5 $SPX Closes Above the Upper Bollinger Band: What Happens 50 Days Later?

1,070 views

Today, despite closing slightly lower, the S&P 500 closed for the 5th day above its upper Bollinger Band (50,2). I have written previously how closes above the the upper band are typically bullish and may signal an abnormal market. This evening we’ll examine what happens after 5 consecutive closes above upper Bollinger Band.

The Rules:

  • Buy $SPX at the close after it has made X consecutive closes above its upper Bollinger Band
  • Sell Y days later
  • $SPX history starts in 1928
  • No commissions or slippage included

The Results:

5 Closes Abv BB

The results are more bullish than I expected, and they improve as the number of closes above the upper band increases.

  • This setup was not nearly as rare as I had imagined.
  • There were 126 occurrences of 5 closes above the upper band with 110 trades held the full 50 days.
  • After 5 closes above the upper band, $SPX has closed higher 50 days later 67.27% of the time.
  • Buy-n-Hold results are calculated by cutting $SPX history into 50 day segments and then averaging the segments.

The number of samples should be sufficient to lend reliability to the results, but I am honestly a little disappointed because I suspected the results would be either extremely bullish or extremely bearish. I was looking for some drama and didn’t find it. Instead, this study just presents another reason to lean bullish.

Shorts Beware: $SPY Abnormally Strong

594 views

I have written many posts about abnormal markets. On Friday, $SPY met a basic criteria for being abnormal with a bias to the upside.

There are times to short and there are times sit on our hands. How do we determine when to short and when to sit? One method I like is to use the upper Bollinger Band (50,2) as an abnormal market filter. I have found through backtesting that a close above the upper BB signals a market that may be entering or continuing a sustained uptrend. In other words, it is a market that is less-likely to revert to the mean and more likely to trend. This may be counter-intuitive as we typically view a market that has been sharply rising as one that is due for a correction, or at the very least, a pullback. What I have found after a close above the upper Bollinger Band is that instead of a sharp pullback or correction, we see some consolidation and then a resume of the uptrend.

Let me demonstrate.

The Rules:

  • Buy $SPY at the close if the close yesterday was NOT above the upper Bollinger Band AND the close today IS above the upper Bollinger Band (50,2).
  • Sell $SPY at the close X days later.
  • No commissions or slippage included.
  • All $SPY history used.

The Results:

There were 123 occurrences of this setup with 27 being held for the full 100 days.

These results compare buying $SPY according to the rules above vs. buy and hold. To generate the buy and hold results and have them comparable, I split all of the $SPY history into 100 day segments and then averaged the segments.

The buy and hold results show the clear bias to the upside that has been prevalent over the past 20 years. The setup results show a market that has closed more than 2 standard deviations above the 50 day mean and still manages to climb almost 2 months later to close higher on average than buying and holding. After this setup, the market has tended to surge, and 100 days later has averaged a return of almost twice what we would expect with buying and holding.

And that is why this triggers the abnormal market filter. It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

$SPY Abnormally Bullish?

519 views

I have written many posts about abnormal markets. On Friday, $SPY met a basic criteria for being abnormal with a bias to the upside.

There are times to short and there are times sit on our hands. How do we determine when to short and when to sit? One method I like is to use the upper Bollinger Band (50,2) as an abnormal market filter. I have found through backtesting that a close above the upper BB signals a market that may be entering or continuing a sustained uptrend. In other words, it is a market that is less-likely to revert to the mean and more likely to trend. This may be counter-intuitive as we typically view a market that has been sharply rising as one that is due for a correction, or at the very least, a pullback. What I have found after a close above the upper Bollinger Band is that instead of a sharp pullback or correction, we see some consolidation and then a resume of the uptrend.

Let me demonstrate.

The Rules:

Buy $SPY at the close if the close yesterday was NOT above the upper Bollinger Band AND the close today IS above the upper Bollinger Band (50,2).

Sell at the close X days later.

The Results:

These results compare buying $SPY according to the rules above vs. buy and hold. To generate the buy and hold results and have them comparable, I split all of the $SPY history into 50 day segments and then averaged the segments.

The buy and hold results show the clear bias to the upside that has been prevalent over the past 20 years. The setup results show a market that has closed more than 2 standard deviations above the 50 day mean and still manages another surge almost 2 months later to close higher on average than buying and holding.

