On Monday, SPY closed at a 25 day high, but volume came in less than the 50 day average. The combination of a 25 day high made on low volume seems to be a bearish combination, but one never knows without backtesting it.
For some background, read this post which shows what happens after X day new highs are made.
The Rules:
Buy SPY at the close if
- SPY closes at a 25 day high AND
- Volume is <80% of the 50 day average
All SPY history was used and no commission or slippage was included.
The Results:
My suspicions may have been proven to be correct. It appears that SPY does not have enough conviction behind it to hold its gains when a 25 day high is made on lower volume. When the volume requirement is removed (see the red line), SPY has tended to hold onto and continue adding to previous gains.
While 50 days after the setup SPY has managed to show gains, this may be due to the fact that markets have a bias to the upside. What is more important to consider is that the period in between has seen sideways and up and down trading. In other words, while volatility tends to drop as SPY makes new highs, the lack of buyer conviction may mean that volatility is going to remain elevated despite the 25 day high.
Sample size was not an issue with this study.
Interestingly enough, another recent study lead me to conclude that “[t]he results show that we can expect more sideways trading and volatility.”
Our current environment contains many uncertainties, but markets have always been able to shrug these things off and continue climbing. However, the studies and the market environment both seem to be in agreement here. Thus, my call for more sideways action and elevated volatility remains.
Good stuff – thank you! Would have loved to see a third line plotted (New High + Vol >= 80%) — Looks like that difference could be meaningful.
Thanks! I wish I would have thought of that…I’ll include it tonight and see what happens. If there is a big change, I’ll update the post.