1000th Post

This is my 1000th post for iBC, since its founding in 2007. While I haven’t been as prolific as most bloggers here, my intent has been to show how one can swing-trade while maintaining full-time employment outside of the financial sector. My trading, understanding of trader psychology, ability to test systems and model market action, all have excelled, due primarily to my slicing and dicing of the markets on a daily basis. Explaining what I am seeing in language that is cogent yet accessible and creating charts and other records is an extremely beneficial process, and I recommend that every trader engages in that process, in some form or fashion.

The other important bit about blogging at iBC is being part of a talented group of traders and bloggers. I am constantly amazed at the dedication and skill of the other bloggers here (as well as our webmaster/tech guru). My partners serve as a constant reminder that excellence requires dedication, focus, a measure of selflessness, and strict adherence to one’s principles. To Fly, RC, Jake, Chess, and the rest of the crew, thanks!

Finally, the iBC community is a wonderful resource. I have had many readers leave great ideas in the comments section. Readers have contacted me via email and offered me support in both personal and professional matters. I sincerely thank my readers for their input over the years as they too have been instrumental in helping me achieve success.

Here’s to the next 1000 posts!

I’ll leave you with a couple of my favorite posts from the Great Bear Market, Bulls Get Banded and Bulls Grow a Pair, But Come Up Short as well as my most popular series of posts, which were on the Fidelity Select Sector Funds Rotational System.

One could build a reliable indicator based on when I take time off work. Almost without fail, when I take time off to get away, the market does strange things. I was home sick during many of the crash days of 2008 and was also home during many of the surge days as well. I tell you this because I am right now trying to get in a short vacation with the family, and so of course, the market is going to do strange things.

As I was loading the boat up to head out to Morris Island Lighthouse, I saw the futures down big and then saw the Dow down over 200 points. Upon returning to dry land, I noted that the market had a large intraday reversal, and closed down only slightly beneath Wednesday’s close.

The following are other important technical features of Thursday’s action:

• SPY traded beneath the 200 day moving average but didn’t close beneath it.
• The gap from Tuesday, 6.21, was filled.
• SPY volume surged and recorded the highest number of shares traded since the last bottom on 3.16.11.
• Volatility, as measured by $VIX, jumped, but did not close above 20.

I have recent studies which address all these issues, and since we are loading up the boat again to head to the north end of Kiawah Island, I’ll just link to those studies so I can get back out on the water. My gut feeling is that we are still working on a tradeable bottom.

What Happens When the Market Closes Beneath the 200 Day Average?

Volume Surge Suggests Bottoming May Be Occurring

VIX Rises Above 20

Stocks have now rallied nicely, and SPY appears to have broken free from the confines of its bottom Bollinger Band. Let’s model the action of the past four days and see what has typically happened going forward.

Four days ago, SPY made a new 50 day low. Since making that low, SPY has rallied, and the 4 day rate-of-change (ROC) is at 1.91%. The index ETF closed above its 200 day moving average and closed beneath its 20 day moving average.

The Rules:

• Buy SPY at the close when 4 days ago SPY made a new 50 day low and today the 4 day ROC is > 1.5%
• Sell X days later
• No commissions or slippage included
• All SPY history used

The Results:

Summary of Results:

First, let’s look at sample sizes:

• Baseline setup had 61 trades held for 1 day and 36 held for the full 50 days
• Adding C<MA20 to the baseline gave us 39 trades held for 1 day and 26 held for the full 50 days
• Adding C>MA200 to the baseline gave us 25 trades held for 1 day and 21 held for the full 50 days
• Adding both C<MA20 AND C>MA200 to the baseline narrowed things down quite a bit with 17 trades held for one day and 14 held for the full 50 days
• If you are confused by the sample sizes and why holding trades longer reduces the sample size, let me know in the comments section

Sample sizes should be a concern for the model that is most similar to recent action, which is the baseline with C<MA20 and C>MA200. That is too bad because that is the model with the best performance. However, forgetting about the MA20 and just requiring a close above the MA200 gets the samples up to 21, and it also yields decent performance.

Something that is confusing about this study to me (but I didn’t really investigate it thoroughly), is why just requiring the baseline and a close beneath the MA20 has such mediocre results (the blue line). Results are very similar to the baseline. Yet requiring a close above the MA200 improves things significantly. I’m guessing that when this setup occurs, it almost always occurs with SPY closing beneath the MA20, but it doesn’t always occur with it trading above the MA200.

