Short illustrations of why this market can go higher…
What if we buy $SPX at the close after 5 consecutive higher closes above the 200 day moving average?
Since this study used $SPX and not SPY, these results start from 1960 and include hundreds of samples.
What if a simple system is generated by deciding to hold the trade for 12 days (the current optimum length to hold the trade after the setup)? What would the equity curve look like?
Yes, this market can go higher.
Comments »There is plenty to cover after such an eventful week. I was thinking that short-term breadth would be extreme, but it is not, and longer-term breadth has not improved as much as I thought it would.
Click the chart to enlarge…
The red line shows the number of stocks above their 5 day moving averages (MA5s). I assumed this indicator would be off the charts. It does show a high reading of 3016, but I would not call it extreme. There were 4 instances of this happening in 2010.
A ran a quick study to test what happens when this indicator hits high readings.
The Rules:
The Results:
There are sample size issues with only 4 occurrences of > 3000 (with Friday counting as the fifth occurrence) and only 16 occurrences of > 2750.
I could take this type of study back further in time, but I would have to change the code to see just the percentage of stocks above their MA5s, rather than the raw number, and I just don’t have time to do that this evening. Perhaps a project for the near future.
The other indicator that gives me some concern is the gray histogram which shows the number of stocks in an uptrend. I consider this indicator to provide an intermediate-term glance at market breadth. With SPY near 52 week highs, this indicator is depressed (a bearish divergence). I look at this indicator as a reflection of whether or not the market has a stable foundation beneath it. Currently, the footing is not as stable as I would like it to be. With this in mind, I believe it is safer to bet that we will see a pullback and some mean-reversion due to the high number of stocks above their MA5s. In fact, give a good look at the chart. You’ll notice that the red line shows larger swings when the gray histogram is depressed.
Bottom Line:
As much as my short position will not like to hear it, the market could go higher here, although I do not believe the foundation of the market is strong enough to support a continued move higher. For this reason, I believe the market will be subject to the forces of mean reversion, and we will see a pullback. I will treat any pullback as a buying opportunity.
Comments »As noted on Twitter, on Friday I bought SDS several times throughout the day. I ended up with an average price of $20.25.
This is the first time this year I’ve had a short position of any significant size.
I have not had time yet to run studies modeling the past week, but I believe that it was such a rare move that there will not be much to compare it to.
My gut says we continue to rally, but I believe that we will have to get some sort of a pullback or consolidation early next week. I don’t plan to hold the SDS for more than a few days.
Happy 4th of July to everyone!
Comments »These type of posts, what happens after 3 consecutive higher closes, are perennial favorites. Yes, many bloggers out there cover this, but I believe it is helpful to revisit the studies from time to time.
The Setup:
The market has recorded 3 consecutive higher closes AND has simultaneously recorded 3 days where the closes were all higher than the opens.
I think most traders are familiar enough with the power of mean-reversion that they understand that consecutive higher closes typically lead to a pullback. That is the easy part of this. What I’m more interested in is what happens AFTER the pullback? Since we are watching to see whether or not the market has bottomed, we want to see the uptrend resume after a short pullback.
The Rules:
The Results:
Summary of Results:
Sample size was healthy on most of these tests. The 2 tests with the smallest samples were Setup & C<MA50 (28 trades held the full 20 days) and Setup + All Variables (6 trades held the full 20 days).
As I tend to do, I added additional factors to the test to more accurately model the current market. All tests show that a slight pullback is likely (as we expected). More importantly, after some reversion to the mean, the results suggest the market may continue higher.
What happens when we add together the setup with all additional factors? Doing so creates the most accurate model of the current market. However, being so specific, there were very few instances of this, meaning the sample size was very small. I put the results on a different chart because the other chart got very busy.
These results were the best of all, primarily because one of the 6 trades resulted in a gain of over 9%. The large gain occurred in 1997.
Bottom Line:
After some weakness, which we would expect after consecutive higher closes, the results suggest that the short-term uptrend may continue.
Comments »Will it be a pause that refreshes, or a pullback?
Today’s expected vote on the Greek austerity measures will likely trump the current technicals. That being said, here is what I am seeing…
The graph above shows SPY in the top pane, with the middle pane showing the number of stocks above their 5 day moving averages (red line) and the number of stocks in an uptrend (gray histogram). The bottom pane green line is a decliners indicator.
All short term measures (red and green lines) are showing that the market internals have reached a level that typically results in a pause or a pullback. As I’ve said before, the market has an upside bias and so picking short-term tops is more error prone than picking short-term bottoms.
The histogram, which is a longer term measure, shows that that most stocks are not in an uptrend. If we are to see a sustained bounce, the histogram will have to improve. As it stands, we are looking at a bounce in the context of a period of consolidation. Could this bounce continue and in hindsight be the start of a new uptrend? It certainly could, but for now I view it as normal bouncing around within a range.
SPY resistance remains at $130.00. We will want to watch carefully how the market responds to the Greek austerity vote, which I believe will pass. Is the news already baked in, or will the passage of the bailout be the catalyst that sparks a new uptrend?
