Thursday, July 5, 2012

Late-Day Optimism Getting Overdone

Despite the strong move higher over the last several days, the market has been consistently producing bullish studies.  At Tuesday’s close I noted the first bearish study to trigger in a while (using the Quantifinder).  It is an interesting one so I thought I would share it on the blog.

The market has seen a lot of strong finishes lately.  When it consistently closes near the high of the day it suggests optimism on the part of traders. This optimism is now at a level that suggests it is a bit overdone and there is a good chance of a pullback. The study below exemplifies this concept.

Downside risk appears to be reaching a level that the market will often experience a brief pullback.  But while the downside edge appears to remain in place for a full week, most of the edge has been realized over the 1st 2 days.


Unknown said...

Interesting study, thanks, but what does "8-day average closing range of SPY crosses over 75%" mean? Not sure how to compute that one.... said...
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Rob Hanna said...

Sorry for the slow reply. I am simply measuring where in the daily range SPY closed each day. For instance if it traded at a low of $134.00 and a high of $135.00 and closed at $134.75, then it would have closed in the 75th percentile of the daily range. A close at $134.50 would have meant 50%.

I them take a simple moving average of the last 8 days. If that average goes from below 75% (where it usually is) to above 75%, the study is triggered.