3 Higher Closes Beneath the 50 Day Average: Bullish or Bearish?

After seeing $SPY run up to the 50 day average and then reverse, I was feeling pretty good about my expectation that the correction would continue. Then I read the Quantifiable Edges study, Why The Strong Breadth The Last 3 Days Should Be Viewed Positively By Bulls, posted in What I’m Reading This Weekend. 

After seeing Hanna’s breadth results, I’m very curious about what the results of this study will be. As I’m writing this, I still do not know.

The Rules:

  • Buy $SPY at the close after 3 consecutive higher closes AND the close is beneath the 50 day simple moving average
  • Sell $SPY at the close X days later
  • No commissions or slippage included
  • All $SPY history used

The Results:

3 Consecutive UpDays

There were 94 occurrences of this setup and 39 trades were able to be held for the full 50 days.

As the chart shows, this setup under-performs $SPY buy and hold. This may be due to the requirement that $SPY close beneath the 50 day moving average. I would call the results of this setup neutral to bearish.

The results posted by Quantifiable Edges are more bullish than my results. I would like to see that breadth study add the condition for the close to be beneath the 50 day average.

I have written many, many times about how hard it is to find a study that yields bearish results. The market has a bias to the upside, and study after study shows the bias. This study, however, does not. The results, while not earth-shaking, should be viewed as a caution signal. My interpretation is that we can expect more volatility, more up and down, while ultimately moving sideways, for at least a few weeks.

Dow Jones Makes 9 Consecutive Higher Closes: What Happens the Next 50 Days?

The financial pundit class is abuzz with Dow Jones histrionics.  Let’s break the history out into some graphs and stats to see what all the fuss is about.

The Rules:

  • Buy the Dow Jones Industrial Average ($DJI) at the Close after 9 Consecutive Higher Closes
  • Sell X Days Later
  • $DJI History Starts in 1910
  • No Commissions or Slippage Included

The Results:

DJI 9 Consecutive Higher Closes

The results are incredibly bullish.

The graph above is constructed by taking all of the trades and averaging them together. This allows us to see what has happened, day by day, after this setup occurred in the past. There were 45 setups with 34 held the full 50 days.

Note that below I list that there were 66 instances of 9 consecutive higher closes. The graph above only uses 45 because some the setups were followed by a 10th higher close, which also doubles as another instance of 9 consecutive higher closes. The trade would have already been on when the 10th consecutive higher close was made. In other words, the graph above is generated by buying the 1st instance of 9 consecutive higher closes and holding that trade for 50 days. Each of these trades are then averaged together.

Some stats:

  • Number of times in history $DJI has made 9 consecutive higher closes: 66
  • Highest % gain after 9 consecutive higher closes: 9.85% on 1.3.1992
  • Lowest % gain after 9 consecutive higher closes: 1.46% on 2.3.1965

What happens if we trade this as a system, buying after the setup and holding each trade for 50 days?

DJI 9 Consecutive Higher Closes Equity Curve

That equity curve shows a fairly consistent bullish edge over a 100 year period!

Some more stats:

  • Percentage of Winning Trades: 64.71%
  • Average Winning Trade: 6.65%
  • Average Losing Trade: -3.81%

Trade Distributions:

DJI Trade Distribution

The bottom line is that the $DJI making 9 consecutive higher closes is incredibly bullish.

What a fantastic time to be involved in the markets. This is the first time this has happened in the 21st century. The last time it occurred was on 11.14.1996.

Delayed Gratification SPY Study: New 20 Day Low, Then 3 Day Surge

Unfortunately, computer problems kept me from studying the new 20 day low and the 3 day surge that followed. The new 20 day low was set on 11.25.11 and the 3 day surge concluded on 11.30.11. I want to now see what has followed such a setup, albeit a couple of days late.

Last week was an incredible week – one for the record books.

On Friday, 11.25, the day after Thanksgiving, SPY made a new 20 day low. Monday, news of improvement in the EuroZone crisis led to a large gap-up. The market continued to rocket through Wednesday, making 3 consecutive higher closes, logging a three day rate of change of 7.44%. After such a surge, it is normal to want to wait and see if a pullback occurs. It is hard to buy after the market moves up so far, so fast.

The Setup:

Buy SPY at the close if:

  • 3 Days Ago SPY Made a New 20 Day Low
  • It Makes 3 Consecutive Higher Closes
  • The 3 Day Rate of Change is Greater Than .99, or 2.99, or 5.99

Sell SPY at the close Y days later. No commission or slippage included. All SPY data used.

