Let’s pretend that you could see the future, and that you knew after you bought the close of the 5th consecutive up day, that the next open would see a nasty gap down…What would the future look like?
SPY, as of Friday, logged 5 consecutive higher closes. Futures, as of 9:10 p.m. Eastern time, are down -1.3%. Let’s see what happens after 5 consecutive higher closes and then a gap down at the open.
The Rules:
Buy SPY if:
- SPY logged 5 consecutive higher closes
- The next open gapped down more than -0.5%
- Assume the buy happened at the 5th consecutive higher close
- Sell X days later
No commissions or slippage included. All SPY history used.
The Results:
Summary of Results
There were only 9 occurrences, and 8 trades of this setup, once the 50 day hold time was accounted for. I did not specify bull vs. bear market since that would have further limited the number of trades, but the graph below will show the trade dates.
Surprisingly, a large rally seems to follow the setup, once the consolidation and mean-reversion from the 5 consecutive up days wears off.
The Trades
This study is the first bullish study in quite some time.
I’m not sure what to make of it, and with so few samples, I’m not inclined to go into Full Bull mode just because the results are bullish. I would be hesitant to sell at tomorrow’s open, and I would be inclined to give the market a day or two before exiting any positions.
That’s a brain scratcher
Treuly.
Hey Wood, very interesting study!
Thanks for putting in the effort to see what happened in the past!
No problem Renn. Good to see you around here.
tks tin man. u r the shit!
Razor! You’re too kind!
Wood, Thanks. Just eyeballing the dates, it looks like the 6 up moves were in bull markets and the 2 negative returns were in bear markets. Like you say though, not enough data to base a trade on but it sure makes sense. FWIW, I’m a lot more bearish today than I was over the past couple of weeks.
Yogi, as you know, I’ve been bearish for some time. This setup, 5 up days in a bear market, should be a great place to get short. In fact, there have been 5 occurrences of 5 up days with the MA 50 beneath the MA 200 and the close beneath both. 50 days later, the average profit/loss is -5%. That is very very bearish, but again, very few samples makes the results suspect.
If I use the $SPX, going back 60 years, we only get 21 trades. The results are neutral. After 50 days, the average trade is near 0%. It appears to be a recent phenomenon that this setup is bearish.
Anyway, the major takeaways are that within the past couple of decades it is bearish setup, but over a longer period of time, 5 up days in a bear market has just led to consolidation.
What is confounding me is why the gap down open leads to such good results. The simple answer is that there are not enough samples to know.
the challenge with the market right here right now is that unlike probably any of those other 9 incidences of this setup, politics and human action will probably define the markets outcome.
If the Europeans steroidize their fund and grant the ECB power to lend to the soverigns at interest rates taht can stabilize them…
If the Europeans spat and bicker and throw little tantrums and greece finally just says
screw it and defaults…
We’re in the hands of politicians more than charts or fundamentals or realities.
We also need fiscal stimulus and for the government to convince people that they have a plan to stabilize the deficit (even though the deficit doesn’t matter)…
Its all int he hands of politicians. We aren’t so cheap or low in the market that valuation and sheer raw oversoldness is grounds for a bullish stance, but stocks (or at least alot of them) are cheap.
I don’t think anybody has an edge right now, because its all in the hands of politicians, and I’m not sure that the actions of a relatively small number of people can be “forseen”.
Its a giant crapshoot, maybe the PPT and just following its signals is about as good of a bet as anything.
Check, regardless of the factors you list, when trading beneath the major moving averages, and new 200 day lows were recently achieved, the result is primarily volatility, chop, and consolidation. Sometimes it gets worse and there is a major downtrend.
We should ignore the other events and focus on the fact that these trends have persisted over many decades, regardless of politicians, the ECB, the Fed, etc.
well taken, woods
guessing: the fed DOES NOT release any kind of QE3 or market moving moves this week. Why? Core CPI and inflation expectations are about on track and they are all well aware that further monetary policy is not likely to really shake things up for hte better.
guessing: the ECB stays one step behind the blowing paper its trying to catch and has some real problems.
guessing: the repubs in ocngress stonewall fiscal policy attempts in an effort to win the white house in 2012.
guessing, we reach -20% “bear market” territory later this year.
guessing, we don’t ever re-test the 2009 lows, for the simple reason that to get that low there was a fundamental belief that the banking system couldn’t function, that any company that needed to roll debt was likely facing failure and insolvency. I don’t think we’re going to get that again this time.
I have said it before …
… I have been crucified here … for sayin’ it !
… there IS a “rhythm” !!!
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FIND IT !!!
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This is NOT “Rocket Science” !!!
People “OVERTHINKTHISSHIT” !!!
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Pah-Leeeze !!!
Open Your Eyes !!!
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Damn you are annoying.
… But … I AM RIGHT !!!
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Right? You seem more like an annoying leftist to me
so it gaps down and there are margin calls bringing it down further to close the day. Meanwhile small retail traders freak out and emotionally sell at the market bringing it down. Then the margin money flows out of the market and the market becomes less leveraged. As a result upon raising cash, people start noticing opportunity and quickly come back into the market. Then shorts cover briefly panic buying, and it one more time repeats. This time there is sideways action followed by a rally, and people try to sell into the rally again only the buying pressures continue and soon these people who are short are covering and then after the breakout goes higher, people sell and prices come back to where they last broke-out and old resistance becomes new support. As a result lots of transactions take place at these levels, which creates a perceived “floor” and buying activity starts one more time (from day 31 onwards) and the market rallies it’s ass off.
or else it just happens that way and who knows why?
what if the open gapped down >1.0%? or better >1.5%