In seeking to understand the significance of the latest rally, I ran a very simple test.
The Method:
Buy the close if SPX rises more than 11% in 10 days (this would have one entering at the close on Friday).
Sell on X day close after entry.
100K per trade. Commissions and fees are not included, and gains were not compounded.
All data for the SPX was used: 1/4/1960 to the present.
Number of occurrences: 34
***Edit*** Jeff Pietsch of Market Rewind brought up a good point in the comments section. The 34 instances can only be achieved if after buying, one was to sell the next day and start the process over again. If instead one bought and help to the optimum 43 day exit, there would only be 9 trades. If this is confusing, let me know and I will try to flesh it out a bit more.
The Results:
The most important takeaway is that on average, the market continues to have a bullish disposition for 20 days after this set-up. If one can hold through some pullbacks/consolidation, there is an edge going out more than 40 days.
What is notable is that there was typically weakness a few days following the SPX being up more than 11% in 10 days.
Large drop in %Profitable about 3 days after the entry, but longer term, odds improve greatly.
The Win/Loss ratio is very interesting. While this setup is profitable, we continue to see a situation where any losses are likely to be much bigger than the winners. What we might extrapolate from this is that if going long here does not work, it is likely to result in a large losing trade. I further interpret this to show that the pullbacks from this setup can be brutal.
Does This Setup Occur Primarily in Bull or Bear Markets?
I added to the test the requirement that the SPX closes above its 200 day simple moving average. There were only 3 instances when the buy criteria was met when the index was trading above the 20odsma:
08/23/82
10/22/98
7/24/2009
This means this setup typically occurs in bearish environments (and therefore are usually considered be in the context of a Bear Market Rally).
Summary:
I’m still not seeing anything that points to a slam-dunk bearish edge. Really the only bearish edge I can find in this study is that the average losing trade is likely to be 25%-50% larger than the average winning trade.
Perhaps the other bearish consideration is that this setup has typically occurred beneath the 200dsma.
It is worthwhile to point out though that the 8/23/1982 occurrence marks the start of an 18 year bull market.
Nice Ed Hardy shirt
http://www.ebuyshoes.com/demo/myfiles/ED%20Hardy%20T-Shirts%20-L002.jpg
Much more manly than your blazer and clogs. Oh, and your big ass gaudy watch.
Wood,
This is a reprhase of Edward Hornstein’s thoughts and as I am a rank amateur, I look to others for where the market is heading over a few months: Here are his thoughts and although I’m seeing many of the same things, his explanation has more gravitas ( I hate that word) Here’s what he said: (a) former leadership is resisting selling off, (b) right now there are less 52 week moving lows,than in Oct. and Nov. when the market was at this level, (c) and new leaders are emerging, wheras at these levels back in Oc. and Nov., there was no leadership or very little, and after a benign correction we had a follow through rally on July 13 , which allowed leader to build proper bases.
So with that William O’neal based thinking, i.e., the individual stocks, that are leaders set the tone for the market, I think a rally maybe in the offing.
Just one more way to look at it. But in the past this guy has been very good.
So Wood, what I’m saying is that if it goes down for awhile, the major push will be to the upside for awhile.
Just another way to thing about it all!
Hi Wood, I think this analysis includes overlapping instances (ie days 10+ in the same run are counted), which readers should know if correct. Same conclusion either way though. Best, JP
Jeff, not sure I understand. Can you be more specific? Thanks…