It might be hard for technicians not to be bullish after Friday’s (2/5/2010) close.
After a tiny gap-up on the opening, the SPY traded down ~-2% and then reversed to close just above the open and above yesterday’s close. This action creates an interesting candlestick which shows the battle between the bulls and bears. (See circled candlestick on chart).
Another interesting feature of Friday’s trading was the surge in volume. Volume on Friday surged to close more than 2x greater than the 50 day volume moving average. The chart shows the number of shares trading hands was reminiscent of the volume surges when the market was forming the March 2009 lows.
MACD looks as if it might have made a higher low, diverging from price, while VIX closed more than 5% above its 10 day moving average (this VIX setup is a high-probability buy signal if one closes the trade when the VIX closes back beneath its 10 day moving average).
All these appear to be bullish signals.
I have to admit, I was feeling pretty bullish after seeing the market reverse from its death spiral to close higher.
I decided to test a set of conditions similar to the characteristics of Friday’s trading to see what typically happens afterward.
The Setup
Using SPY…
1. One day ago, the market closes at a new 20 day low.
2. Today, the H-L range is greater than 1.5%
3. Today, volume is more than 2x greater than the 50 day moving average of volume.
4. The close is higher than the open.
Buy the SPY next open, and sell the close n bars later.
Results
About the axis of the graph.
- The horizontal axis shows how long the trade was held. Exiting on day zero means the trade was closed the same day it was opened.
- The left vertical axis shows the percentage of winners
- The right vertical axis shows the percentage gain of the average trade.
The setup appears to have a bullish edge.
Caveats
There were only 22 instances of this setup since 1995.
The same conditions as tested above also existed on Friday’s close for IWM, QQQQ, and DIA. The setup is decidedly bearish on the QQQQ and IWM over the full 30 days after buying and only marginally effective for the DIA.
Because the volume surge on Friday was surprisingly large, I increased the surge requirement to 2.5x the average. This adjustment halved the number of instances of this setup to 11, and made the setup only marginally effective up to 5 days after the buy day, and then bearish to neutral for the following 25 days.
Considering these caveats, you may decide, as I have, that the setup may not be as bullish as it first appeared to be.
By the way, if you enjoy reading this type of study, the undisputed master of the genre is Rob Hanna over at Quantifiable Edges.
Also, Michael Arold did some similar research over on his blog, and even posts a chart of each instance of the setup: The Friday Reversal Trade.
Sell the bounce, But there good news for banks over the weekend
G7 wants banks to pay for rescue, details pending
that should make people buyers of banks,
Thats the G-7 saying your screw
Add another variable and you’ll likely increase your odds ….. close above friday’s high.
I think it has too many variables already 😉
I was watching the real time real time chart (2 min) all day. We were in a bear flag after the low of the day. The price just nudged out the upper channel line and then bam, things exploded to the upside. Sure looked like short covering from tight stops. Also noted that it petered out just after we got positive and NYSE comp still closed down.
I was short and did well this week. I want to see how this bounce plays out. I think selling it will be the correct trade.
This is great analysis Wood, thanks.
Sikander, good for you, re: being short. I saw the setup come up underneath the 50 day, and did not pull the short trigger. Oh well, I’ll get it the next time.
Wood,
What a great analysis. Always interesting!
Hi CVIM pal,
did a very similar study yesterday, but you were faster in posting 🙂
http://wp.me/pCTzl-3X
Happy trading
Michael
Woodshedder,
Thanks for the props. I looked at the reversal bar bar a few different ways this weekend as well. My results when examining from a price action and volume standpoint were similar to yours – nothing terribly compelling.
Best,
Rob