The Results:

First, let’s look at the sample sizes for the three different ROCs.

  1. ROC3>.99 had 58 occurrences with 38 held the full 50 days.
  2. ROC3>2.99 had 34 occurrences with 26 held the full 50 days.
  3. ROC3>5.99 had 6 occurrences with all 6 held the full 50 days.

This setup had a win rate that increased as the ROC3 increased. ROC3>.99 had a win rate that averaged near 60%, but higher ROC3s had win rates in the 70s and 80s.

As the ROC3 amount increased, the average length of consolidation after the setup shortened. From the chart above, ROC>.99 consolidated about 11 days before moving again. ROC3>2.99 paused for about 6 days while ROC>5.99 barely consolidates at all before taking off again.

All but one of the six ROC3>5.99 occurred during a bear market, with one of them marking the bottom after the 2008 and early 2009 bear market. Another one of the six marked a major bottom in 2002 while another marked a major short-term bottom in 2008. It remains to be seen whether our current setup will mark a major bottom. Keep in mind it is included in the six.

For the ROC3>.99 and ROC3>2.99, the average losing trades maxed out at near -7% while the average winning trades maxed out at near 6%. Because there were more winners than losers, the average is positive. Any losing trades for ROC3>5.99 were very small.

What Does It All Mean?

If this setup is going to work, we should likely know next week. Setups modeling last-week’s behavior have typically marked long-term bottoms (small sample sizes aside) and have not consolidated for very long before moving again. The setups with larger sample sizes still show an edge here. Perhaps the best way to play this is to wait for confirmation in the form of a new short-term closing high.

There is significant resistance around SPY $126.00. If the market blows through this resistance, that in itself will be significant. If that occurs, I will definitely view that as confirmation of a significant bottom.

 

Don’t Get Punked By the Bear Market Rally

I was thinking about how to describe my frustration and dis-belief with the Euro-zone financial shenanigans. Lucky for me, Fly had already written just about everything I was thinking.

The action of the past few days reminds me a lot of what happened after September 18, 2008, when Paulson and Bernanke met with members of congress to propose the 700 Billion Bailout (which eventually became TARP). The next day, SPY gapped up over 5.5% but reversed to close up 3.4%. After that day, SPY began falling and almost never stopped until it found a temporary bottom in November.

I’m not saying that is what is going to happen now, but I am very very suspicious of this Germany-Bails out-Europe solution. The mess in Europe seems worse to me than the American credit crisis, and I have a hard time believing that the S&P 500 has found a bottom amidst all the uncertainty. If anything the recent bounce has given professionals one last time to lighten up before new lows are made.

Yes, my gut still says we will see new lows. While the Nasdaq chart is not terrible, the S&P 500 and the Russell 2000 both look awful, like they are just going to fall off a cliff, any day now. There is now strong resistance overhead on both charts, and the falling 50 day average seems to be acting like a lid on price.

Anyway, the last three days closed higher, and gained more than 4%. Lets look at what happened in the past after this setup.

The Rules:

Buy SPY at the Close If:

  • It has made 3 consecutive higher close
  • The MA50 is < MA200 and the Close is beneath both moving averages
  • The 3 day Rate of Change > 4%

No commissions or slippage included. All SPY history used.

The Results:

As we would expect, the results show some reversion to the mean over the next week. In fact, during high volatility environments, it works very very well to sell the rips. I fully expect a pullback here, unless the Europeans are able to pull a rabbit out of their silly little bag of magic tricks.

Weird Omen Alert: Anyone notice that the chart above looks almost exactly like the last 2 months of the S&P 500 and Russell 2000?

Crystal Balling: Seeing the Future after 5 Consecutive Up Days and a Gap Down Open

Let’s pretend that you could see the future, and that you knew after you bought the close of the 5th consecutive up day, that the next open would see a nasty gap down…What would the future look like?

SPY, as of Friday, logged 5 consecutive higher closes. Futures, as of 9:10 p.m. Eastern time, are down -1.3%. Let’s see what happens after 5 consecutive higher closes and then a gap down at the open.

The Rules:

Buy SPY if:

  • SPY logged 5 consecutive higher closes
  • The next open gapped down more than -0.5%
  • Assume the buy happened at the 5th consecutive higher close
  • Sell X days later

No commissions or slippage included. All SPY history used.

