Why The Strong Breadth The Last 3 Days Should Be Viewed Positively By Bulls

Thursday was the 3rd day in a row that there was a very high percentage of advancing issues versus declining issues on the NYSE.  In the past, 3 days of such strong breadth has led to further short-term upside.  This is demonstrated in the study below.

Not only are the net results strong but the consistency has been outstanding with all 19 instances posting gains at some point during the next week.  This suggests the strong move over the last few days has a good chance of seeing some additional follow-through.  And it isn’t just the short-term implications that look bullish.  Below is a stats table showing longer-term results.

No matter what time frame you are looking at, 3 days of especially strong breadth like we’ve seen this week is something that has commonly been followed by a bullish environment.

Why Friday's Weak Bounce Was Not Encouraging

The first day of a bounce from an oversold condition can often provide strong hints about how the next several days are likely to perform. Weak bounces like we saw on Friday tend to have a much lower success rate over the following days.  The study below appeared in Friday’s Quantifinder.  It exemplifies this concept.

The numbers here suggest a decent downside edge that has generally played out over the next 3 days.

SPX Performance After Strong Drops Through The 50-Day Moving Average

Thursday’s big drop moved the SPX strongly down through its 50-day moving average.  And it did so with both breadth and volume providing exclamation marks.  Such breaks of highly public support lines like the 50-day moving average can be notable (and it certainly drew attention on Thursday).  Some traders may view it as a change in trend.  And while it may be when looking out over a period of days, weeks, or months, the immediate 1-day reaction to such moving average breaks has typically been to bounce.  This can be seen in the study below.

The 15 for 16 record is very impressive, and suggests a good chance of the market closing higher today.  The average instance gained about 0.6% on the day.

2 Reminders: Upcoming Free Webinar & Fed Day Preparation

The blog has been a little slow lately, but I will be back at it hard soon.  A couple of notes for today:

First, I am giving a presentation as part of Tradestation's free educational series.  It is today at 4:30pm and will focus on overnight trading and edges.  You may use the link below for more information and to register.

https://www.tradestation.com/en/education/events/webinars-schedule

Second, tomorrow will be a Fed Day.  I have posted a substantial amount of research related to Fed Days over the years.  Here are a few things you may want to note.

In September of 2012 I showed that Fed Days have shown a strong upside inclination when SPX does NOT close at an intermediate-term high the day before:
http://quantifiableedges.blogspot.com/2012/09/the-impact-of-intermediate-term-highs.html

You may use the "Fed Study" label to browse through all my Fed-related posts over the years:
http://quantifiableedges.blogspot.com/search/label/Fed%20Study

Of course my most complete collection of Fed Day research is in the Quantifiable Edges Guide to Fed Days, which it looks like Amazon has on sale at the moment.

Has The Strong Bounce Worked Off The Upside Edge?

After being strongly oversold the market has bounced back quite nicely the last 1½  days.  The effect has basically been to work off the oversold condition and leave several indices just a little above their 10-day moving averages.  In other words, it has been a quick trip from near-panic to fairly neutral.  Had the reversal not been so strong then the current upside potential would be a little better.  But since the move was so good (and I’m not complaining), it took out much of the upside edge.  I demonstrated this in last night’s subscriber letter.

There I looked at patterns similar to the current one where SPY made a 10-day intraday low on day 1 and then posted an unfilled gap up along with a close above the open (and above the 200ma) the next day, as it did on Friday.  I broke it down by instances that closed above the 10ma versus instances that closed below it.

So the current situation falls into the 2nd category.  Wins & losses are basically breakeven but the losses were a bit bigger.  I don’t view this as a bearish edge, but I think it demonstrates my point fairly well.  Had we not bounced so much, we would have a better chance of seeing more follow-though.  As is, it appears some caution and perhaps some profit-taking is warranted.

A Simple Reversal From Lows Pattern With A Good Success History

During long-term uptrends, reversals from 20-day lows like we saw on Thursday often succeed in delivering further gains.  This can be seen in the study below.

Results here seem to suggest a solid upside edge.  Have a great weekend!

How the Market has Historically Reacted to Very Bad Fridays (Updated)

The study below is one I last showed in the October 22, 2012 blog.  It examines large drops on Fridays.  Both the Crash of ’29 and the Crash of ’87 happened on Monday.  The Crash of ’87 is still remembered by many traders that are active today.  There was a strong selloff on Friday and then all hell broke loose on Monday.  But since then strong Friday selloffs have commonly been followed by bounces on Mondays.  Perhaps this is due to the fact that fear of a crash causes what might otherwise be an ordinary selloff to become exaggerated and overdone on Fridays.  Or perhaps it is just that people don’t want to hold over the weekend (and end up paying a premium not to).  Whatever the reason, the tendency to bounce has been very strong.  I’ve updated that 10/22/12 study below.

The numbers here are all very impressive and suggest a strong bullish bias.  Traders may also want to take notice of the note at the bottom of the table.  A failure to bounce today could be a warning that the market is not following historical norms and the environment is becoming more dangerous.