SPY Closes Above Upper Bollinger Band- Bearish?

Nope, but if you’ve spent anytime reading this blog, the answer was not a surprise.

I have written a fair amount about how I use a SPY close above the upper Bollinger Band of 50,2 bands to signal an abnormally over-bought market.  One of my readers wondered what happens after a close above a standard 20,2 upper Bollinger Band.

Rules:

Buy SPY at the close if it closes above the upper Bollinger Band (standard settings of 20 day mean and 2 standard deviation bands).

Sell the position at the close X days later.

No commissions or slippage. Tested over all SPY history.

The blue line shows the results of the setup. They are definitely not bearish, but they are not nearly as bullish as a close above the 50,2 upper band.

The green line shows the results of buying SPY at inception and holding it in 50 day increments. This is not a perfect comparison as the start date will have a great affect on performance, but it does give us something to which we can compare the setup results.

The bottom line is that over the short-term, markets have tended to mean-revert. Over longer time frames, such as 50 trading days, markets will exhibit more trending behavior. If we start with a market that is already strong enough to close 2 standard deviations above the mean, it should not be surprising that the strength will more often than not continue over the intermediate term.

SPY last closed above the upper Bollinger Band (20,2) on 2.8.11

Still working on the candlestick code. Looks like I’ve got the Evening Star code pretty close. Here are tonight’s submissions…

Each chart is linked…

ITUB

ICO

MT

ATHN

In last night’s Morning Star post, someone wondered in the comments whether I will be backtesting these candlestick patterns. Sure, although it has been done before, by Ripe Trade. Once I feel that the code is good, I’ll run some backtests. It may actually be worthwhile to compare my results to Ripe Trade’s.

On December 13th, 2010, I penned a post which described how an abnormally overbought market is actually a bullish market, not a bearish one.

It is time to check in on the performance of that prediction.

You may recall I defined abnormally overbought as occurring when SPY closes above its upper Bollinger Band (built around a 50dma, with the upper band 2 standard deviations above the mean). Check out the post linked above for more information on this measure.

The graph below has been tracking performance of SPY since the original post, superimposed on top of the average performance of all abnormally overbought performances.

Right on cue, we see that SPY has reached its historical apex, where it has typically peaked in terms of gain and win percentage. If SPY continues to follow this historical trajectory, we will see some weakening and/or consolidation over the next 2 weeks.

While the past 40 trading days’ performance has been impressive, there have been 4 instances since SPY’s inception where the ETF gained more than +10% after this setup, with the largest from May to July of 1997 where it booked a gain of +12.35%.

Up next, per a reader request, I’ll look at what it means when the index closes above the top band of a 20,2 Bollinger
Band configuration (the default configuration). SPY closed above the top band on Monday and Tuesday.

Technically speaking, these patterns represent a setup that has come to be known on iBC as The Honey Hole. The Honey Hole is the mythical intersection between price and moving average where bears meet up to pillage, plunder, and eat honey.

All symbols are linked to charts…

IGTE

TGA

QCOR

SPMD

ACTG

Based on a suggestion in the comments of my last post, here are the Morning Star candlestick patterns generated today.

The code is not perfect, but if it is perfect, there may not be very many candidates. I will likely adjust it some over the coming days and see if I can’t get it to where if finds only the textbook Morning Star.

Each symbol is linked to a chart…

HEV

ACM

CRZO

COMV

LEI

BRXX

To the point: Is there a particular setup or trade that I could post here nightly, or several times a week?

I ask because I know that readers particularly enjoy stock picks. While the big picture posts are all well and good,  I understand that readers want to trade stuff.

My perspective is that of a mechanical system trader. Thus, I have a hard time writing about setups that do not backtest well. However, there are many discretionary traders out there that make good money from setups that don’t backtest particularly well. Perhaps I could bring my expertise in scanning the market after the close to bring a particular setup(s) to the iBC community, most evenings.

Along similar lines, is there anything that you would enjoy seeing me write about on a regular basis?

Leave me your ideas in the comments section. I’ll see what I can do.

Excuse me while I share some recent successes.

Yesterday, PDS closed GENE for a huge gain. GENE was the top-ranked pick for 2.1.11

Today, PDS closed HILL for an out-sized gain. Hill was the top pick on 2.2.11

CIEN was also closed today, for another big gain. CIEN was ranked 4 out of 14 picks on 1.21.11

Have a great weekend!