Solid Upside Breadth on a Down Day

Sorry the blog has been slow lately. It will probably be so for another week. One study identified by the Quantifinder yesterday considered the strong breadth on days the SPX declined. I have produced the results table below.

The edge isn’t huge, but it does appear to be high-percentage.

A Historical Look At 2% Drops In Uptrends

The SPY fell over 2% yesterday.  Below is a simple study that looks at SPY performance follow all 2%+ drops while the market is above the 200ma.

The stats table is impressive and suggests a solid upside edge.  But there is a problem with this study that can’t be seen in a stats table.  It hasn’t worked well lately.  To illustrate this I have broken it into 2 studies below.  This first one shows the 1993 – 1999 period.

Extremely strong edge suggested here.  But then market behavior changed.  Here is 2000 – present.

No edge suggested here.  Market dynamics are always changing.  Sometimes for reasons we can explain, and sometimes not.  In either case, when you use edges in setting your bias, it is important to make sure those edges have held up in recent times as well.

A New Look At Short-Term Strength After FTDs

Tuesday was a Follow Through Day (FTD).  Despite the fact that it gave inclinations of being a weak one that would probably fail, the market so far is doing well.  In 2008 I showed that performance in the week after a FTD was often indicative ofwhether the attempted rally was likely to succeed or not.  I took a fresh, and slightly different, look this weekend.  Using the current expanded FTD list I looked at performance starting 3 days after the FTDs.  If a rally succeeded or failed before the close of day 3 then it was not included in study.  There were 34 instances that closed under the FTD close on day 3.  Of those, 12 (35%) went on to successful rallies.  There were 46 that closed above the FTD close on day 3 (like Friday).  Of those, 27 (59%) went on to successful rallies.  Not overwhelming odds, but at least notable, and perhaps worth some consideration.

A Strong Move Up Ahead Of OpEx

It is a little unusual to see the market close so strongly just ahead of options expiration.  And when it has happened it has typically led to selling over the next few days.  The study below shows this.  I last showed it on the blog in January.  All stats have been updated.

Numbers here are moderately compelling and suggest a downside edge.

FTDs on Moderate Volume

Total NYSE volume was down slightly but Nasdaq volume rose on Tuesday.  Using the original 1% gain rules that we used to create our Follow Through Day (FTD) database, this meant Tuesday did see a FTD in the Nasdaq.  But what happens when volume rises to trigger a FTD, but it is still light?  This is one concept I looked at in last night’s subscriber letter.  To answer this question I looked at all FTDs where volume came in below its 10ma.

The inclinations over the 1st few days here appear moderately bearish.  The stat at the bottom is interesting, and suggests the rally attempts often fail when FTDs don’t come on strong volume. And for those that may be curious, the success rate rises to 56% when volume comes in above its 10ma.

Historical Implications of Monday's Multi-Day Engulfing Pattern

Monday’s action was so extreme that it engulfed the last 2 days.  The Quantifinder identified the below study, which I last looked at in the subscriber letter a little over a year ago.  Results are all up-to-date.

While the immediate 1-3 day reaction has been unreliable, these extreme outside days with poor closes have commonly been followed by upside over the 4-10 day period.

A New Look At 3 Down Days After An FTD

Last June I showed a study that looked at times the SPX pulled back 3 consecutive days after a Follow Through Day (FTD).  Johan pointed it out in the comments so I thought I should take a fresh look.  I made an adjustment an re-ran the results.  The adjustment was that the study last June was conducted using the list of FTDs from the original Follow Through Day study.  Since then, all of the FTD studies I have conducted have used a more complete list.  The difference is that the original list was as generous as possible in determining a failure.  It required the market to close below its intraday correction low before being deemed a fail.  The more complete list simply requires an intraday probe to a new low, and it doesn’t look at the close.  If I use the newer list, rather than the original, then results would look like this:

Results still appear bullish, but the 2 additional trades are both losers (over the 3-day period).  They occurred on 8/2/82 and 10/13/98. There is also 1 important factor to consider about Tuesday’s FTD.  It has already failed.  The market hit new lows on Friday.  There have only been 3 other instances of FTDs that have failed so quickly.  One was the 8/2/82 that was just added to the study.  The others were 3/8/01 and 9/25/08 (neither of which were followed by 3 down days in a row and are not included in this study).  I'm not sure that the fact that the rally has already failed will matter, but it does mean the market is in a different state. It is undergoing a selloff and no longer involved in a rally attempt. And just the fact that we are in a different state makes me cautious about this study.