As $SPY and $QQQ continue to climb the upper Bollinger Band, I am not looking for a strong pullback as much as some pausing and consolidation. That is not to say that there will not be a strong pullback. There will be. I believe it is too early for that. My point remains that this is not a market that is made for shorting.
Let’s look at an objective measure to add some perspective.
In the graph above, we want to observe the red line, Above_MA5, which is a representation of the number of stocks trading above their 5 day simple moving averages. We can see that it seems to correspond fairly well with minor market tops and swings. When the red line gets above 2500, it typically marks a minor top and the market pulls back. What we want to know is how much is the average pullback? Is there enough meat on the bone of one of these pullbacks to consider shorting?
Buy $SPY or $QQQ at the close if:
- The number of stocks above their 5 day simple moving averages is greater than 2500
We are going to sell at the close X days later.
No commissions or slippage is included. These tests unfortunately do not go back more than five years because there were not enough stocks to make the 2500 number, even using delisted stocks. In other words, there were still peaks and valleys in the red line, but it couldn’t make it to 2500 simply because there were not enough stocks in the market.
The results show that on average, the market climbs slightly higher over the next few days, and then we see the slight pause that refreshes.
Even though $SPY and $QQQ are almost parabolic, this is not a place to short. Instead, we are looking for some consolidation, possibly a minor pullback, and then a resumption of the uptrend.