The Results:

Summary of Results

There were only 9 occurrences, and 8 trades of this setup, once the 50 day hold time was accounted for. I did not specify bull vs. bear market since that would have further limited the number of trades, but the graph below will show the trade dates.

Surprisingly, a large rally seems to follow the setup, once the consolidation and mean-reversion from the 5 consecutive up days wears off.

The Trades

This study is the first bullish study in quite some time.

I’m not sure what to make of it, and with so few samples, I’m not inclined to go into Full Bull mode just because the results are bullish. I would be hesitant to sell at tomorrow’s open, and I would be inclined to give the market a day or two before exiting any positions.

Obligatory: Four Up Days in a Bear Market

Whenever we have a string of up or down days in the market, there are always questions about what happens next…Let’s take a look at what has happened in the short and intermediate terms after 4 consecutive up days during a bear market.

The Rules:

Buy SPY at the close If:

  • It has had four consecutive days of higher closes
  • The 50 day moving average is beneath the 200 day moving average
  • The close is beneath both the 50 and 200 day moving averages

No commissions or slippage included. All SPY history used.

The Results:


Summary of Results:

There were 18 occurrences of this setup and 121 of the bull market setup.

After this setup, the market tends to pull back quickly over the next couple of days, with the average pullback nearing -2%. After the pullback, the market has tended to consolidate for a couple of weeks.

As we look out more than 10 days or so, the rest of the performance is due primarily to the moving average setup, which is commonly known as a Death Cross.

As a contrast, I ran the same 4 consecutive higher closes setup except I required a Golden Cross, which is to have the 50 day moving average above the 200 day moving average and the close above both moving averages. This is represented by the red line.

The volatile blue line against the stable red line shows just how volatile bear markets are compared to bull markets.

We are still expecting a high volatility market that will trade within a range. I still see more downside than upside, especially with the falling 50 day moving average being likely to act as significant resistance.

 

This Market Can Go Higher

Short illustrations of why this market can go higher…

What if we buy $SPX at the close after 5 consecutive higher closes above the 200 day moving average?

 

 

 

Since this study used $SPX and not SPY, these results start from 1960 and include hundreds of samples.

What if a simple system is generated by deciding to hold the trade for 12 days (the current optimum length to hold the trade after the setup)? What would the equity curve look like?

Yes, this market can go higher.

3 Higher Closes Beneath the 50 Day Average: Bullish or Bearish?

After seeing $SPY run up to the 50 day average and then reverse, I was feeling pretty good about my expectation that the correction would continue. Then I read the Quantifiable Edges study, Why The Strong Breadth The Last 3 Days Should Be Viewed Positively By Bulls, posted in What I’m Reading This Weekend. 

After seeing Hanna’s breadth results, I’m very curious about what the results of this study will be. As I’m writing this, I still do not know.

The Rules:

  • Buy $SPY at the close after 3 consecutive higher closes AND the close is beneath the 50 day simple moving average
  • Sell $SPY at the close X days later
  • No commissions or slippage included
  • All $SPY history used

The Results:

3 Consecutive UpDays

There were 94 occurrences of this setup and 39 trades were able to be held for the full 50 days.

As the chart shows, this setup under-performs $SPY buy and hold. This may be due to the requirement that $SPY close beneath the 50 day moving average. I would call the results of this setup neutral to bearish.

The results posted by Quantifiable Edges are more bullish than my results. I would like to see that breadth study add the condition for the close to be beneath the 50 day average.

I have written many, many times about how hard it is to find a study that yields bearish results. The market has a bias to the upside, and study after study shows the bias. This study, however, does not. The results, while not earth-shaking, should be viewed as a caution signal. My interpretation is that we can expect more volatility, more up and down, while ultimately moving sideways, for at least a few weeks.

Dow Jones Makes 9 Consecutive Higher Closes: What Happens the Next 50 Days?

The financial pundit class is abuzz with Dow Jones histrionics.  Let’s break the history out into some graphs and stats to see what all the fuss is about.

The Rules:

  • Buy the Dow Jones Industrial Average ($DJI) at the Close after 9 Consecutive Higher Closes
  • Sell X Days Later
  • $DJI History Starts in 1910
  • No Commissions or Slippage Included

The Results:

DJI 9 Consecutive Higher Closes

The results are incredibly bullish.

The graph above is constructed by taking all of the trades and averaging them together. This allows us to see what has happened, day by day, after this setup occurred in the past. There were 45 setups with 34 held the full 50 days.