And that is why this triggers the abnormal market filter. It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. Since the June 4th low, we’ve seen fairly predictable swings. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

 

This Market is Almost Abnormally Bullish: Bears Beware

1,059 views

A market that does the opposite of what it is supposed to do should is telling you something. Our current market has almost over-extended itself into abnormality. Let’s look at what happens with SPY when it extends itself above the upper Bollinger Band.

Traders must develop abnormal market filters. These filters can be used to denote markets that are abnormally bullish or bearish and will help traders know when trends may extend themselves for longer than normal without a significant correction or pullback. My favorite go-to abnormally bullish market filter is the upper Bollinger Band, set to a 50 day period and 2 standard deviations (50,2).

SPY has closed just 12 pennies beneath the upper Bollinger Band. Although the close is technically beneath the band, one shouldn’t take a completely binary approach to determining an abnormal market. In this case, like hand grenades, close enough counts. Bears who are looking for a swift and sure pullback for this over-extended market may end up waiting longer than they can bear.

The Rules:

Buy SPY at the Close if

  • SPY closes above its upper Bollinger Band (50,2);

Sell X days later. No commissions or slippage included. All SPY history used.

The Results:

Thoughts and Caveats:

Results over the first 30 trading days tend to under-perform.

The under-performance or consolidation (compared to buy-n-hold) that is typical after a close above the upper Bollinger Band probably lulls bears into a false sense of security. Rather than putting in a large pullback, SPY has tended to shoot higher.

After getting abnormally overextended,  bullishness tends to persist. This concept is a simple illustration of the power of momentum. During abnormally bearish markets, price tends to slide down the lower Bollinger Band (see SPY in 2008) while in abnormally bullish markets, price will ride the upper Bollinger Band. The chart below shows many examples of this phenomenon.

There are enough samples of this setup for the results to be generalizable.

To read previous posts on both abnormally bullish and abnormally bearish markets, go here.

The above chart illustrates the tendency of SPY to ride up and slide down the upper and lower Bollinger Bands.

Volume Surge Suggests Bottoming?

501 views

Last week, volume on SPY surged to 175% greater than the 50 day average volume. Does this surge in volume hint that a tradeable bottom is near?

On Wednesday, June 15th, SPY volume surged to more than 175% of the 50 day average and made a new 50 day low. On Thursday, volume again surged. When looking for bottoms, it helps to see capitulation. Volume surges coupled with new lows suggest that capitulation may be occurring.

The wild card, and the major caveat of any current SPY study is that it continues to close beneath its bottom Bollinger Band. Since the bottom band marks 2 standard deviations beneath SPY’s 50 day average, multiple closes beneath it signals that the market is abnormal. An abnormal market can stay abnormal longer than we would like. I have written previously about abnormal markets here. We really need multiple closes above the bottom band before this abnormality is removed. Once this happens, bottom-calling makes more sense, in my opinion.

Anyway, lets look at what the volume surge suggests.

The Rules:

  • When volume surges to more than 175% of the 50 day average volume, buy SPY at the close
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

The Results:

Summary of Results:

I added two other variables in order to more accurately model recent market action.

  1. The blue line is the basic setup where volume surges to 175% of the 50 day average volume
  2. The red line adds the factor of the new 50 day low
  3. The green line uses the other factors and adds the requirement of the last close beneath the lower Bollinger Band (50,2)

Sample sizes for these studies were acceptable with 271 occurrences of the basic setup (58 trades if the trade is held the full 50 days), and 59 occurrences of the added factor of the 50 day low (29 trades if the trade is held the full 50 days). Adding the final factor of the close beneath the bottom Bollinger Band reduces the number of occurrences to only 24 with only 14 trades if the trade is held the full 50 days.

Bottom Line: As noted above, SPY has got to quit closing below the bottom Bollinger Band. Until it doesn’t, we should expect that it will continue. If we ignore the additional factor of the close beneath the bottom band, it appears that the market may be bottoming. The red line is suggesting some consolidation over the next month. After about 25 days, consolidation has ended and over the next 25 days, SPY has climbed 3% on average.

SPY Closes Twice Beneath Lower Bollinger Band: Bullish?

706 views

Last night’s post looked at what has happened in the past when SPY closed beneath the lower Bollinger Band. Tonight’s post updates the previous research to include a 2nd close beneath the lower Bollinger Band.

