On 8.8.11, SPY made a new 200 day low. As the results will show, a market making new 200 day lows remains volatile and prone to failure for many months going forward.
I’m still struggling with the best way to model an abnormal market that is making history daily with unprecedented action. The idea is to get enough sample sizes to feel confident about the results. The SPY’s recent 200 day low may offer just what we need: decent sample size and objective criteria to help avoid curve fitting.
- Buy SPY at the Close When It Makes a New 200 Day Low (on a closing basis)
- Sell at the Close X Days Later
- No Commissions or Slippage Included
- All SPY History Used
There have been 74 occurrences of new 200 day lows. As the graph shows, once a new 200 day low is made, SPY tends to want to revisit that low.
I stretched out the results over 100 trading days as I think it is important to understand the long-term effect of a new 200 day low on the market. Based on these results, a new 200 day low seems to continue to produce a volatile, somewhat range-bound market, for many months following the occurrence.
And indeud, we have been experiencing the volatility first-hand. The blue line shows that after a new 200 day low is made, the market spasms periodically, producing wild up and down swings of 2% or more.
To demonstrate the difference in volatility, I added the results of buying SPY after it makes a new 200 day high. Newton would be proud to see his first law demonstrated so simply. In fact, this illustrates how we should be thinking about a market making new 200 day lows. It is constantly being bombarded by outside forces, whether they be economic, or psychological. In contrast to the market making new 200 day highs, almost every force is stronger than the market itself, and it is constantly buffeted by the changing winds of the economy and investor fear and uncertainty.
The market making new 200 day highs is carried by its own momentum. The momentum allows the market to shrug off bad data and investor fear and uncertainty.
A few posts ago I made the remark that this market was going to eat people alive, if they were not very careful. Looking at the blue line, I’d say the market has a voracious appetite and will be hungry for some time. Discipline is the key. One must face this market without emotion, if he wants to avoid being eaten.Read More »