Note that below I list that there were 66 instances of 9 consecutive higher closes. The graph above only uses 45 because some the setups were followed by a 10th higher close, which also doubles as another instance of 9 consecutive higher closes. The trade would have already been on when the 10th consecutive higher close was made. In other words, the graph above is generated by buying the 1st instance of 9 consecutive higher closes and holding that trade for 50 days. Each of these trades are then averaged together.

Some stats:

  • Number of times in history $DJI has made 9 consecutive higher closes: 66
  • Highest % gain after 9 consecutive higher closes: 9.85% on 1.3.1992
  • Lowest % gain after 9 consecutive higher closes: 1.46% on 2.3.1965

What happens if we trade this as a system, buying after the setup and holding each trade for 50 days?

DJI 9 Consecutive Higher Closes Equity Curve

That equity curve shows a fairly consistent bullish edge over a 100 year period!

Some more stats:

  • Percentage of Winning Trades: 64.71%
  • Average Winning Trade: 6.65%
  • Average Losing Trade: -3.81%

Trade Distributions:

DJI Trade Distribution

The bottom line is that the $DJI making 9 consecutive higher closes is incredibly bullish.

What a fantastic time to be involved in the markets. This is the first time this has happened in the 21st century. The last time it occurred was on 11.14.1996.

Delayed Gratification SPY Study: New 20 Day Low, Then 3 Day Surge

Unfortunately, computer problems kept me from studying the new 20 day low and the 3 day surge that followed. The new 20 day low was set on 11.25.11 and the 3 day surge concluded on 11.30.11. I want to now see what has followed such a setup, albeit a couple of days late.

Last week was an incredible week – one for the record books.

On Friday, 11.25, the day after Thanksgiving, SPY made a new 20 day low. Monday, news of improvement in the EuroZone crisis led to a large gap-up. The market continued to rocket through Wednesday, making 3 consecutive higher closes, logging a three day rate of change of 7.44%. After such a surge, it is normal to want to wait and see if a pullback occurs. It is hard to buy after the market moves up so far, so fast.

The Setup:

Buy SPY at the close if:

  • 3 Days Ago SPY Made a New 20 Day Low
  • It Makes 3 Consecutive Higher Closes
  • The 3 Day Rate of Change is Greater Than .99, or 2.99, or 5.99

Sell SPY at the close Y days later. No commission or slippage included. All SPY data used.

The Results:

First, let’s look at the sample sizes for the three different ROCs.

  1. ROC3>.99 had 58 occurrences with 38 held the full 50 days.
  2. ROC3>2.99 had 34 occurrences with 26 held the full 50 days.
  3. ROC3>5.99 had 6 occurrences with all 6 held the full 50 days.

This setup had a win rate that increased as the ROC3 increased. ROC3>.99 had a win rate that averaged near 60%, but higher ROC3s had win rates in the 70s and 80s.

As the ROC3 amount increased, the average length of consolidation after the setup shortened. From the chart above, ROC>.99 consolidated about 11 days before moving again. ROC3>2.99 paused for about 6 days while ROC>5.99 barely consolidates at all before taking off again.

All but one of the six ROC3>5.99 occurred during a bear market, with one of them marking the bottom after the 2008 and early 2009 bear market. Another one of the six marked a major bottom in 2002 while another marked a major short-term bottom in 2008. It remains to be seen whether our current setup will mark a major bottom. Keep in mind it is included in the six.

For the ROC3>.99 and ROC3>2.99, the average losing trades maxed out at near -7% while the average winning trades maxed out at near 6%. Because there were more winners than losers, the average is positive. Any losing trades for ROC3>5.99 were very small.

What Does It All Mean?

If this setup is going to work, we should likely know next week. Setups modeling last-week’s behavior have typically marked long-term bottoms (small sample sizes aside) and have not consolidated for very long before moving again. The setups with larger sample sizes still show an edge here. Perhaps the best way to play this is to wait for confirmation in the form of a new short-term closing high.

There is significant resistance around SPY $126.00. If the market blows through this resistance, that in itself will be significant. If that occurs, I will definitely view that as confirmation of a significant bottom.

 

Don’t Get Punked By the Bear Market Rally

I was thinking about how to describe my frustration and dis-belief with the Euro-zone financial shenanigans. Lucky for me, Fly had already written just about everything I was thinking.

The action of the past few days reminds me a lot of what happened after September 18, 2008, when Paulson and Bernanke met with members of congress to propose the 700 Billion Bailout (which eventually became TARP). The next day, SPY gapped up over 5.5% but reversed to close up 3.4%. After that day, SPY began falling and almost never stopped until it found a temporary bottom in November.