Bottom Line: When SPY rallies shortly after a new 50 day low, some of that rally is usually retraced over the next 5-9 days. We’ll call that a re-test of the bottom or low. However, after this re-test or retracement, SPY has typically exhibited higher than average performance over the next 40 days. If we couple this study with my other study about bottoms and volume surges, it appears we just might have a tradeable bottom in the making.

Rob Hanna, blogging at ETF Prophet, has this to say:

From the 5/2 peak down to the low on 6/16 the SPX declined 8.2%. After such a decline, Investors Business Daily followers will be eagerly awaiting a follow-though day (FTD) before looking to aggressively allocate intermediate-term trend following positions to their portfolios. I conducted and published to the blog extensive research into IBD Follow-Through-Days (FTD) over the last few years.

I’ll be updating some of it and showing some new information in the next several days, but I would suggest readers that are interested in FTDs may want check out the links below.

Be sure to read the rest of Rob’s post here, which includes several very good links to his research on Follow-Through-Days.

Last week, volume on SPY surged to 175% greater than the 50 day average volume. Does this surge in volume hint that a tradeable bottom is near?

On Wednesday, June 15th, SPY volume surged to more than 175% of the 50 day average and made a new 50 day low. On Thursday, volume again surged. When looking for bottoms, it helps to see capitulation. Volume surges coupled with new lows suggest that capitulation may be occurring.

The wild card, and the major caveat of any current SPY study is that it continues to close beneath its bottom Bollinger Band. Since the bottom band marks 2 standard deviations beneath SPY’s 50 day average, multiple closes beneath it signals that the market is abnormal. An abnormal market can stay abnormal longer than we would like. I have written previously about abnormal markets here. We really need multiple closes above the bottom band before this abnormality is removed. Once this happens, bottom-calling makes more sense, in my opinion.

Anyway, lets look at what the volume surge suggests.

The Rules:

• When volume surges to more than 175% of the 50 day average volume, buy SPY at the close
• Sell X days later
• No commissions or slippage included
• All SPY history used

The Results:

Summary of Results:

I added two other variables in order to more accurately model recent market action.

1. The blue line is the basic setup where volume surges to 175% of the 50 day average volume
2. The red line adds the factor of the new 50 day low
3. The green line uses the other factors and adds the requirement of the last close beneath the lower Bollinger Band (50,2)

Sample sizes for these studies were acceptable with 271 occurrences of the basic setup (58 trades if the trade is held the full 50 days), and 59 occurrences of the added factor of the 50 day low (29 trades if the trade is held the full 50 days). Adding the final factor of the close beneath the bottom Bollinger Band reduces the number of occurrences to only 24 with only 14 trades if the trade is held the full 50 days.

Bottom Line: As noted above, SPY has got to quit closing below the bottom Bollinger Band. Until it doesn’t, we should expect that it will continue. If we ignore the additional factor of the close beneath the bottom band, it appears that the market may be bottoming. The red line is suggesting some consolidation over the next month. After about 25 days, consolidation has ended and over the next 25 days, SPY has climbed 3% on average.

Wednesday’s close found $VIX above 20 for the first time in several months. What has happened in the past when $VIX is rising and crossed above 20?

Rules:

• When $VIX crosses above 20, buy SPY at the close
• Sell X days later
• No commissions or slippage included
• All SPY history used

Results:

Summary of Results:

I included 2 other tests with added variables for comparison:

1. I added the requirement that $VIX be higher than its 50 day moving average
2. I used $VIX>20 AND $VIX >MA50 AND SPY < bottom Bollinger Band

• By itself, $VIX crossing above 20 presents a rather bearish setup. There were 33 occurrences.
• However, when we require $VIX to be above its 50 day moving average, results are more neutral to bullish. There were 23 occurrences of $VIX>20 and higher than its 50 day moving average. I have written about this setup before here.
• Requiring SPY to have closed beneath its lower Bollinger Band did not change the results much, and there were only 6 occurrences.

Bottom Line: Recent market action is still suggesting more downside or consolidation over the next 20 days.

Tuesday’s gap of just more than 0.9% brought welcome relief from the recent slide. Will the relief last, or will the gap soon be filled?

Let’s model recent action and see what is suggested by the results.

Rules:

• 1 day ago, the 9 day rate of change was less than -5%
• Today, SPY gaps up more than 0.9% and today’s close is higher than the open
• The close is less than the 50 day moving average.
• No commissions or slippage included
• All SPY history used

Summary of Results:

There were 30 occurrences of this setup.

Results suggest that the gap will be filled within 3-5 days and that the recent lows may be revisited or even broken.

However, if the market does trade down -2.5% from here, it may activate this recent study, which was bullish.

Bottom Line: Yesterday’s move does not suggest that the market has put in a bottom.