Market Getting Overdone Short-Term

I looked at a lot of studies in the past week or so and they’ve all said pretty much the same thing: the edge was to the long side. Over the last two trading days the market has shot up impressively. I am now seeing some short-term indications that it is due for a pullback or at least a rest. Let’s look at two quick examples – one price based and one sentiment based.

Price
I looked at shorting the S&P 500 under the following conditions:
1) The S&P closed below its 200-day moving average
2) The S&P rose at least 1.5% the last two days in a row.

Results below ($100,000 per trade):


Based on the price action it appears a pullback is likely to begin soon. A modest edge is apparent to the downside after day 2.

Sentiment
I then looked at the position of the VXO – as a gauge of sentiment rather than price. I looked at the performance of the S&P 500 under the following conditions:
1) The S&P closed below its 200-day moving average
2) The VXO closed at least 10% below its 10-day moving average.

Shorting the market under these conditions and covering when the VXO closed back above its 10-day moving average would have produced the following results since 1987. 51 total trades. 31 (61%) winners. Average winning trade = 2.2%. Average losing trade = 2.6%. Expected value = 0.3% per trade. Profit factor = 1.3.

Not an overwhelming downside edge here, but more evidence that continued upside may not be in the making.

Based on price and sentiment measures, a pullback beginning in the next few days seems to be a likely scenario.