Evidence That $SPY Can Go Higher Still

In this recent post Huge New High, Can We Go Higher? I made some educated guesses based on some indicators about what the market would do over the short-term. I finished the post with these remarks:

My best guess, using these indicators? The market consolidates, pulls back slightly, less than 2%, and then continues the up trend. I will start looking for a more meaningful correction if the percentage of stocks trading above their 20 day moving averages gets closer to 80.

That was written exactly one week ago, tomorrow (or today, if you are reading this on Friday the 14th). I’ll save the congratulatory patting-of-myself-on-the-back for later.

What I really want to talk about is the indicator that shows the percentage of stocks trading above their 20 day moving averages. I speculated in that previous post that once that number got closer to 80 that I would be looking for a more meaningful correction. Upon second thought, and testing of that hypothesis, a more meaningful correction has not typically followed readings near 80 or above.

Let me demonstrate.

The indicator on which I am focused is represented by the green line. I have added trading arrows to the $SPY chart to show where the buys are made.

The Rules:

Buy $SPY at the close if

• the % of stocks above their 20 day moving averages was not above 78 yesterday but is today

I also added a requirement that the % of stocks above their 50 day moving average must be above 75 (but plotted the results separately).

The trades were closed at the close X days later.

The Results:

Caveats: The setup has only enough samples to be statistically significant to 5 days out from the buy. By the time the results get to 50 days, the average is being generated from only 14 samples.

The setup with the added variable requiring the % of stocks above their 50 day moving average to be above 75 reduces the number of samples to 16 on day one and 7 on day fifty.

Ignoring the sample sizes, the intermediate term appears to be very bullish, while the short-term picture suggests that a small pullback is in order.

I am somewhat fascinated by the results shown when the % of stocks above their 50 day moving average is bullish and the % above the 20 day moving average is bullish. When both are in agreement, it suggests a strong trend that shrugs off short-term mean reversion. I suspect that if I ran the same test and required the % above their 50 day moving average to be low or bearish, we could expect a strong pullback in the near-term, but that is only a guess.

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A low volatility market doesn’t give a whole lot of blog fodder. It is much more fun and interesting to tear apart a market that is falling, or at least volatile. So while the market continues to be rather boring, I’m going to dust off some scans and see how you folks like them.

 

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Some new ones have appeared…

Have a great week!

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Today’s high on $SPY is something like a 1000 day new high. These type of events are bullish, as I’ve written about numerous times. I also warned about getting bearish during an abnormally bullish market. I finished that July 30th post with this thought:

It is not a market that we want to aggressively short. We may also not want to be aggressively long. The results show we may have a few weeks to consider our positioning and bias.

The bottom line is that I am looking for the market to trend more than swing. Since the June 4th low, we’ve seen fairly predictable swings. These results suggest that the swings may be less predictable and the market may shrug off bad news as it climbs the wall of worry.

Since market performance has been consistent with my expectations, what I want to examine tonight is whether it can continue for a while without a pullback or correction. For that examination, I will use some breadth indicators.

Let’s start with a graph of the percentage of stocks above their 20, 50, and 200 day moving averages. For the most part, I only focus on the percentage above the 20 day average.

We are looking at the green line in the bottom pane. Since the bottom in 2009, larger pullbacks and corrections have typically occurred when this line gets near to or above 80. It closed tonight at 71.32. That doesn’t mean we won’t pullback here. It just means that any pullback will tend to be shallow until we get nearer to 80. One caveat is that before the 2008 Armageddon and subsequent March 2009 bottom, larger pullbacks and corrections tended to occur nearer to 70. I’m still of the mind that the crash changed the character of the markets. Therefore, I’m comfortable using 80.

The second measure of breadth to examine is the number of stocks trading above their 5 day moving averages and the percent rank of the number of decliners. Since the chart is covering more than 3 years, it gets a little hard to read, but I think it still makes the point. You can click on it to enlarge it.

As one might expect after such a big day, the percent rank of the number of decliners (green line, bottom pane) is very, very low. After such a low reading, I expect the next day to produce a doji that closes near the top of today’s candle, or a slightly lower close.

The red line is the number of stocks trading above their 5 day moving averages. It closed at 2606. I like to use 2500 as an area of caution. This tells me the market is susceptible to experiencing a shallow pullback that may last a few days.

Both of these readings can go in the other direction after just a few days of consolidation, allowing the market to go higher without much of a pullback.

My best guess, using these indicators? The market consolidates, pulls back slightly, less than 2%, and then continues the up trend. I will start looking for a more meaningful correction if the percentage of stocks trading above their 20 day moving averages gets closer to 80.

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There is one new High Tight Flag for Wednesday and one previous pic that still fits the criteria. First, the new one.

And finally, just for fun, let’s look at IMH, which has twice been selected for the HTF and twice surged more than 20% the next day. The green arrows indicate the evening the stock was selected as a HTF for the next day.

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My Labor Day contribution is below. Hat Tip to @TheLondonWhale for bringing the Friedman videos to my attention.

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We’ve got two HTFs for Friday, including one that was a previous pick and a subsequent huge winner. It has consolidated and is now making the screen again.

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