Joined Nov 11, 2007
1,458 Blog Posts

Breadth Indicators Suggesting Bounce Ahead

Breadth is not yet registering extreme levels, but it is at a level that tends to be associated with bounces.

The decliners indicator (green line) closed above 84. At this level, we can expect better than average returns over the next 10 days. Closing above 90 would register an extreme and would constitute a high likelihood of a bounce.

The number of stocks above their 5 day moving averages (red line) closed at a level that has been associated with bounces in 2012. However, this indicator can go much lower, as shown in 2011.

With the market showing slight gains today, we should see these indicators move into neutral territory, if the gains are held. I again reiterate that we are in bounce or die mode. The level these indicators closed at last night is good enough to support a 2 to 3 day upswing. If we do not get that, more downside is probable, in my humble opinion.

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HAH! Finally A Study Returns Bearish Results

Here is the setup: Buy SPY at the close if it closes less than 0.5% above the lower Bollinger Band (50,2). As you will see below, unlike almost all studies looking 50 days forward, this one is bearish.

If one applies Bollinger Bands to SPY using a 50 day period and 2 standard deviations it is evident that SPY rarely closes near the lower band. Just look back over 5 years and you’ll see what I’m talking about. Usually when it does get near the lower band, it bounces. But sometimes it doesn’t bounce…

Since SPY closed on Friday less than 0.5% above the bottom Bollinger Band, I was curious what had happened when that occurred in the past.

The Results:

The graph above shows the average trade spends most of its time in negative territory after this setup.

However, it is important to note that these results are heavily influenced by a few large losers, with the largest being a -29.84% loss on November 25, 2008.

In fact, with a 62.5% win rate (generated by selling the trade after 50 days), the setup has a decent edge in terms of predicting a higher close over the intermediate term. Unfortunately, in terms of the average winner compared to the average loser, the results are not nearly as positive.

The average winner was 4.77% The average loser was -8.99%.

So while over the intermediate term there is a better than average chance that 50 days later SPY will be higher than Friday’s close, if the setup does not work, the damages could be severe.

I might be a tad melodramatic when I write this, but we are nearing a bounce or die situation.

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Resting Up for the Tournament

We arrived safely in Myrtle Beach, S.C., aka the Redneck Riviera late this afternoon. It is good to be back in my home state and near to my old stomping grounds. The water was warm enough to get in and the weather was a perfect 75 degrees with just a few clouds.

My son is playing in a 10 and under tournament this weekend at The Ripken Experience. We have two games on Saturday and at least one and as many as three (assuming we are winning) on Sunday. His first game is 9:00 a.m. Saturday morning, so we are all retiring early tonight.

Perhaps I’ll have some time to get a post up this weekend. Perhaps not. We’ll see…

As for the markets, any gains keep getting sold. The market cannot hold its gains into the close. We should be bouncing, but are not. That is troublesome. I’ll be thinking over this weekend how to break down the recent action to see if there are any clues about the future waiting for us in the past.


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S&P 500 Makes New 43 Day Low. Bearish Yet?

The S&P 500 has closed lower 5 out of the last 6 days and is now resting just above its lower Bollinger Band (50,2). I’m a tad concerned that we could see the S&P start a slide down the lower Bollinger Band. Still, even with the above conditions and the S&P making a new 43 day closing low, the intermediate term is still looking bullish. It is truly rare to find a set of conditions that are bearish when looking 50 days ahead.

The Rules:

Buy SPY at the close if

  • It will make a new 43 day low

Sell the trade X days later, at the close.

No commissions or slippage included. All SPY history used.


This setup has occurred 170 times, and if the trade was held for the full 50 days, there were 45 samples used to make the average represented in the graph above.

We can see increased volatility in the graph, but other than that, everything appears just about normal as the market trends upward at a slightly increased pace following a new 43 day low.

What is somewhat abnormal is closing so close to the lower Bollinger Band. As noted above, caution is in order. However, the intermediate term outlook is that on average, the market recovers from these pullbacks and nothing abnormal occurs.


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Another Year Older, Still Under the Age Limit

And definitely still able to out-ghetto-workout 97.3% of the visitors of this site.

Off to eat my 6 inch fried shrimp po boy made with fresh Gulf shrimp (don’t believe all that stuff that Cronk posts about Gulf shrimp; they’re still the best) pan fried in my special seafood batter, drizzled with a spicy remoulade, topped with shredded iceberg lettuce, and sandwiched between two warm pieces of baguette. Oh, and it will be washed down with a cold Legend Lager, brewed right here in Richmond, Virginia.


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High Tight Flags for Tuesday

Six sweet high tight flags for today. The charts are posted in order from the most recent to the oldest flags.


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Breadth Indicators Suggest More Bounce Ahead

Two short-term breadth indicators are suggesting that a bounce has just begun and it may have some room left to run.

As the chart below shows, these indicators work better when the market is consolidating or trading in a range and volatility is ticking up.

The red line is a measure of the number of stocks trading above their 5 day moving averages. This indicator has just turned up, but it can move to the top of its range very quickly, over the course of a day or two.

The green line is a measure of the number of declining stocks. Anything above 80 is a good buy signal.

As of Friday’s close, both indicators were giving decent buy signals. The recent pullback has paused and the market appears to have found some support, and neither indicator is suggesting that the bounce is complete.

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