Comments »For the back story, see this post: Comcast’s Negligence Killed My Television.
Yesterday I received a check from Comcast’s insurance company, Liberty Mutual. I was reimbursed for the cost of replacing my fried TV plus sales tax, as well as the two charges for diagnosing the problem with the TV. In general, I am very pleased and feel that Comcast rectified the situation. However, were it not for this bully pulpit of a blog, the situation may not have ended in my favor.
When I last wrote about this incident, I tweeted the provocative post to @ComcastCares and to several of Comcast’s twitter representatives. Thanks to some of my dear readers, the tweet was re-tweeted, and within a few minutes, the main page of @ComcastCares twitter feed was at least half full with the words “Comcast’s Negligence Killed My Television.”
I was at work the next morning when I got a call from Comcast. A gentleman from the local office was on the phone, and he was very friendly. After explaining what happened to my TV, he said that he wanted to call Comcast’s insurance company. I asked when he would be dispatching technicians to properly ground the CATV line, and he seemed to be completely unaware that the line was improperly grounded. Either he was playing dumb, or he truly was not aware of my blog post with all the pictures. My suspicion is that he received orders from above to take care of my problem, but was probably given very little background information. He promised to have a technician come out the same day. Finally, he asked if he could call me back on a 3-way call with their insurance company on the line. I agreed, and a few minutes later he was on the line with a Liberty Mutual agent. I quickly received a claim number and was told to call Liberty Mutual the next day.
I came home from work a little early, and sure enough, a Comcast technician was in the yard, pulling cable from a spool. He was a decent fellow, but made the mistake of mentioning to me that the line was “grounded to the copper pipes.” I wasted no time in telling him that the copper pipes were fed by a PVC pipe, and were therefore not grounded. He said that the copper pipes were likely bonded to the whole-house ground. I told him that if that were the case, the national electrical code required a second ground, with the recommendation being a grounding rod, EVEN if the copper pipes were bonded to the whole house ground. His response was, “Don’t worry, I’m going to ground it right.” I left to meet my family at the pool. I did not crawl back under the house and check his work. My suspicion, based on the amount of wire he was pulling, was that he ran a grounding wire to the whole house ground.
Anyway, I’ll skip some minor details here and cut to the chase. Liberty Mutual was very friendly and fairly efficient. There was a one-week delay while they were waiting to hear back from Comcast to authorize payment. I called Comcast and expressed my displeasure at having to wait, and they sent an email to my local guy, the one who had initially called me. Once he returned to the office (it seems he was on vacation or had some time off), he authorized Liberty Mutual to pay, and things moved very quickly. Liberty asked me what the TV was retailing for, and I pulled up Best Buy’s website and told them. I then asked to be reimbursed for the charges to diagnose the TV. The representative readily agreed. I do not think she even checked to see if the replacement costs I quoted were accurate. She seemed to cut the check while we were on the phone, and several days later, it was in my mailbox.
When I went to Best Buy tonight to buy the new TV, it was on sale for $100 less than I quoted Liberty. Score.
I’m still waiting on the part to fix the old TV. It will cost between $150-$200.00. All suppliers are out of stock and are saying they will not have the part until September.
I know for a fact that other neighbors lost TVs on the same night I did. One neighbor lost three. All were fried via the cable line. Not a single neighbor that I know of filed a damage claim with Comcast. I figure that is the norm, and that is why Comcast may not spend the time grounding their lines correctly. Article 820 of the National Electrical Code, ANSI/NFPA No. 40, provides guidance for correct grounding.
Thanks to all of the folks who offered advice and shared their cable company horror stories. When dealing with gargantuan corporations, social media now makes it very easy to get one’s voice heard. With the click of a mouse, one can publish some pictures or recount an unfavorable situation to thousands of potential customers. A blog post with a smart title may get listed on the first page of search engine results. This reality is a game-changer, and the Davids of the world no longer have to rely on simple slings to fight Goliath.
Comments »More modeling of recent market action suggests a bottom that is characterized by volatile trading within a trading range…
The Setup:
On Friday, SPY closed at a new 50 day low, less than 1% above the 200 day simple moving average.
The Results:
Summary of Results:
As always, we want to be aware of sample size. The setup had a sample size of 8 trades held for the full 50 days. This is very low, and the results may not be able to be generalized.
It’s almost as if the longer we hang out just above the 200 day average, the longer we have to wait for any meaningful upside. These studies just show grinding action with upside of 1% or so (the close beneath the 200dma is the exception). Note that the model most similar to the current conditions (blue line), is the only one that sees us trading lower than Friday’s close. If it proves accurate, then we will have a close beneath the 200 day moving average. As painful as it may be, closing beneath the 200 day average in the past has provided a very bullish edge going forward.
Bottom Line:
I’m seeing lots of studies that suggest volatile, range-trading ahead. The only studies that are showing a bullish edge are those that have us closing beneath the 200 day moving average. At this point, with the 200 day average about .25% beneath Friday’s close, I say BRING IT ON.
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