The 7 day rate-of-change (ROC7) for SPY is 9.84%. Looking back over 40 years, a ROC7 of greater than 9% has occurred only 44 times. Standard thinking would have us looking for a pullback here. Testing this setup shows that the move higher is likely to continue.
I’ve got a short position open that I rode down to the recent new low, and have ridden back up to our current close. I’m looking for a pullback here because I want to close the short for break-even and put some cash to work. Plus, it just makes sense that after the market goes up almost 10% with no pullbacks, that it will pullback. Unfortunately, such a strong and forceful move like we’ve seen over the past 7 days seems to indicate a change in the market, and the change looks like it might be an uptrend. If we do see an uptrend develop, look for volatility to quickly dissipate.
The Rules:
Buy SPY at the close if:
- The 7 day rate of change is greater than 8% (I lowered the threshold to 8% to obtain a larger sample)
- Sell X days later
- Also look at when SPY is beneath its 200 day moving average
- Include 60 years of $SPX data
No commissions or slippage included. All SPY history used.
The Results:
Analysis of Results:
SPY ROC7>8 had a sample size of 28 setups with 13 trades held for the full 50 days.
SPY <MA200 had a sample size of 21 setups with 9 trades held for the full 50 days.
$SPX < MA200 had a sample size of 31 setups with 16 trades held for the full 50 days. The first trade was in 1962.
These results do not need an in-depth explanation. They are bullish. In the past there has been a small pullback, and then it has been off to the races.
Frankly, these results do not square very well with this study about SPY re-taking the 50 day moving average. I’m inclined to believe that such a powerful move up negates the influence of the 50 day moving average.
Interesting.
(chin scratch).
I was pondering over some charts today and stumbled across something quite interesting. The Hang Sang topped in November last year. Consequently, the SPX(silver also) topped about 6 months later. (I should mention I do not believe in coincidence, not in the markets at least)It seems the Hang Sang has been the leading indicator of the SPX(by about 6 months)
Im telling you this only because the Hang Sang made a top on April, before jumping off a cliff. Meaning the SnP would be ripe for also making a top and selling off a cliff. Im in the same position as you, I had paper profits on my shorts of +10% at the lows and life was great then. However, as of today Im in negative territory with those shorts and Im ready to snap some fucking necks.
Maybe I’m late to the party on this one? O well..I could care less..fuck it.
What are your thoughts o master of the backtest!
Hmm. Interesting about the Hang Seng. I’ll have to pull up a chart of it.
The ECB stuff is the wild card and is driving sentiment, at least about the short term. In the long term, did it matter that we bailed out the banks? No. Will it matter that Greece gets bailed out or goes bankrupt? No. Next it will be Italy, or Spain, or California, or Illinois. But in the short-term, we rally like our asses are on fire.
I don’t know. I think that until volatility drops significantly and we see a firm uptrend, that we are long for a bounce and then go to cash.
Not very helpful, I know.
I will agree that the ECB stuff is a wild card, but not what will bring this market crashing down. I look at the markets as a big magic show. When the media is fixated on something I always look around and try to determine what everyone is being distracted from. I will now quote one of my favorite movies.
Gabriel: Have you ever heard of Harry Houdini? Well he wasn’t like today’s magicians who are only interested in television ratings. He was an artist. He could make an elephant disappear in the middle of a theater filled with people, and do you know how he did that? Misdirection.
Stanley: What the fuck are you talking about?
Gabriel: Misdirection. What the eyes see and the ears hear, the mind believes.
What do you know?
http://www.bloomberg.com/news/2011-10-13/china-trade-surplus-drops-to-lowest-in-four-months-as-export-growth-slows.html
“omg…where did that come from?”
I really enjoy your stuff. Top Quality.
The market certainly has had a dramatic shift in sentiment. All dips are buys me think.
I’ll be buying the dip tomorrow.
Thanks. I really want to buy a dip as well, and get my short covered. I STILL have the distinct feeling that the market has much more downside ahead. That is my gut. It is likely wrong. Hence, I moderate the gut with historical precedence.
Maybe not just gut feelings. Keep in mind the 50-100 day lookforwards projected in some of the modelling done back in August and September.
We are just entering those zones and they looked ghastly on those projections, and they too were based on “historical precedence”.
I think prior comments to this post regarding the unique crosswinds right now are right on, and that these crosscurrents are playing out in these varying longer timeframe simulations.
Net result, then, is alternating projections, some wildly bullish, some very somber, and a net net in realtime of a huge volatile sidewaysness… as we’ve had over the recent intermediate timeframe.
I think, Wood, that it’s a primordial UR-memory of some of those Aug-Sept studies that is stirring your gut…
Your past two posts are spot on. Might I add that you are one of only two people on this site that isn’t a degenerate gambler. Keep up the good work…
Thanks! But…what is wrong with degenerate gambling?
Never mind that… I want to know who’s the OTHER one?? LOL!
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I take offense to that.
I’m inclined to be very wary of applying historical tendencies to the present market.
Between robot trading, massive central-banker intervention in the markets, the zero bound monetary situation, and governments the world over suddenly caring about deficits after using untold billions to bail out banks and before making serious efforts to cure double-digit unemployment, the market is getting pinballed by a lot of strong and unpredictable forces that didn’t exist until the last few of those 40 years.
It is still useful to know that it is wrong to assume that such a rapid rise means that a pullback is imminent, but I would use that info just to neutralize an incorrect bearish assumption rather than to build a bullish case for the current market.
The banks have for the most part paid back their bailout. It’s your folks at the UAW who are still in arrears.
Recall, that “additional use of TARP” was in pursuit of “curing double digit unemployment.”
History proves economies heal on their own, as long as they are not taking additional hits from “helping hands” who think they’ve the sole solution.
Thank the Founders for elections every two years.
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You define bailout too narrowly.
For example, the money paid out to make AIG’s creditors whole was a giveaway – the banks and other creditors were bailed out with free money rather than a loan that has to be paid back.
True.
I lump AIG into the theft category along with the UAW’s stealing GM and Chrysler from the bondjolders. It was a 100% pass through to the Goldman crooks.
We are now finding out that the entire “green energy” giveaway was almost entirely big corporate welfare as well.
Sigh.
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Why do I get the feeling that the powerdip is about to be minting some serious coin going forward?
Cheese, we need a pullback for it to start firing.
Woods — Love that you and Mr. Thaler have dueling headers today.
Embrace the diversity!
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With the banks reporting this week, my vote is for a down week. Time for FAZ?
Woodshedder,
If I wanted to run some of my own setups and also do backtesting as you are doing, what is the best and cheapest way to get the input market data?
–Thanks Bull
Bull, cheapest is to use something like Yahoo. There are problems with that, but it will definitely work, and a lot of people use that.
If I am writing code to automate the process, is yahoo still a possibility?
Should be no problem. There are likely many scripts that pull from yahoo daily.
What percent are you up (or down) this year Woodshedder? With all this T/A work you should be up at least 50%.