Joined Nov 11, 2007
1,458 Blog Posts

Time to Sell the Rips

$SPY closed beneath its lower Bollinger Band for the 4th day in a row. This is a sign that the market has moved significantly to the downside, and just like a market that trades above its upper Bollinger Band, a sign that a strong trend is developing.

Since the trend is arguably to the downside, we must adjust from a dip-buying mindset to that of the cut-throat villain whose number one concern is protection of himself and his dwindling assets. In other words, we sell the rips.

This market is quickly developing into one which must be traded with unwavering confidence, borne from battle-hardened experience. The market will bounce. But it will only be a bounce, and the bounce must be sold. Period. While the lows may not be re-visited  after the bounce (they likely will be), there will again be lower prices. One can be almost 100% certain that there will be no V-bottom. Volatility begets volatility.

I expect the first $SPY rally to run to around $141 to $142. I would not be surprised to see it run all the way back to the 50 day average before reversing. But it will reverse. The first rally will be a great opportunity to unload anything that one wishes were unloaded during the last rally. After that, I’ll adopt a wait and see approach.

I’m expecting more volatility, ups and downs, and then a slow recovery, rather than a prolonged correction or bear market. Beware though, every bear market starts with a down day, and then a pullback…

All the above is only me speaking from my gut. iBC celeberated its 5th anniversary yesterday. This blog was literally inaugurated during the onset of one of the worst bear markets in modern history. Around here, when we smell bear, we prepare for battle. One can have the best systems, the best evidence, and the best battle plans, but if he doesn’t have the testicular fortitude to pull the trigger, to make the trades that need to be made, then it is all for nothing.

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The Farther We Fall, the Closer We Get to the Bottom

I checked in tonight with one of my favorite breadth indicators, which measures the % of stocks above their 20 day moving averages. This indicator excludes OTCBB stocks but includes all major exchange listed stocks, regardless of price or volume.

The indicator does a good job of identifying intermediate term bottoms.  I ran a backtest to get an idea of what Friday’s reading of 27.1 might mean going forward.

Click on the chart to enlarge it. We are focused on the green line in the bottom pane.

The Rules:

Buy $SPY at the close if

  • Yesterday the % AbvMA20 > X
  • Today the % AbvMA20 < X

$SPY is sold Y days later. All $SPY history was used. No commissions or slippage included.

The Results:

I started with X=28 since % AbvMA20 closed at 27.1. I have noted in previous posts that when this indicator gets near 20, $SPY is typically near an intermediate term bottom. These results bear this idea out.

Unfortunately, at 27.1, we may have a couple more weeks of up and down and volatility before beginning a solid uptrend. In other words, the market needs to fall farther before it nears an area on which it has typically found stronger footing.

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$SPY Closed Beneath the 200 Day Moving Average. Bullish or Bearish? UPDATED

*Based on some comments, I have updated the post. Updates are at the end of the post.

I truly love these posts that challenge conventional wisdom. I mean everyone knows that closing beneath the 200 day moving average is like super duper super squared bearish, right?

Today $SPY closed beneath its 200 day moving average for the first time since June. What happens when one buys the $SPY after such an event?

The Rules:

Buy $SPY (or $SPX) at the close if

  • Yesterday $SPY ($SPX) closed above the 200 day moving average
  • Today $SPY ($SPX) closed below the 200 day moving average

All $SPY history used. $SPX history goes back to 1928. No commissions or slippage included.

The Results:

Over the last 20 years or so, this has been a trade that almost doubles expected $SPY buy-n-hold performance over any average 50 day period. The first $SPY trade for this setup occurred in 1994.

On the other hand, going back to 1928 and using $SPX to buy and sell (which can’t happen in real life, but it does give us lots of history to play with), this has been a trade that almost halves the expected $SPY buy-n-hold performance over any average 50 day period.

So recently this setup has worked well but over the past century, not so well.

