:

Results here are fairly bullish. This is just one of several studies I am following at the moment. The vast majority are suggesting a short-term upside edge. A word of caution that I’ve been discussing in the subscriber letter is that the market has been acting abnormally for the last 5-6 days. This increases risk and traders must decide how they want to handle it.

From A 50-Day High To A 50-Day Low In 8 Days

Amazingly, Thursday’s close marked a 50-day low in the S&P. It was just last week that the S&P closed at a 50-day high. Moving from a 50-day closing high to a 50-day closing low so quickly is quite rare. I only found 6 other instances. Unfortunately, while it appears rare, it doesn’t appear predictive. Below is the stats table.


Examining the individual charts left me with no deeper insights. I’ve listed the dates of each instance in case anyone else would like to have a closer look.

Poor Closes Going Into A Fed Day

Wednesday is a Fed Day. I’ve written a lot about Fed Days and they’ve historically shown a positive bias. Despite this bias they represent an event that is often anticipated with some anxiety by market participants. This anxiety is natural as participants await potentially market-moving news. What’s interesting is that those times where anxiety is the highest have typically proven much more profitable. To demonstrate this I examined where the SPY closed within its daily range. I used SPY rather than SPX for this test because the daily range is typically more accurate with the ETF thanks to the staggered market opening. Below are all times like Tuesday where the SPY closed in the bottom 25% of its daily range prior to a Fed Day.


Stats here are strongly bullish. Last night’s Subscriber Letter examined the results in even more detail. It also showed what happens when SPY closes in the TOP 25% of its daily range on the day before a Fed Day. You may sign up for a free trial subscription by clicking here if you’d like access to that report.

You may also check the Fed Day label to see previous blog posts about Fed Days.

Poor Breadth On Bounce Somewhat Discouraging

I’ve shown numerous studies over the last couple of years that illustrate weak bounces from oversold conditions are often followed by downside.

A study that appeared in last night’s Quantifinder is an example of this. The study was last shown in the 6/24/09 blog post and is updated below:

Notable about the above study is that 4 of the last 5 instances showed positive returns 5 days out. The one instance that never closed below the entry was the last instance on 11/2/09. Still, the stats are convincing enough that I’m not inclined to completely ignore them.

Gaps Up From 10-day Lows

SPY is set to gap up just over 1% as I type this morning. I’ve shown before that large gaps up from low areas will often spark short covering rallies. Let’s look at some stats. First, here is a look at 1% + gaps up from 10-day lows (all stats look at the last 17 years):

Decidedly bullish edge here. The average loss size suggests risks are high, though.

Buy what if the market pulls back and the gap up is only between 0.5% and 1%?

Now you’re looking at basically a coinflip.

Why I Always Look Deeper Than The Stats Table

The evidence I most often show when illustrating a study is a statistics table like the one below. But it’s not all I look at and it never tells the whole story. In the subscriber letter I’ll often go into more detail on some of the studies. Tonight I thought I’d show an example of one study whose stats table I consider to be a poor representation of the truth.

Tuesday’s rally was the biggest % gain in at least 10 days. It followed Friday’s selloff which was the biggest % drop in at least 10 days. With the market trading above the 200ma and a new 10-day high being made on Tuesday, it made for an unusual setup. Below is a stats table showing similar setups in the past.


From the stats table it appears there is a fairly strong inclination for more upside over the next several days. Now let’s zoom in a bit on some of the results. I chose to zoom in on the 6-day here exit since that had the highest win %. Below is an equity curve with the 6-day exit strategy.

While the surface stats looked good, this chart tells a much different story. For one, there haven’t been any instances in nearly 10 years. Also, the 10 years prior to that there were only 5 instances and the return from them was breakeven. In other words, it’s been over 20 years since any edge has been exhibited by this study. In fact, just about the entire “edge” appears to be thanks to the 80’s. So while the initial results looked substantially bullish, this is definitely not a study that I would want to base a trade on. Traders who conduct their own studies should keep this lesson in mind. It’s important to carefully examine all results and not jump to conclusions based of the first set of numbers.