The market put in an incredible reversal today with a huge intraday swing which was even larger than yesterday’s -6.66% loss. Not surprisingly, the extreme down and back up volatility has not happened very often in the past. However, there have been similar instances, and they have all led to a re-test of the bottom.
Unfortunately, I tried exactly modeling the past two day’s market action, and there are only several comparable instances. I had to loosen the criteria a bit, and even then, I have only come up with 5 other occurrences. Describing recent market action as unprecedented would not be inappropriate.
Anyway, here is what I used to model the Devil’s Bottom.
- Buy SPY if Yesterday Closed Down More than -2% and the Close was a 100 Day Low AND Today Closed Up More than 2% and Today’s Volume was More than Yesterday’s Volume
- Sell X Days Later
- No Commissions or Slippage Included
- All SPY History Used
A quick word about my methodology: Yesterday’s volume was incredible, but if I get too specific trying to get a near match of yesterday’s volume, it limits the sample size. Therefore, I just required today’s volume to be more than yesterday’s. It seems to work as anytime the market is putting in new 100 day lows, volume is swelling.
I also tried requiring a new 200 day low (yesterday was a new 200 day low) but that limited sample size. Again, I sufficed for the less restrictive 100 day low.
I also tried messing around with the relationships between yesterday’s and today’s opens and closes. Again, it was just too restrictive. As it stands, even with the less restrictive buy rules above, there were only 5 samples, not including today.
Every instance saw a re-test of lows.
I’m not at all confident that these results are generalizable due to the small sample size.
What I do know is that the market is still in an abnormal state in a climate of high volatility with a 200 day moving average that is rolling over. An abnormal market will do abnormal things, and even if volatility starts to decline, it will decline with ever smaller spikes and waves.
My money is on a re-test. As I am writing this, I am working through some possibly more effective and generalizable ways of determining whether a re-test is likely. Stay tuned!