Here is the setup: Buy SPY at the close if it closes less than 0.5% above the lower Bollinger Band (50,2). As you will see below, unlike almost all studies looking 50 days forward, this one is bearish.

If one applies Bollinger Bands to SPY using a 50 day period and 2 standard deviations it is evident that SPY rarely closes near the lower band. Just look back over 5 years and you’ll see what I’m talking about. Usually when it does get near the lower band, it bounces. But sometimes it doesn’t bounce…

Since SPY closed on Friday less than 0.5% above the bottom Bollinger Band, I was curious what had happened when that occurred in the past.

The Results:

The graph above shows the average trade spends most of its time in negative territory after this setup.

However, it is important to note that these results are heavily influenced by a few large losers, with the largest being a -29.84% loss on November 25, 2008.

In fact, with a 62.5% win rate (generated by selling the trade after 50 days), the setup has a decent edge in terms of predicting a higher close over the intermediate term. Unfortunately, in terms of the average winner compared to the average loser, the results are not nearly as positive.

The average winner was 4.77% The average loser was -8.99%.

So while over the intermediate term there is a better than average chance that 50 days later SPY will be higher than Friday’s close, if the setup does not work, the damages could be severe.

I might be a tad melodramatic when I write this, but we are nearing a bounce or die situation.