Ideally, we would have bounced today and closed back above the lower Bollinger Band (50,2). In fact, the market was trading above the lower band until the Bernanke speech derailed the rally. This action was disappointing and a bit troublesome.

Since the bands I’m using mark 2 standard deviations below the mean, sustained trading in this area represents an abnormal market. Similar to when the market closes above the upper Bollinger Band, trading beneath the lower band for any length of time can signal that it is a bad time to be looking for a sustained bounce. Tonight’s research demonstrates this principle. Observe the difference in near-term market performance when the market fails to bounce and close above the lower Bollinger Band on the 2nd day.

This is the same graph from the previous post updated with tonight’s research.

Note that while we are still looking for a bounce over the next couple of days, the intensity of the bounce has been decreased. Bounces after 2 closes beneath the lower band have had a hard time holding onto gains.

Unless something changes, and quickly, it appears that the next 20 days of trading could find us trading lower or consolidating around today’s close, give or take a percent or so.

On the bright side, if past history is any indication of the future, we should be higher than today’s close sometime after July 4th.

On the dark side, we could be starting an extended slide down the lower band. I’m a big believer in symmetry and am worried that after our 3 month melt up along upper band from December 2010 through February 2011, we might have to spend some time melting down along the lower band.

Market Abnormally Overbought, Again

548 views

The market is extended here but one measure suggests an abnormally overbought market can keep going higher and higher.

I’ve written before, here and here, about an abnormally overbought S&P 500. I do not recommend shorting overbought markets as they have the tendency to stay overbought for longer than we might expect.

The Setup:

  • Buy SPY (or $SPX) at the close when it closes above the upper Bollinger Band (built around a 50 period mean with the bands 2 standard deviations from the mean).
  • Sell X days later.
  • No commissions or slippage included.
  • All SPY history used. $SPX history starts in 1960.

The Results:

While many traders see an abnormally overbought market and think it is time to short, this study shows that at the very least, it is better to just do nothing, or stay long.

While the edge is not much better than Buy and Hold (for the SPY), there doesn’t appear to be much value in expecting a major correction or even a big pullback. Perhaps if this setup was combined with other factors, such as low volume, we might predict when an abnormally overbought market might fail.

This setup, as shown with 50 years of data on $SPX, has consistently led to more market melt ups.

5 $SPX Closes Above the Upper Bollinger Band: What Happens 50 Days Later?

1,070 views

Today, despite closing slightly lower, the S&P 500 closed for the 5th day above its upper Bollinger Band (50,2). I have written previously how closes above the the upper band are typically bullish and may signal an abnormal market. This evening we’ll examine what happens after 5 consecutive closes above upper Bollinger Band.

The Rules:

  • Buy $SPX at the close after it has made X consecutive closes above its upper Bollinger Band
  • Sell Y days later
  • $SPX history starts in 1928
  • No commissions or slippage included

The Results:

5 Closes Abv BB

The results are more bullish than I expected, and they improve as the number of closes above the upper band increases.

  • This setup was not nearly as rare as I had imagined.
  • There were 126 occurrences of 5 closes above the upper band with 110 trades held the full 50 days.
  • After 5 closes above the upper band, $SPX has closed higher 50 days later 67.27% of the time.
  • Buy-n-Hold results are calculated by cutting $SPX history into 50 day segments and then averaging the segments.

The number of samples should be sufficient to lend reliability to the results, but I am honestly a little disappointed because I suspected the results would be either extremely bullish or extremely bearish. I was looking for some drama and didn’t find it. Instead, this study just presents another reason to lean bullish.

Shorts Beware: $SPY Abnormally Strong

594 views

I have written many posts about abnormal markets. On Friday, $SPY met a basic criteria for being abnormal with a bias to the upside.

There are times to short and there are times sit on our hands. How do we determine when to short and when to sit? One method I like is to use the upper Bollinger Band (50,2) as an abnormal market filter. I have found through backtesting that a close above the upper BB signals a market that may be entering or continuing a sustained uptrend. In other words, it is a market that is less-likely to revert to the mean and more likely to trend. This may be counter-intuitive as we typically view a market that has been sharply rising as one that is due for a correction, or at the very least, a pullback. What I have found after a close above the upper Bollinger Band is that instead of a sharp pullback or correction, we see some consolidation and then a resume of the uptrend.

Let me demonstrate.

