More modeling of recent market action suggests a bottom that is characterized by volatile trading within a trading range…
The Setup:
On Friday, SPY closed at a new 50 day low, less than 1% above the 200 day simple moving average.
- When the setup occurs, buy SPY at the close
- Sell SPY X days later
- No commissions or slippage included
- All SPY history used
The Results:
Summary of Results:
As always, we want to be aware of sample size. The setup had a sample size of 8 trades held for the full 50 days. This is very low, and the results may not be able to be generalized.
- The red line is the result of buying ONLY when a new 50 day low is made, with not other factors involved.
- The purple line is the result of buying on a close beneath the 200 day moving average. I’ve written more on this setup here.
- The lime green line is the result of slicing all SPY history into 50 day increments and averaging those. I’ve posted this for the sake of comparison.
It’s almost as if the longer we hang out just above the 200 day average, the longer we have to wait for any meaningful upside. These studies just show grinding action with upside of 1% or so (the close beneath the 200dma is the exception). Note that the model most similar to the current conditions (blue line), is the only one that sees us trading lower than Friday’s close. If it proves accurate, then we will have a close beneath the 200 day moving average. As painful as it may be, closing beneath the 200 day average in the past has provided a very bullish edge going forward.
Bottom Line:
I’m seeing lots of studies that suggest volatile, range-trading ahead. The only studies that are showing a bullish edge are those that have us closing beneath the 200 day moving average. At this point, with the 200 day average about .25% beneath Friday’s close, I say BRING IT ON.
Very interesting!
We’ll see…I’m still perplexed about the 200 day average setup. I may have to go through each trade, trade by trade by hand so I can see exactly what is goign on that makes it such a bullish setup.
Maybe because shorts get short below 200 ma, and get trapped in a bear trap. I believe the same is true for death crosses. Death crosses seem bearish, but aren’t that bearish.
I suspect the the 200 day ma is a flush out trade, with most people throwing in the towel once it breaks. Once sentiment bottoms, the market is sure to follow.
Agreud.
Curious – how many instances are there of the close beneath 200dma?
Marshall, 69.
I think if you look closely, Wood, you will see that her name is Marsha, and she’s from Indiana.
Unless there’s a Marsha, Indiana town somewhere, which there very well might be, and I retract my statement.
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Actually, it’s Marshal N, so Wood was closer, Jake 🙂
Whew. For a second there I thought I had offered 69 to a Marsha from Indiana.