Last week, volume on SPY surged to 175% greater than the 50 day average volume. Does this surge in volume hint that a tradeable bottom is near?
On Wednesday, June 15th, SPY volume surged to more than 175% of the 50 day average and made a new 50 day low. On Thursday, volume again surged. When looking for bottoms, it helps to see capitulation. Volume surges coupled with new lows suggest that capitulation may be occurring.
The wild card, and the major caveat of any current SPY study is that it continues to close beneath its bottom Bollinger Band. Since the bottom band marks 2 standard deviations beneath SPY’s 50 day average, multiple closes beneath it signals that the market is abnormal. An abnormal market can stay abnormal longer than we would like. I have written previously about abnormal markets here. We really need multiple closes above the bottom band before this abnormality is removed. Once this happens, bottom-calling makes more sense, in my opinion.
Anyway, lets look at what the volume surge suggests.
- When volume surges to more than 175% of the 50 day average volume, buy SPY at the close
- Sell X days later
- No commissions or slippage included
- All SPY history used
Summary of Results:
I added two other variables in order to more accurately model recent market action.
- The blue line is the basic setup where volume surges to 175% of the 50 day average volume
- The red line adds the factor of the new 50 day low
- The green line uses the other factors and adds the requirement of the last close beneath the lower Bollinger Band (50,2)
Sample sizes for these studies were acceptable with 271 occurrences of the basic setup (58 trades if the trade is held the full 50 days), and 59 occurrences of the added factor of the 50 day low (29 trades if the trade is held the full 50 days). Adding the final factor of the close beneath the bottom Bollinger Band reduces the number of occurrences to only 24 with only 14 trades if the trade is held the full 50 days.
Bottom Line: As noted above, SPY has got to quit closing below the bottom Bollinger Band. Until it doesn’t, we should expect that it will continue. If we ignore the additional factor of the close beneath the bottom band, it appears that the market may be bottoming. The red line is suggesting some consolidation over the next month. After about 25 days, consolidation has ended and over the next 25 days, SPY has climbed 3% on average.