On April 2nd, SPY made a new 50 day high. How long can the index trade without making another new high before our expectations turn bearish?
It makes intuitive sense that the longer an index trades without making a new high the more bearish traders become. In fact, this might be one time when intuition and historical results agree.
Buy SPY at the close if
- It has been > X days since SPY made a new 50 day high (NH50)
Sell SPY at the close Y days later.
No commissions or slippage included. All SPY history used.
The above results show that traders should begin to expect consolidation or bearish action when it has been more than 25 days since SPY made a new 50 day high.
What makes these results even more bearish, in my opinion, is that SPY was within a percent or so of making a new high, and then failed to do so. The resulting chart (see below) is beginning to suggest that we might be seeing a correction rather than a pullback. The longer SPY trades without making a new high, the more likely it is that trading will become more volatile and bearish.
The Bottom Line:
If we could look back on recent market action from the future, I do not believe we would be calling it a pullback. As the market continues to trade sideways (or down), I believe history will record this as a correction. Be prepared to move to cash or introduce whatever protective measures fit your investment profile.
Eventually, an inflection point will be met where we can determine that SPY has traded for too long without making a new 50 day high. Then it will be time to become very bullish. A future study will seek to determine where or when this inflection point might occur.