The Rules:

  • Buy $SPY at the close if the close yesterday was NOT above the upper Bollinger Band AND the close today IS above the upper Bollinger Band (50,2).
  • Sell $SPY at the close X days later.
  • No commissions or slippage included.
  • All $SPY history used.

The Results:

There were 123 occurrences of this setup with 27 being held for the full 100 days.

These results compare buying $SPY according to the rules above vs. buy and hold. To generate the buy and hold results and have them comparable, I split all of the $SPY history into 100 day segments and then averaged the segments.

The buy and hold results show the clear bias to the upside that has been prevalent over the past 20 years. The setup results show a market that has closed more than 2 standard deviations above the 50 day mean and still manages to climb almost 2 months later to close higher on average than buying and holding. After this setup, the market has tended to surge, and 100 days later has averaged a return of almost twice what we would expect with buying and holding.

And that is why this triggers the abnormal market filter. It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

$SPY Abnormally Bullish?

519 views

I have written many posts about abnormal markets. On Friday, $SPY met a basic criteria for being abnormal with a bias to the upside.

There are times to short and there are times sit on our hands. How do we determine when to short and when to sit? One method I like is to use the upper Bollinger Band (50,2) as an abnormal market filter. I have found through backtesting that a close above the upper BB signals a market that may be entering or continuing a sustained uptrend. In other words, it is a market that is less-likely to revert to the mean and more likely to trend. This may be counter-intuitive as we typically view a market that has been sharply rising as one that is due for a correction, or at the very least, a pullback. What I have found after a close above the upper Bollinger Band is that instead of a sharp pullback or correction, we see some consolidation and then a resume of the uptrend.

Let me demonstrate.

The Rules:

Buy $SPY at the close if the close yesterday was NOT above the upper Bollinger Band AND the close today IS above the upper Bollinger Band (50,2).

Sell at the close X days later.

The Results:

These results compare buying $SPY according to the rules above vs. buy and hold. To generate the buy and hold results and have them comparable, I split all of the $SPY history into 50 day segments and then averaged the segments.

The buy and hold results show the clear bias to the upside that has been prevalent over the past 20 years. The setup results show a market that has closed more than 2 standard deviations above the 50 day mean and still manages another surge almost 2 months later to close higher on average than buying and holding.

And that is why this triggers the abnormal market filter. It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. Since the June 4th low, we’ve seen fairly predictable swings. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

 

This Market is Almost Abnormally Bullish: Bears Beware

1,059 views

A market that does the opposite of what it is supposed to do should is telling you something. Our current market has almost over-extended itself into abnormality. Let’s look at what happens with SPY when it extends itself above the upper Bollinger Band.

Traders must develop abnormal market filters. These filters can be used to denote markets that are abnormally bullish or bearish and will help traders know when trends may extend themselves for longer than normal without a significant correction or pullback. My favorite go-to abnormally bullish market filter is the upper Bollinger Band, set to a 50 day period and 2 standard deviations (50,2).

SPY has closed just 12 pennies beneath the upper Bollinger Band. Although the close is technically beneath the band, one shouldn’t take a completely binary approach to determining an abnormal market. In this case, like hand grenades, close enough counts. Bears who are looking for a swift and sure pullback for this over-extended market may end up waiting longer than they can bear.

The Rules:

Buy SPY at the Close if

  • SPY closes above its upper Bollinger Band (50,2);

Sell X days later. No commissions or slippage included. All SPY history used.

The Results:

Thoughts and Caveats:

Results over the first 30 trading days tend to under-perform.

The under-performance or consolidation (compared to buy-n-hold) that is typical after a close above the upper Bollinger Band probably lulls bears into a false sense of security. Rather than putting in a large pullback, SPY has tended to shoot higher.

After getting abnormally overextended,  bullishness tends to persist. This concept is a simple illustration of the power of momentum. During abnormally bearish markets, price tends to slide down the lower Bollinger Band (see SPY in 2008) while in abnormally bullish markets, price will ride the upper Bollinger Band. The chart below shows many examples of this phenomenon.

There are enough samples of this setup for the results to be generalizable.

To read previous posts on both abnormally bullish and abnormally bearish markets, go here.

The above chart illustrates the tendency of SPY to ride up and slide down the upper and lower Bollinger Bands.

Volume Surge Suggests Bottoming?

501 views

Last week, volume on SPY surged to 175% greater than the 50 day average volume. Does this surge in volume hint that a tradeable bottom is near?

