$SPY Has Traded Above its MA20 for 34 Days. Bullish or Bearish?

Well it appears that last night’s post jinxed the market today. Either that or Fly’s tweet of my post caused a disturbance in the market equilibrium. Whatever the reason, today’s little blip caused quite a bit of teeth gnashing, except for those who were magically short going into the day.

Today marked the 34th day that $SPY closed above its 20 day simple moving average (MA20). Even after losing 1.3% on the day, the ETF managed to close just above the MA20. I suspect we’ll see some follow through tomorrow, which means $SPY will likely close beneath its MA20. With that in mind, let’s look at what has happened when this setup occurred in the past.

The Rules:

• Buy $SPY or $SPX at the Close when it Trades above its MA20 for more than 30 Days and then Closes beneath its MA20.
• Sell X Days Later.
• No commissions or slippage included.
• All $SPY history used. $SPX history starts in 1928.

The Results:

$SPY results are the average of 21 trades held for the full 50 days. $SPX results are the average of 103 trades with 93 held for the full 50 days. Buy-n-Hold results are generated by chopping all $SPY history into 50 day segments and then averaging the segments.

If we were to only consider the past ~20 years of $SPY results, sample size would be a limitation in this study. The addition of almost 90 years of $SPX results lends more reliability to the results.

Its hard to ignore the edge here. If $SPY closes beneath its MA20 tomorrow, the future will look bright for the next 10 to 15 trading days. After that, history guides us to expect some consolidation or another small pullback.

For the traders who woke up today and magically found themselves short, neat trick. For the bulls, if the edge prevails, all of today’s losses will likely be erased. At that point it would be wise to consider whether to continue pressing your luck without reducing exposure or adding hedges.

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