Extreme Weakness Never Before Seen By This Measure

The McClellan Oscillator uses advance/decline data to calculate the strength or weakness of a move from a breadth standpoint. The value will vary from provider to provider as there are often slight differences in advance/decline data. Worden Bros. is one data provider I use. Their measure of the McClellan Oscillator hit -381.49 on Wednesday. This is the lowest reading since they began tracking advance/decline data in 1986. (Others I look at are low but not quite all-time lows.) Below is a chart of the McClellan Oscillator over the entire data period.

One notable about this chart is that breadth readings have become more extreme over time. Whereas moves above 100 and below -100 were rare from ’86 – ’93, they are fairly ordinary today.

For more information on the McClellan Oscillator you may visit the link below:

http://www.mcoscillator.com/learning_center/kb/mcclellan_oscillator/the_mcclellan_oscillator_summation_index/

Based On This Setup SPY Has Always Bounced In The Past

I’ve shown before how a deceleration in selling often suggests a bullish edge. A study from the Quantifinder last night illustrated this concept. It first appeared in the June 18, 2009 blog. I’ve updated the results below.



Most impressive about this one is the 100% consistency of the bounce. That’s an impressive feat with a sample size so ample.

Weak Closes Since The March Bottom

Monday’s selloff saw the market close poorly and near its lows for the day. Below is a study that examines weak closes since the March bottom.

I consider this particular study to be environmental. It is indicative of the strength of the rally of the last 7 months and not necessarily an all-weather setup. While I wouldn’t base a trade on this study I do think it will be important to see how it plays out over the next few days. An all out failure to bounce could suggest a change of character for the market.

QQQQ Closes at 5-day Low for the 1st Time in a While

One notable study that appeared in the Quantifnder Friday evening looked at the fact that the QQQQ closed at a 5-day low for the 1st time in at least 10 days. I’ve updated those results below:

This study appears to provide a mild upside edge. Much of the edge occurs within the 1st two days.

Back to back 7-day reversals - a rare setup

More of an oddity than a quantified edge this morning…

The last two days we’ve seen opposing reversals. Wednesday the market made a new high but closed down on the day. Thursday it hit a 7-day low before reversing to close up on the day. A reversal off a 7-day high followed by a reversal off a 7-day low would seem a bit unusual. I looked back to 1978 and found out just how unusual it was. Below is what I found.



It’d be dangerous to trade based off of just a sample set of 5, but I was still fairly amazed that there wasn’t a single instance of a profitable close within the next 4 days.

The Day After Last Hour Smackdowns

So what happens for SPX after last hour breakdowns that are especially large compared to the size of the average daily range? I took a look. The most substantial results came on the day following the late-day selloff. Here they are:



Last night’s Subscriber Letter contained more details and observations about this study. Click here for a free trial.

What Happens In Vegas...

The International Traders Expo takes place at Mandalay Bay in Las Vegas on November 18-21, 2009.

I’m pleased to announce I’ll be speaking on Thursday, November 19th at 1:15pm. The topic of my presentation will be “Quantifiable Edges for Swing Trading”. I’ll be discussing some of my favorite edges and most interesting research.

Registration for the event is free, and you may do so by clicking here.

I hope to get the opportunity to meet many readers and subscribers at the Expo.

The Last 4 Days Price/Volume Pattern

Price/volume the last 4 days has done the following. Thursday the SPX closed at a 50-day high on lower NYSE volume. Friday SPX closed lower and NYSE volume rose. Monday we got another 50-day closing high on lower NYSE volume. Tuesday another market drop with rising volume. That certainly sounds like a bearish price/volume pattern. I took a look.

Going back to 1970 I was only able to find two other instances with the same 4 day pattern where 50-day highs were being made. The 1st was 3/26/81 and it was followed by a decline of nearly a year and a half. The 2nd instance was 6/6/95 and that was followed by a 3-day consolidation and then a continuation of a massive bull market. Nothing to learn there.

But what if we look at the 4-day price/volume pattern on its own and not require new highs be made? Based on common knowledge it would still seem to be bearish. Below are stats going back to 1970:



It could be argued that the above results suggest bullish tendencies, especially over the 4-7 day period. I don’t see any evidence that suggests the current 4-day price/volume pattern is bearish.

Quantifying the Value of Historical Research

The most common type of post here on the blog is one where I’ll show a setup along with a statistics table examining how the market has performed based on similar setups in the past. On the blog, most studies are examined independently. In the Subscriber Letter I’ll take a holistic approach to viewing the studies. The tool I use to do this is the Quantifiable Edges Aggregator.

The Aggregator takes a measurement each evening that estimates what all of the currently active studies are projecting over the next few days. This number is plotted and used on the Aggregator chart, which is published each night in the Subscriber Letter. Along with the estimates the Aggregator chart also shows how the market has performed relative to expectations over the last few days. This is helpful in establishing whether the market is overbought or oversold. I have claimed substantial upside edges typically exist when expectations are positive and the market is oversold versus recent expectations. Also, substantial downside edges typically exist when expectations are negative and the market is overbought versus recent expectations.

While many of the index-oriented trade ideas in the Subscriber Letter were based on the Aggregator chart, I’d never quantified the Aggregator nor used it as a mechanical entry…until recently.

Now that we have nearly two years of historical values I decided it was time to take the concepts above and show exactly how a mechanical strategy based on the Aggregator would have performed. The results were even better than I expected.