How do we square these results with last night’s results? I’m not sure, but I have some ideas. I’d be curious to hear your ideas in the comments section.

Related Posts:

S&P 500 In Bad Position, Relative to the 200 Day Moving Average

Fade the Bears and the 200 Day Average


I’m going to focus on the more recent trades (over the last 20 years) which used $SPY.

$SPX is used to determine all signals. If $SPX closes beneath the 200 day moving average, then $SPY is purchased. Davey Jones asked how many times this has occurred. There are a couple ways to answer that. One way is to just give raw signals, meaning how many times has the setup occurred? The setup has occurred 73 times. However, if trades are taken and held for 50 days, then that number decreases to 28.

As for the outliers and the median return, I’m just going to post the trade-by-trades as I think that being able to see the actual trades is the most helpful.

I asked in the post, how do we square the results of this bullish study against the somewhat bearish study posted the night before? After doing some poking around, I believe that the two bear markets over the past 10 years have skewed results. In those bear markets, $SPY would often hover just above the lower Bollinger Band (50,2) and then resume the slide down the band as the bear market endured. Thus, any close near the lower BB meant that it was likely that the market was still trending downward.

If there is anything I have missed, let me know in the comments section.

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The Return of the Bearshitter

Finally, we get some market action that leads to less-than-bullish projections over an intermediate time frame.

First, we’ll start with the hard-to-quantify Honey Hole Setup. See below….

The Honey Hole setup will be familiar to iBC old timers. It is a simple but seldom seen setup, except in bear markets, where it can be almost common. It is formed when price rises from beneath the 50 day moving average and is denied, usually several times, before reversing downward. I think I have tried to quantify its edge in the past, but I do not recall the outcome. For me personally, I automatically take a more cautious approach when i start seeing this setup appear across the major indices.

The quantifiable Bearshitter stuff is this: Today’s close just above the lower Bollinger Band (50,2) has bearish implications over the next 50 days. See results below…

The next 7 days show the propensity for a bounce, but after that, it is downhill. And don’t let this somewhat benign looking chart fool you! It is very difficult to find a quantifiable setup that leads to bearish results for the $SPY looking out over 50 days. Bearish results are uncommon as the markets have had a historical bias to the upside.

The 200 day moving average, the traditional bear market demarcation, sits roughly 1% beneath today’s close. This could get interesting…

Below are some other posts I have written on this or a similar topic:

HAH! Finally A Study Returns Bearish Results

Slicing Through Lower Bollinger Bands: Bounce or Not?

Volume Surge Suggests Bottoming?


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20 Day, 50 Day Moving Average Cross…Whaddaya Worried About?

In chessNwine’s nightly market recap, he mentioned the $SPY moving average cross where the 20 day has fallen beneath the 50 day average. Like most moving average crosses where the shorter average crosses beneath the longer average, popular lore considers these crosses to be bearish. Chess noted that I have previously written on this topic, and the research showed that the 20 day, 50 day cross is not a solidly bearish event.

Surprisingly, it has been over 2 years since I looked at these crosses. Man how time flies. Tonight I re-ran tests using $SPY, buying the close when the 20 day average crosses beneath the 50 day average. There have been 8 more of these crosses since I last tested them.

The results are below…

The median of the winning trades is 5.70% and the median of the losing trades is -5.72%.

I have included the $SPY buy-n-hold calculation. To arrive at this calculation I have simply chopped all $SPY history into 100 day segments and then averaged those segments.

The bottom line is that a 20, 50 day cross, at least in terms of $SPY, is really nothing to be worried about. In terms of buy and sell signals, on average $SPY doesn’t usually trade significantly lower after the cross. It remains a better buy signal than sell signal, over the course of almost 20 years of $SPY history, and tracks very similarly to the average $SPY buy-n-hold performance.

