The market is no longer boring. It is indeed flashing signs that the low volatility, 45 degree angle uptrend is ending, or at the least, taking a break.
If you got caught long here holding high beta names, don’t be too hard on yourself. There was no way to know with 100% certainty what would happen. The fact is that over the last 6 months or so, the market has handsomely rewarded those who have bought these kinds of dips. The trend is your friend…
While we still have a strong trend here, a sell-off like the past 2 days has not been seen since November of 2010. In fact, the sell-off in November was the only time this rally paused since it began on September 1st, 2010. Will it pause again here? I’m guessing that it will.
However, a pause and a bounce are not mutually exclusive. I ran a test, modeling the last 3 days worth of market behavior, and the results are strongly bullish. It appears that a bounce is likely.
The Rules:
If 2 Days Ago, SPY Closed at a 10 Day High or Higher AND the 2 Day Rate of Change is > -2.5%, Buy SPY at the Close.
Sell X Days Later.
All SPY history used. No commissions or slippage included…
The Results:
There were 44 instances of this setup, and as the graph shows, the results are strongly bullish. A limitation is that I did not add a factor in for the recent explosion of oil prices.
The Avg. % Profit/Loss is on the left axis and peaks around 1.5% gain. The % of Winners is on the right axis and peaks around 75% winners.
My crystal ball is saying that we will bounce and then have some volatility and consolidation. Note though that it is almost impossible to model exogenous events caused by murderous, oil-rich Middle-Eastern tyrants. Add in the possibility of a complete revolution in the Middle-East, and your sample size gets real small, real quick. Because it is impossible to know what will happen, I will stick with my simple market modeling.
PDS has dozens of excellent setups for tomorrow’s open, if you’re interested.
i dig these so much
Good stuff Wood.
I’m about to capitulate on my tna position (yes, I tried adding to it on Tues, not a smart move)… An expensive lesson in stop loss management, but at this point, there’s nothing I can do about it.
Hope you were able to hold on! Should gain back even more tomorrow.