Since 2/25/08 (about 20 months), the reinvested return (not inclusive of commissions, slippage, or interest on cash) of trading the SPX based on the Aggregator System signals would have been 106.34%. The system has struggled more recently and is currently experiencing a 3.94% drawdown. Over the full time period it has been invested a little over 60% of the time, with the remaining 40% of the time spent in cash. Both long and short trades have contributed fairly equally.

In my mind, the success of the Aggregator as a tool and as a predictive indicator has cemented the value of historical quantitative research. It demonstrates that incorporating quantifiable edges does indeed provide a quantifiable edge!

More details about the Aggregator System may be found on the systems page of the Quantifiable Edges website. Details include an 11-page working document that reviews the results, discusses recent performance and evaluates alternate entry and exit techniques. Additionally there is a spreadsheet available to all trial users that shows summary statistics, an equity curve and details of every single trigger since 2/25/08 (when the Subscriber Letter began).

Gold level subscribers are able to download the full history of the Aggregator and Differential values in a .csv file. This allows them to more easily integrate the tool into existing strategies or to build their own strategies based on it.

Anyone who wishes to trial the Quantifiable Edges subscriber services may do by clicking here. If you have previously trialed or subscribed to Quantifiable Edges, but would like the opportunity to trial again and see details of the Aggregator System, feel free to drop an email to support @ quantifiableedges.com (no spaces) and you will be set up with a new 1-week trial.

Strong Drops From Highs

When strong moves down occur from high levels as happened on Friday, there is often a bit more downside follow through. Below is a study that exemplifies this.



Certainly not an overwhelming edge, but a hint that there could be more selling before a bounce occurs.

BTW, watch out this week for a few exciting announcements from Quantifiable Edges!

Large Gap & Go's To Intermediate-term Highs

Wednesday’s move may look especially strong on a chart. Historically when large gaps continue higher intraday and make new intermediate-term highs it has most often led to a pullback over the next few days. Below is a study that examines this.



Instances are a bit low but notable nonetheless. Below is a list of all the instances using the 3-day exit criteria.



This would appear to suggest a bit of a downside edge over the next few days.

A Look At This Morning's Gap

Big gap up this morning on the heels of solid earnings. I looked at other times we saw a gap up to new highs in the SPY and found the following results:

This would suggest a bit of a downside edge from open to close today.

Columbus Day Performance

While the markets are open on Monday, banks, schools, and government offices are closed. In past years, with the bond market closed, the stock market has done quite well on Columbus Day. Last year Columbus Day saw a gain in the S&P of over 11%. Many traders will likely recall it was the week prior that the market suffered its multi-day crash. Stats associated with Columbus Day are now a bit skewed thanks to 2008. Below is a chart from 1961 – present that shows Columbus Day performance.

As you can see it has generally been a positive holiday for the market.

Considering This Morning's Gap

The SPY is looking to gap up over 1% as I write this. It has also closed higher 3 days in a row. Back in April I looked at large gaps up after the market ha already risen. This study suggests risk/reward favors the downside should SPY gap more than 1% this morning. The fact that the SPY closed within a range rather than at a 10-day high makes it a little less encouraging.. Overall, should this gap hold until the open, I would estimate a mild edge to the downside from open to close.

What's Happened To "2 Days Up In Chop"?

A few weeks ago I discussed the performance of the “2 Days In Chop” systems. After doing extremely well through June, I noted the systems had faltered a bit lately. The primary reason for the struggle over the last few months has been that the “2 Days Up In Chop” system has done poorly.

Below is an equity curve of “2 Days Up In Chop”.

The poor performance of “2 Days Up In Chop” can be attributed the strongly trending rally that has taken place. “2 Days Up In Chop” triggered again on Tuesday afternoon. I effectively suspended use of it as an indicator a while back. Should the market top out or enter a period of consolidation, or even simply undergo a deceleration in its uptrend, then “2 Days Up In Chop” may begin working again. I’ll continue to monitor the equity curve as a gauge of market behavior. Equity curves of simple systems such as this are a nice way to look under the hood of the market and understand what’s working and what isn’t in the current environment.

The Trend vs. Chop equity curve is one I update weekly on the subscriber site. It shows the effect of buying all up days and shorting all down days. In a choppy environment the line will fall. A rising line suggests a more trendy environment. For more discussion on this chart you may see this post from a little over a year ago. A current chart is below.

As you might suspect, the strong move up has been accompanied by unusually trendy behavior.

Deceleration of Decline Suggests Bounce

When there is a rapid deceleration in what was once a sharp selloff that often indicates a bounce is near. I’ve shown some examples of this concept over time. One way to look at deceleration would be by looking the size of the bars. Friday’s Quantifinder found the following study from the 6/24/08 blog. This study uses WR7 and NR7 days. A WR7 is a day whose range is the widest in the last 7 days. An NR7 is a day whose range is the narrowest in the last 7 days. All stats are updated.



This study suggests a decent upside edge over the next week-plus. One aspect of this study that I find particular appealing is that it has been consistent over time. Below is a profit curve using a 5-day exit strategy.


The consistent upward slope shown here is preferable to a jagged equity curve or one where most of the profits were made in a small number of trades.

Bad Ends To The Quarter

Below is an excerpt from a special report that was sent to subscribers yesterday around noon. This study examined performance after the SPX declined the last 2 days of a quarter.



86% of instances were trading higher 2 days later and the average trade was 1.2%. This suggests a decent upside edge for the next couple of days.

A more detailed look at this study may be found in last night’s Subscriber Letter. To view it in full you may take a free trial. If you have trialed Quantifiable Edges before but not since 6/1/09 you may send a request to support @ quantifiableedges.com (no spaces).