Unfortunately, computer problems kept me from studying the new 20 day low and the 3 day surge that followed. The new 20 day low was set on 11.25.11 and the 3 day surge concluded on 11.30.11. I want to now see what has followed such a setup, albeit a couple of days late.
Last week was an incredible week – one for the record books.
On Friday, 11.25, the day after Thanksgiving, SPY made a new 20 day low. Monday, news of improvement in the EuroZone crisis led to a large gap-up. The market continued to rocket through Wednesday, making 3 consecutive higher closes, logging a three day rate of change of 7.44%. After such a surge, it is normal to want to wait and see if a pullback occurs. It is hard to buy after the market moves up so far, so fast.
The Setup:
Buy SPY at the close if:
- 3 Days Ago SPY Made a New 20 Day Low
- It Makes 3 Consecutive Higher Closes
- The 3 Day Rate of Change is Greater Than .99, or 2.99, or 5.99
Sell SPY at the close Y days later. No commission or slippage included. All SPY data used.
The Results:
First, let’s look at the sample sizes for the three different ROCs.
- ROC3>.99 had 58 occurrences with 38 held the full 50 days.
- ROC3>2.99 had 34 occurrences with 26 held the full 50 days.
- ROC3>5.99 had 6 occurrences with all 6 held the full 50 days.
This setup had a win rate that increased as the ROC3 increased. ROC3>.99 had a win rate that averaged near 60%, but higher ROC3s had win rates in the 70s and 80s.
As the ROC3 amount increased, the average length of consolidation after the setup shortened. From the chart above, ROC>.99 consolidated about 11 days before moving again. ROC3>2.99 paused for about 6 days while ROC>5.99 barely consolidates at all before taking off again.
All but one of the six ROC3>5.99 occurred during a bear market, with one of them marking the bottom after the 2008 and early 2009 bear market. Another one of the six marked a major bottom in 2002 while another marked a major short-term bottom in 2008. It remains to be seen whether our current setup will mark a major bottom. Keep in mind it is included in the six.
For the ROC3>.99 and ROC3>2.99, the average losing trades maxed out at near -7% while the average winning trades maxed out at near 6%. Because there were more winners than losers, the average is positive. Any losing trades for ROC3>5.99 were very small.
What Does It All Mean?
If this setup is going to work, we should likely know next week. Setups modeling last-week’s behavior have typically marked long-term bottoms (small sample sizes aside) and have not consolidated for very long before moving again. The setups with larger sample sizes still show an edge here. Perhaps the best way to play this is to wait for confirmation in the form of a new short-term closing high.
There is significant resistance around SPY $126.00. If the market blows through this resistance, that in itself will be significant. If that occurs, I will definitely view that as confirmation of a significant bottom.
i must be retarded. what exactly is the trade wood? and… are you getting longer term bullish here? thanxs
what is the current ROC?
Fake, here is the setup.
1. A new 20 day low.
2. After a new 20 day low, the next 3 days close consecutively higher.
That is the setup. The variable is the ROC3, which is to say, how much did SPY gain over those 3 consecutive higher closes?
You would be buying at the close of the 3rd consecutive higher close.
Hope this helps. If not, let me know.
Thanks for the information. I’m sure Thursday will show the way onto next week as well.
From the rumors (if you’ve been following inside information) is the Fed’s grip has not loosened, so the market will continue going up.
This strength reminds me of the huge gains after the major bottoms in 2002 and 2003, but without the incessant declines in prices that preceded them (i.e., those were much more V-shaped bottoms, while this was more flat-bottomed). But this one seems much more news driven.
Thanks Wood. Nice job. It’s great when the statistics confirms what the “gut” tells me.