On May 20th, I published the following piece: Bottom Signal: Percentage of Stocks Above 20 and 50 Day Averages At Historic Lows. As the stats suggested it would be, the May 18th SPY close of $129.74 was within a percentage point from the actual bottom of $128.10, which occurred 10 days later on June 4th. The spread between the bottom call and the actual bottom was even closer on QQQ. I finished that post with this thought: “It is possible that we have not yet had enough capitulation for a bottom, but this study shows that we are likely very near to one.”
I find it helpful to continually review these indicators. In doing so, I’m wondering if the most important data point is the percentage of stocks above their 20 day averages. Thus, we would ignore the percentage of stocks above the 50 and 200 day averages.
Let’s look at the graph with the indicators in the bottom pane.
As we would expect, the PctAboveMA20, the green line, moves the fastest. It is probably the best indicator of this group to use for calling short-term swings. However, I was curious at how well it called bottoms when looking out at an intermediate term of 50 days.
Below are the results of those tests.
When the PctAboveMA20 < 15, the average trade for both SPY and QQQ is near 2% by the 3rd day. Those are pretty decent results over the short-term. Looking out over the full 50 days, the PctAboveMA20 bottom call appears to work well with an intermediate time frame. An average trade of 5-6% using QQQ is not too shabby.
It seems that we may be able to ignore the percentage of stocks above their 50 and 200 day averages, but before I write them off completely I want to run more tests. More on this in the future.
Key thing that I look for, and I have no idea how to test, is to look at divergence between price of the index and the calculation – so you’ll notice (or at least I did) that we had a higher percentage while price was lower – indicating to me that breadth was not in-line with price and that a long position should be taken. It’s worked for me quite often!
Hi Damian, I noticed that as well and am trying to figure how to quantify it.
Interestingly, over the weekend I noticed a different divergence – a negative one – would have been handy for this morning! 🙂
When you refer to days held, do you mean “trading days” or simple days on the calendar?
Bull, trading days.