5 Day Moving Avg Indicator Signaling Breadth Bounce is Near

With $VIX reversing to the downside to create a tombstone doji and $SPY reversing to the upside to make a bullish hammer, it appears the bounce will start tomorrow.  I’ve got another simple indicator that is also signaling that a bounce is imminent: the number of stocks trading above their 5 day moving averages.

The Rules:

• Buy $SPY at the close when the number of stocks above their 5 day moving average is less than 700.
• Sell $SPY at the close X days later.
• No commissions or slippage included.
• All available $SPY history used.

The Results:

Some Additional Stats:

Next Day Winning Percentage: 50.11%
5 Day Winning Percentage: 55.04%
Median Trade After 50 Days: 2.38%
Average Trade After 50 Day: 2.22%
Number of Setups: 443
Number of Trades Held 50 Days: 86

This study triggered a buy on the close of the 26th. This means that tomorrow will put us at day 3 on the chart above. As I stated in the beginning, I believe $VIX will pullback and $SPY will bounce, if only because the rubber band typically cannot be pulled very far to the downside before snapping back.

Below is a chart with the indicator displayed.

We are focused on the red line in the bottom pane.

Also note that the decliners indicator (green line) is falling and approaching a neutral area. This means that the market has been stabilizing.

Related Post: $VIX Explodes: Bullish or Bearish for $SPY?

Over the last 5 days, $VIX has gained more than 25%. Is a large gain in the volatility index bullish or bearish for the S&P 500 over the next 50 days?

The Rules:

• Buy $SPY at close when $VIX has gained more than 25% over the last 5 days.
• Sell $SPY at the close X days later.
• No commission or slippage included.
• All available $SPY history used.

The Results:

Some Additional Stats:

Next Day Winning Percentage: 58.93%
5 Day Winning Percentage: 69.62%
Median Trade After 50 Days: 2.74%
Average Trade After 50 Day: 2.26%
Number of Setups: 112
Number of Trades Held 50 Days: 44

While my breadth indicators are not quite signaling that a bounce is imminent, this study has yielded bullish results.

$VIX closed at 19.48 and hasn’t closed above 20 since July, 2012. Let’s see what happens over the next couple of days. Another $VIX spike and an extreme breadth reading will make for a great short-term bottom.

If we look at a graph of the average of all December’s vs. 2012 December, we see that Santa is having a hard time getting that sleigh off the ground. Perhaps all of you finance folks weren’t very good this year?

In most Decembers the rally would have started in earnest on Thursday or Friday of last week. If this December is to follow previous Decembers, we’ll need to start firming up and bouncing tomorrow.

The last data point was created with real-time $SPY data as of 11:30ish a.m.

To all my friends and iBC family, Woodshedder and family wish you all a very merry Christmas! May you all wake on Christmas morning and celebrate your family, health, wealth, and all the good things that go with them!

Seriously, we had just finished putting out reindeer food…

Shortly thereafter, my neighbor captured this shot of a couple of Santa’s reindeer taking a quick break. Must have been the glitter in the food that made her feel special.

Mrs. Woodshedder is absolutely head over heels in love with Michael Buble…

Hopefully you’ll enjoy this song as much as she does.

http://www.youtube.com/watch?v=8ARJFg2y410

Based on my breadth indicators, we are nearing breadth readings that typically signal a bounce is near. We are not quite there yet.

I want the green Decliners Indicator to be above 90 and the red Number of Stocks Above Their 5 Day Moving Averages to be much closer to 800.

However, we are in a period of positive seasonality, as evidenced by this recent post from Quantifiable Edges: Twas 3 Nights Before Christmas (Again). And here is another study that finds similar results: The Christmas Trade.

Because the market is nearing oversold and there is positive seasonality, I think a bounce is likely. Surely with the President on vacation and Congress shut down the market can forget about the Fecal Cliff for a day or so? For Santa?