For the last two days, SPY has traded above the 200 day moving average and then reversed to close beneath it. Is this rejection by the bear market demarcation a bullish or bearish development?
I wouldn’t know personally, but I’ve heard that rejection sucks. If this is true, SPY bulls must be feeling down in the dumps about now. Why? Because over the last two days, SPY has traded above the 200 day simple moving average but has been unable to close above it. This would seem to be a bearish development. Let’s test it and find out.
The Rules:
Buy SPY at the Close if:
- Yesterday SPY traded above the MA200 but closed beneath it AND today SPY traded above the MA200 but closed beneath it.
Note that on the graph below this will be referred to as “Setup.” “Setup” does not care what happened 3 days ago, so 3 days ago SPY could have been trading above or below the MA200. I added an additional rule to be sure SPY had moved from beneath the MA200 and then was rejected by it. These rules are as follows:
Buy SPY at the Close if:
- 2 Days ago SPY did not trade above the MA200
- Yesterday SPY traded above the MA200 but closed beneath it AND today SPY traded above the MA200 but closed beneath it.
On the graph, this more refined version of “Setup” is labeled “Only 2 Days Above.”
All SPY history was used. No commissions or slippage included.
The Results:
Bottom Line:
There were just enough samples of “Setup” to be generalizable, but only 9 samples of “Only 2 Days Above.”
My interpretation is that on average, when SPY is hovering near the 200 day moving average, it is bullish (reference “Setup” results).
However, when SPY moves up from beneath the MA200 and is then rejected by it twice (reference “Only 2 Days Above”), SPY has tended to consolidate near the average for approximately 3 weeks, and then begins to climb.
It looks to me like SPY is not much affected by rejection. The index has tended to regroup and has then kept on truckin’.
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