After a large bear market breakaway gap where both the open and the close were more than -2% beneath the previous close, what can we expect in both the short and intermediate terms?
If the past is any guide to the future, things will get worse before they get better.
Today’s open gapped down -2.90% and the close finished -3.23% beneath the previous close. Truly, it was a nasty, ugly day, and the market came very close to breaking through support near $112.00. Support held, and SPY formed a doji.
Those who are very bearish after witnessing the decapitation of the bulls are right to be bearish. Those who are bullish are right to be bullish. However, the bears are likely to be right in the short term. Bulls, gird your loins. Bears, if there is a crash, take your money and run.
The Rules:
Buy SPY at the Close If:
- The open gaps down < -2%
- The close is < -2% beneath the previous close
- The close is < than both the MA50 and the MA200
No commissions or slippage included. First SPY trade was 9.17.98
The Results:
Analysis of Results:
Sample size is always an issue when attempting to model a specific market event, and this study is no different. There were 19 occurrences of this setup, but only 5 samples were available if each trade were held for the full 100 days. Therefore, these results may not be generalizable. Unfortunately, because $SPX does not record gaps, I could not use the much longer history that is available.
Look: This chart is showing the average of the trades. Actual trades were worse or better. The bottom line is that a -6% fall or +8% gain is huge and speaks to the volatility that lies ahead. Hopefully today removed all doubt, but if not, WE ARE IN A BEAR MARKET. In bear markets, one can lose lots of money. Pro tip: in a bear market, you want to sell the rips, and be very, very careful about buying the dips.
Still, the results reflect the possibility of a bottom being put in. I agree. If we can get a large flush out, I think we may have a solid bottom that can last for months.
My gut says that the near-term will look much like the chart above. I fully expect a bounce and/or consolidation, and then a gut-wrenching Armageddon-style week.
***Update***
Below is a chart showing the dates of 19 setups and the returns 1 close later.
Thanks Wood. Any chance you could post the minimums and #of days after the gap for the 19 occurrences?
Yogi, I would be glad to, I think, but I’m not sure what you are asking.
I think he means maximum drawdown for the trades in the sample?
Maybe so. Yogi will come back and elaborate.
Sure,I’ll try. It’s been a long day. At about day 14 on the chart, there is a minimum which is the average of 19 trades. What I’m curious about is the actual minimums for each of the 19 trades and when they occurred.
For instance in the PPT, the monthly seasonality numbers can be skewed by years when a stock had a monster run, thus masking what may be a reliable down month over the long term. So for 9 years in October the stock lost 5% and 1 year in October the stock doubled. I normally check on a chart before taking the trade.
I hope that’s a bit more clear.
Aha, I got it. You want the maximum drawdown of each individual trade. I could figure that and make it look purty, but its been a long day for me too. Let me give you the trade dates, and you can check it out for yourself, on a chart.
I will update the post and place a graph showing the individual trades.
Thanks. That would be great. Exactly what I was looking for.
Yogi, let me know. I’ve got graphs and stuff galore that could be emailed. Cheers, my friend.
As an example I’m mostly trading $TNA/$TZA right now. I know (from our friend Omen’s work) that the sweet spot for holding $TZA after a PPT OB signal is about 3 days. I can then trade $TZA after an OB and hold it for 3 days with some expectation of it working. If I’m not stopped out, or if the trade does nothing, I close it out after 3 days. If a strong down trend develops, I reevaluate each subsequent day looking to close the trade.
Hmmm. Still not sure if I understand what you are looking for. Possibly the maximum adverse excursion? I’m probably speaking backtester speak.
Just too long a day for me to make sense any more. lol.
How do you find short set ups that let you ride the bear throughout it’s journey. Obviously we have to wait for good entry points. ETFs dont seem to be good strategy to stay short until bear market ends. Can you find a stocks that let you stay short for considerable length of time.
Fish, that is a great question. In a true bear market, pretty much any stock will do. Just pick one that still has some meat on the bone and ride it down.
The hard part is staying short through all the rallies. There will be rallies of +10% and then the stocks will fall farther. Most people don’t have the conviction to stay short long enough to get the big winners.
There is a reason they call it going short. Most of the time selling short is short-term trade, since the market has an obvious up-side bias. In a true bear market, most people apply the same rules to short selling as they do in a bull market. That is a mistake. In a true bear market, you just get short, and then hold on tight.
Great post!
Woodshedder iS there a way to e-mail you?
woodshedder73 at the google mail.