On Wednesday, June 15th, SPY volume surged to more than 175% of the 50 day average and made a new 50 day low. On Thursday, volume again surged. When looking for bottoms, it helps to see capitulation. Volume surges coupled with new lows suggest that capitulation may be occurring.

The wild card, and the major caveat of any current SPY study is that it continues to close beneath its bottom Bollinger Band. Since the bottom band marks 2 standard deviations beneath SPY’s 50 day average, multiple closes beneath it signals that the market is abnormal. An abnormal market can stay abnormal longer than we would like. I have written previously about abnormal markets here. We really need multiple closes above the bottom band before this abnormality is removed. Once this happens, bottom-calling makes more sense, in my opinion.

Anyway, lets look at what the volume surge suggests.

The Rules:

  • When volume surges to more than 175% of the 50 day average volume, buy SPY at the close
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

The Results:

Summary of Results:

I added two other variables in order to more accurately model recent market action.

  1. The blue line is the basic setup where volume surges to 175% of the 50 day average volume
  2. The red line adds the factor of the new 50 day low
  3. The green line uses the other factors and adds the requirement of the last close beneath the lower Bollinger Band (50,2)

Sample sizes for these studies were acceptable with 271 occurrences of the basic setup (58 trades if the trade is held the full 50 days), and 59 occurrences of the added factor of the 50 day low (29 trades if the trade is held the full 50 days). Adding the final factor of the close beneath the bottom Bollinger Band reduces the number of occurrences to only 24 with only 14 trades if the trade is held the full 50 days.

Bottom Line: As noted above, SPY has got to quit closing below the bottom Bollinger Band. Until it doesn’t, we should expect that it will continue. If we ignore the additional factor of the close beneath the bottom band, it appears that the market may be bottoming. The red line is suggesting some consolidation over the next month. After about 25 days, consolidation has ended and over the next 25 days, SPY has climbed 3% on average.

SPY Closes Twice Beneath Lower Bollinger Band: Bullish?

706 views

Last night’s post looked at what has happened in the past when SPY closed beneath the lower Bollinger Band. Tonight’s post updates the previous research to include a 2nd close beneath the lower Bollinger Band.

Ideally, we would have bounced today and closed back above the lower Bollinger Band (50,2). In fact, the market was trading above the lower band until the Bernanke speech derailed the rally. This action was disappointing and a bit troublesome.

Since the bands I’m using mark 2 standard deviations below the mean, sustained trading in this area represents an abnormal market. Similar to when the market closes above the upper Bollinger Band, trading beneath the lower band for any length of time can signal that it is a bad time to be looking for a sustained bounce. Tonight’s research demonstrates this principle. Observe the difference in near-term market performance when the market fails to bounce and close above the lower Bollinger Band on the 2nd day.

This is the same graph from the previous post updated with tonight’s research.

Note that while we are still looking for a bounce over the next couple of days, the intensity of the bounce has been decreased. Bounces after 2 closes beneath the lower band have had a hard time holding onto gains.

Unless something changes, and quickly, it appears that the next 20 days of trading could find us trading lower or consolidating around today’s close, give or take a percent or so.

On the bright side, if past history is any indication of the future, we should be higher than today’s close sometime after July 4th.

On the dark side, we could be starting an extended slide down the lower band. I’m a big believer in symmetry and am worried that after our 3 month melt up along upper band from December 2010 through February 2011, we might have to spend some time melting down along the lower band.

Market Abnormally Overbought, Again

548 views

The market is extended here but one measure suggests an abnormally overbought market can keep going higher and higher.

I’ve written before, here and here, about an abnormally overbought S&P 500. I do not recommend shorting overbought markets as they have the tendency to stay overbought for longer than we might expect.

The Setup:

  • Buy SPY (or $SPX) at the close when it closes above the upper Bollinger Band (built around a 50 period mean with the bands 2 standard deviations from the mean).
  • Sell X days later.
  • No commissions or slippage included.
  • All SPY history used. $SPX history starts in 1960.

The Results:

While many traders see an abnormally overbought market and think it is time to short, this study shows that at the very least, it is better to just do nothing, or stay long.

While the edge is not much better than Buy and Hold (for the SPY), there doesn’t appear to be much value in expecting a major correction or even a big pullback. Perhaps if this setup was combined with other factors, such as low volume, we might predict when an abnormally overbought market might fail.

This setup, as shown with 50 years of data on $SPX, has consistently led to more market melt ups.