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Consecutive Lower Closes

Down Two Days More Than 1.5% and No Bounce. Now What Happens?

Thursday’s post examined what happened after SPY was down two days in a row, losing more than 1.5% each day. History showed that the third day saw SPY bounce more than 70% of the time. Instead of bouncing, SPY closed down on the third day. What can we expect going forward?

On Friday, SPY closed down slightly, losing roughly 0.1%. Let’s look at what happen when the bounce fails to materialize on the third day.

The Rules:

Buy SPY at the close if:

  • 2 days ago SPY closed down more than 1.49%
  • 1 day ago SPY closed down more than 1.49%
  • Today, SPY closed lower than yesterday’s close.
  • Sell X days at the close.
  • No commissions or slippage included.
  • All SPY History used.

The Results:

Despite a failed bounce on the third day, slightly more than 50% of trades bounced on the 4th day.

Be careful with the average returns as presented. One trade gained more than 14.5%, and it has skewed the returns. View the graph below to see the trade.

Trade By Trade Results:

Date/time shows the date the setup was completed and the buy was made.

Each day listed does not show a cumulative return starting from purchase. Instead it shows what happened on that particular day.

Again, we must be careful looking at the average returns in the first chart because we see in the graph above a 14.52% return, which is an outlier. If we remove that particular trade, the next day return drops to an average of 0.36%.

Without the outlier trade, results are not impressive. With the percentage of winning trades barely above 50%, I’m not putting much faith in a large bounce on Monday. Still, the conditions are such that we could see a large bounce.

Perhaps the major highlight of the trade by trade results is the volatility. Look how many days have returns of greater than 1%!

It looks as if the volatility beatings will continue until moral improves.

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Down 1.5% Two Days in a Row. What Happens Next?

Bespoke had an interesting post this afternoon, Down 1.5% Two Days in a Row. They show what happened the next day. I wanted to see what happened looking farther out. See below for the answer.

This is a simple test. SPY closes down 2 days in a row, and both days lose 1.5% or more. What happens the next day?

I first tried to replicate Bespoke’s results. My results were very close. They had 31 trades (counting today) and my results had 30. This discrepancy may be due to the time frame they are using. They state, “Today marks the 31st time in the last ten years that the S&P 500 has been down 1.5% or more for two days in a row.” Therefore, I tested from 11.17.2001 to 11.17.2011. Bespoke may have used a slightly different period of time.

Being reasonably confident that we were both looking at the same data, I simply looked at what happened every day following the setup, for the next 20 days, and then averaged the results.

All buys and sells are assumed to have taken place at the close, with the buy made the same close as the day the setup is realized.

The Results:

The blue line is a close approximation of the test Bespoke published.

The red line uses the same time frame as the blue but requires SPY to have closed beneath the 200 day simple moving average. This requirement eliminated only 2 trades. Hence, this setup is characteristic of a bear market.

The green line is using all SPY data, which starts in 1993.

This is bullish over the short-term, but what happens if we use the same setup and look further out?

Looking out over 50 days, we see something that looks a lot like what we’ve been seeing over the past several months: a bear market trading environment.

Let’s see if we get the bounce tomorrow. Over 70% of trades closed higher the next day after the setup occurred.

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6 Consecutive Lower Closes: What’s Next?

Recent history suggests we should sell any bounce over the next 1-3 days. Recent and long term history both show an edge that develops about 2 weeks after the setup.

The Rules:

  • Buy SPY or $SPX at the Close after 6 Consecutive Lower Closes
  • Sell at the Close X Days Later
  • No Commission or Slippage Included
  • All History Used for each Security

The Results:

SPY Results Above

  • Right Axis is the % of Winners
  • Left Axis is the Avg % Profit/Loss

SPY gives a more recent history of this setup with 15 occurrences. The first occurrence was  in 1999. Since some of the trades overlap, there are only 9 – 11 trades used to generate the graph above. (I know that is confusing. Ask in the comments section if you need clarification).

SPY history is skewed due to the bear market trades in 2008 and 2009.  To illustrate this, I programmed the backtester to sell the trades at the close of the 11th day. As the graph above shows, the 11th day has been the worst. Below are the results of the trade if one sells on the 11th day:

Recent history shows that this has not been a trade that one wants to hold on to for more than a few days. However, if the trade works, a nice gain of 2% of more may be had on any bounce. Most of the gains have come by the 2nd day.

Aside: SPY volume today rose to almost twice the 50 day average. Throughout SPY history, whenever there has been 6 consecutive down days, volume is almost always above the 50 day average on the 6th lower close.

Lets look back farther by using $SPX.

$SPX Results Above

  • Right Axis is the % of Winners
  • Left Axis is the Avg % Profit/Loss

The first trade on $SPX was in 1960 and there has been 167 occurrences of this setup. Between 116 and 64 trades were averaged to make the graph above.

Remarkably, in over 50 years of trades, the 11th day has been the worst day to sell on. I was surprised to see that this stayed the same as with SPY.

Like the SPY results show, the best chance of selling this setup for a profit has come the 2nd day.

Bottom Line:

With the exception of the next few days of trading, this setup has been bearish to neutral. A disciplined trader may be able to trade this setup for profits. It will be important to realize that having to hold this trade for more than 3 probably means that the setup has failed.

While we are not able to look into the future and know exactly when the market has bottomed and is ready for a sustained bounce, this setup has surprisingly found a bottom 11 days later. Perhaps the best trade is to wait a couple of weeks and then re-evaluate.

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No Wonder 95% of All Traders Blow Up

For the most part, I have been Mr. Nice Guy, during my almost 3 years of financial blogging. I have chosen the “You can lead a horse to water…” approach, rather than force-feed information to those who are either unable or unwilling to understand and accept it. I have provided gifts, if you will, but because they were often wrapped in an old brown bag or the comics section of the newspaper,  many readers have chosen to ignore them, instead of unwrapping them and marveling at their splendor.

Lately though the stupidity of some of the readers of iBankCoin has been unnerving. I have become very frustrated by the generally wrong, typically under-educated, and always over-confident miscreant who declares, “There is no edge in this trade!” or “The head and shoulders top is in!” or any variety of over-the-top emotional outbursts. These folks have no idea what they are talking about.

Case in point:

The level of bearishness on the blogs today was overwhelming. Many of these folks are ready to short any stock with one, two, three, or four letters in its symbol. The fact of the matter is that shorting here is an AWFUL setup. Just plain AWFUL. Yet, any attempt to challenge this bearishness with knowledge and cold, hard data is met with derision. Basically, knowledge is being countered with foolish idiocy.

Let me show you people who were all gung ho to pile in on the short-side today what kind of odds/edge you are looking at.

The Study:

Since today was the third consecutive lower close, this study gets short the close anytime there will be three consecutive lower closes. To be clear, we will be shorting the SPY at the close, on the third consecutive lower close. I used all the data available for the SPY, with the first trade taking place in November, 1993. There were 355 instances of this setup.

The exit is a simple time exit. I am plotting what the results will be if you exit the at next close, the close two days later, and so on and so forth.

The test assumes $100,000 per trade, does not compound gains (losses, actually) and does not include commissions or slippage.


Please, if you do not understand what the graphs are showing, I will be happy to explain it. Just ask.


There is NO EDGE to shorting the SPY at today’s close, but you wouldn’t know that from listening to the myriad emotional train-wrecks who call themselves traders. No wonder 95% of all traders blow up.

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