I’m not saying that is what is going to happen now, but I am very very suspicious of this Germany-Bails out-Europe solution. The mess in Europe seems worse to me than the American credit crisis, and I have a hard time believing that the S&P 500 has found a bottom amidst all the uncertainty. If anything the recent bounce has given professionals one last time to lighten up before new lows are made.

Yes, my gut still says we will see new lows. While the Nasdaq chart is not terrible, the S&P 500 and the Russell 2000 both look awful, like they are just going to fall off a cliff, any day now. There is now strong resistance overhead on both charts, and the falling 50 day average seems to be acting like a lid on price.

Anyway, the last three days closed higher, and gained more than 4%. Lets look at what happened in the past after this setup.

The Rules:

Buy SPY at the Close If:

  • It has made 3 consecutive higher close
  • The MA50 is < MA200 and the Close is beneath both moving averages
  • The 3 day Rate of Change > 4%

No commissions or slippage included. All SPY history used.

The Results:

As we would expect, the results show some reversion to the mean over the next week. In fact, during high volatility environments, it works very very well to sell the rips. I fully expect a pullback here, unless the Europeans are able to pull a rabbit out of their silly little bag of magic tricks.

Weird Omen Alert: Anyone notice that the chart above looks almost exactly like the last 2 months of the S&P 500 and Russell 2000?

Crystal Balling: Seeing the Future after 5 Consecutive Up Days and a Gap Down Open

Let’s pretend that you could see the future, and that you knew after you bought the close of the 5th consecutive up day, that the next open would see a nasty gap down…What would the future look like?

SPY, as of Friday, logged 5 consecutive higher closes. Futures, as of 9:10 p.m. Eastern time, are down -1.3%. Let’s see what happens after 5 consecutive higher closes and then a gap down at the open.

The Rules:

Buy SPY if:

  • SPY logged 5 consecutive higher closes
  • The next open gapped down more than -0.5%
  • Assume the buy happened at the 5th consecutive higher close
  • Sell X days later

No commissions or slippage included. All SPY history used.

The Results:

Summary of Results

There were only 9 occurrences, and 8 trades of this setup, once the 50 day hold time was accounted for. I did not specify bull vs. bear market since that would have further limited the number of trades, but the graph below will show the trade dates.

Surprisingly, a large rally seems to follow the setup, once the consolidation and mean-reversion from the 5 consecutive up days wears off.

The Trades

This study is the first bullish study in quite some time.

I’m not sure what to make of it, and with so few samples, I’m not inclined to go into Full Bull mode just because the results are bullish. I would be hesitant to sell at tomorrow’s open, and I would be inclined to give the market a day or two before exiting any positions.

Obligatory: Four Up Days in a Bear Market

Whenever we have a string of up or down days in the market, there are always questions about what happens next…Let’s take a look at what has happened in the short and intermediate terms after 4 consecutive up days during a bear market.

The Rules:

Buy SPY at the close If:

  • It has had four consecutive days of higher closes
  • The 50 day moving average is beneath the 200 day moving average
  • The close is beneath both the 50 and 200 day moving averages

No commissions or slippage included. All SPY history used.

The Results:


Summary of Results:

There were 18 occurrences of this setup and 121 of the bull market setup.

After this setup, the market tends to pull back quickly over the next couple of days, with the average pullback nearing -2%. After the pullback, the market has tended to consolidate for a couple of weeks.

As we look out more than 10 days or so, the rest of the performance is due primarily to the moving average setup, which is commonly known as a Death Cross.

As a contrast, I ran the same 4 consecutive higher closes setup except I required a Golden Cross, which is to have the 50 day moving average above the 200 day moving average and the close above both moving averages. This is represented by the red line.

The volatile blue line against the stable red line shows just how volatile bear markets are compared to bull markets.

We are still expecting a high volatility market that will trade within a range. I still see more downside than upside, especially with the falling 50 day moving average being likely to act as significant resistance.

 

This Market Can Go Higher

Short illustrations of why this market can go higher…

What if we buy $SPX at the close after 5 consecutive higher closes above the 200 day moving average?

 

 

 

Since this study used $SPX and not SPY, these results start from 1960 and include hundreds of samples.

What if a simple system is generated by deciding to hold the trade for 12 days (the current optimum length to hold the trade after the setup)? What would the equity curve look like?

Yes, this market can go higher.