Joined Nov 11, 2007
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S&P 500 Still Working Through Process of Normal Pullback

A couple of weeks ago I wrote that modeling of similar setups showed that SPY was likely working through a normal pullback and not making a significant top.

This post continues with the same line of inquiry, the goal of which is to model recent SPY behavior without making the model so specific that there are not enough samples to backtest.

SPY made a new 50 day high 18 days ago and the 18 day rate-of-change is a tad more than -1%.

All I have done is told the backtester to find other similar instances.

The Rules:

Buy SPY at the close if

  • It made a new 50 day high >15 days ago and <20 days ago
  • The 18 day ROC is <-1% and >-2%

No commissions or slippage were included. All SPY history was used.

The Results:

The results look very similar to the previous study. After a period of consolidation, the rally continues. There were 29 occurrences of this setup, and 22 of them were held for the full 50 days.

As I’ve said before, there is nothing magic here. Making new 50 day highs is a big deal, and the momentum tends to persist. Perhaps the most important takeaway is that when SPY is making new 50 day highs, it seldom goes more than a few days or a week before making another new high. If SPY goes any longer without making a new high, it is likely pulling back.

I calculated the average SPY buy-n-hold return by chopping all SPY history into 50 day segments and then averaging the segments.

The most recent example of this setup occurred when a pullback began on 11.8.2010. Another example was the pullback that began on 8.10.2010.

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