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She Built This: Becoming Her Own Boss

And bossing me around a bit as well…

I’ve been busy of late helping Mrs. Woodshedder with her home business. I know what you are thinking…It is not the usual “home business” many wives seem to gravitate towards like the Pampered Chef and Thirty-One, where they drive all over Hell’s half-acre to make direct sales and bring back 20%, minus gas, time, and whatever shit they decide to buy with their meager cut. This is one that she has built herself, from the ground up.

Rabid iBC fans and the subset thereof that read my blog may remember this post from almost a year ago: Real Men Know How to Sew. Mrs. Woodshedder has made that commercial/industrial model her bitch and has leveraged its capability so that it has returned many times her initial investment. The only downside is that I’ve become a part-time sewing machine tech/repairman.

And now the business has grown so much that she will likely quit her part-time job in January so that she can run her home business full-time. And if it keeps growing like it has over the past couple of years, I do not believe it will be confined to the home for much longer. This month she has sold more than ever before.

So I’ve spent the past week helping her make this thing legitimate, meeting with accountants, finalizing the business entity, exploring small business loans, and researching new, hi-tech machines to purchase before year-end. Then hurricane Sandy came through and I spent a couple of days procuring a generator and supplies so that she could continue running the business even if we lost power for a few days.

There is definitely a sublime sense of satisfaction that is derived from building one’s own business from the ground up, but there is also a steep learning curve. The learning curve may not be what most imagine, such as learning how to sew, or identifying fashion trends, or using blogs and the interwebs to build the business. The most challenging part for Mrs. Woodshedder has not been the stress and the 70-80 hour weeks from building the business as much as it has been learning how to navigate the various taxes and fees. While she has always paid attention to politics, she has been engaged like never before in the upcoming election because she has realized the amount that government costs small businesses like her own.

With most of these details about wrapped up, she should be ready to take this thing to the next level…I’m hoping that means less involvement for yours truly. The new machines she is researching are more hi-tech and less sweat-shop than her last investment. For me that means fewer hours in the sweat-shop as repairman and more hours spent blogging and researching. Perhaps she’ll start giving me evenings off again. I hope so as it is about time to wipe the dust off this blog and get back at it…

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Like a Hot Knife Through Butter, or The Market Catches a Cold

I’ve been saying for a couple of weeks that I thought any bounces would not be sustainable. I was surprised that the last bounce lasted as long as it did. The point is that I was not terribly surprised by today’s hot knife through butter action.

We are about 1.3% beneath where we were on October 10th, when I wrote, “I do not think we will see much more than 2-3% downside from Wednesday’s [October 10] close. If $SPY falls another 2 percent or so, it will be near $140.00 which is an area of dual support from both the lower Bollinger Band (50,2) and the June/July resistance (now support).

A reversal or consolidation near $SPY $140.00 would represent a minor correction of ~5% from the September 14th top, which is surely normal and probably overdue for 2012.

While my call on Monday morning for an immediate bounce was early, that is the unavoidable nature of buying dips. Most of the time you are right, but sometimes you are wrong. With that in mind, I will be adding another post to the series which deals with trying to avoid buying dips which turn into waterfall cascades. The next post will likely (again) demonstrate that waterfall type dips are very difficult, if not impossible to avoid.

In the meantime, there is more evidence that a sustainable bottom is near. Check out the percentage of stocks above their 20 day moving averages (the green line in the lower pane). Click on the chart to enlarge it.

When the green line is near 30 (it closed tonight at 31 and change), the bottoms that result can last for a few weeks or even months. Bottoms that occur near 20 typically occur in a volatile market and therefore may be revisited within a short time frame. Therefore the best case scenario for the next couple of weeks is that volatility remains tame and we fall another couple of percent.

Today’s $SPY gap down on the largest volume since the June bottom is a clear sign that the market environment has changed. We should be looking for increased volatility, larger daily ranges, and snappier reversion to the mean. All that being said, I see nothing abnormal about the market. I’m expecting a minor correction of about 5%. These are similar to getting colds: You get them a few times a year; they may last a couple of weeks and make you feel like crap, but they don’t kill you.

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