Gone Surfing…Will Be Back Later

I am in a nice little Sea Shack at Folly Beach, S.C., where I used to be a local. I am expecting some nice over-head and glassy sets (thanks Igor!) tomorrow morning.

Normally I just rent a board when I go surfing as my quiver is not what it used to be. Turns out the waves are so big that the local surf shops are not renting due to fear of being sued if someone drowns or something. Luckily, I had an old board stashed in my parent’s attic. I think this was the 3rd board I ever had. It was good back in the day. I spent this morning cleaning the old wax and insulation off of it. I found all the old repairs I made to it, including the re-built nose and back fin re-attachment, which was ripped out one time in Florida.

Anyway, cleaning it up took me back 15+ years. It is not in great shape, with several places where the glass has de-laminated from the foam, but it should do tomorrow. I do finding myself wishing it were about a foot longer. It will be a long paddle-out.

Disregard little Woodshedder. Poor guy, he put on his best pose and then found out he wouldn’t be taking the board out while the waves are big. He was mad, until he was beat up by the shore break, in waist deep water this evening. For this part of the East Coast, these waves are big.

Although I’m probably in better shape now than I was when I used to surf every day, I’m pretty sure that first paddle out will be interesting, to say the least.

I have no idea what the market will do tomorrow. And for one day, I’m not going to be thinking about it.

***Update***

A local blogger is taking some nice pictures of the swell…This one is from today.

Based on this particular study, probably.

The SPY is currently stretched just over 3% above the 50 day moving average. Is this bullish or bearish?

Rules:

• Buy the SPY when the close is stretched more than 3% above the 50 day moving average
• Sell X days later
• No commissions or slippage added
• All buys and sells at the close
• All SPY history tested

Results:

Right axis is the % of Winners.

There were 599 instances of this setup.

While a max Avg. % Profit of 0.55% achieved 13 days out suggests that we won’t see much of a big move going forward,  it looks like The Tea Party Rally could continue.

For the record, as we increase the stretch requirement to 4 or 5%, results get bearish, fairly quickly.

So I ran my short screen tonight, expecting tons of picks. There were only 5. Of those 5 picks, 3 of them look (subjective, of course) more bullish than bearish. The best candidate, in my opinion, is SNDK.

What does this mean?

The market, against all odds, seems to want to go higher.

Should it go higher, I will dub this the Tea Party Rally.

As you were…

Rules:

1. Buy the SPY after 4 consecutive higher closes
2. Last close must be above the 200 day simple moving average
3. Volume on all 4 days is less than the 50 day average volume

The above rules describe the current market environment.

All buys and sells made at the close. No commissions or slippage. All SPY history was tested.

Results:

Not so good. The trades (there were 34) have a hard time going green, even after 20 days. The % of Winners is low until the trade is held for 8 days (% of Winners metric is on the right axis).

Now, lets remove the volume requirement.

Results Without Volume Requirement:

Much better, no? The average trade over 130 instances of this setup only dips into the red on the 4th day, and is solidly green by the 19th day. The % of Winners is also much higher.

What can we learn from this?

Even though volume increased today, I don’t have a lot of faith that the market can rally much further here without a pullback.

If you enjoy this type of study, be sure to visit Rob Hanna at Quantifiable Edges.

But will it be able to hold above the bear market demarcation?

As much as I think a pullback would be more healthy at this point, I can’t force the market to conform to my bias.

At the time of this writing, the S&P E-mini futures are up 0.70%. If the futures can hold on, the S&P should open up right at the 200 day moving average. With the market nearing short-term overbought levels, we might have the making of a good short setup. These major moving averages typically provide resistance and support.

But with a lot of traders seemingly sitting on their hands (note the lack of volume), a break above the 200 day average may trigger some buying.

Since May, the SPY has been unable to trade above the 200 day average for more than a week.  With recent highs at $113.30, there is likely to be further resistance even if it can break above the major moving average. Volume has also been extremely light over the past week. All things considered, I’m still not seeing a strong case for a move much higher, although as I mentioned earlier, continued strength may bring some reluctant buyers off the sidelines.

When I look at my breadth indicators, I still see a market that could go either way.

When I look at volatility, I see it near recent lows, but near areas that have typically led to short upticks. If volatility breaks through the areas that have supported it over the last 3 months, we might have conditions that are ripe for a run towards the April highs.

I also can’t help but think that the market may be pricing in a Republican led house.

Next upside target remains $113.30. Downside target is the 50 day average at ~$109.00

SPY hit $110.68 today, 18 pennies above my target, before reversing. I expected a slightly deeper pullback before hitting the target. Alas, I believe I just got the order of events wrong.

I’m still looking for the pullback.

The chart above shows SPY getting denied at the 200 day moving average, as the bears met at the honey hole. Volume has been depressed over the last five days. There just doesn’t seem to be a lot of conviction here from the buyers. Therefore, I’m still expecting a pullback, but I’m not expecting a breach of the 50 day average, currently at $108.64

Below is a graph showing PDS eligible candidates. Eligible candidates are the stocks meeting the uptrend, volume, and liquidity requirements but have not yet pulled back enough to warrant purchasing.

With 469 eligible candidates (lowest blue line, bottom pane), if we get the pullback I’m looking for, there should be plenty of dips to buy. On a side note, this is essentially a measure of breadth, and it seems to do a decent job of marking bottoms.

My bet is still to remain patient, wait for a pullback, and then load up for a run above the 200 day moving average.

I’m watching the 50 day average, currently at $108.45 on the SPY, for support. Today’s action was healthy, with light volume. I fully expect a run to $110.50 within a week, but I think we go a little lower first.

By the way, 9 out of 10 short setups posted on Friday are in the money, but I wouldn’t be letting any grass grow under those positions.

The mean-reversion system I wrote about the other day is short from Friday’s open and has not yet received the signal to cover.

As you were…