From A 50-Day High To A 50-Day Low In 8 Days

Amazingly, Thursday’s close marked a 50-day low in the S&P. It was just last week that the S&P closed at a 50-day high. Moving from a 50-day closing high to a 50-day closing low so quickly is quite rare. I only found 6 other instances. Unfortunately, while it appears rare, it doesn’t appear predictive. Below is the stats table.

Examining the individual charts left me with no deeper insights. I’ve listed the dates of each instance in case anyone else would like to have a closer look.

Poor Closes Going Into A Fed Day

Wednesday is a Fed Day. I’ve written a lot about Fed Days and they’ve historically shown a positive bias. Despite this bias they represent an event that is often anticipated with some anxiety by market participants. This anxiety is natural as participants await potentially market-moving news. What’s interesting is that those times where anxiety is the highest have typically proven much more profitable. To demonstrate this I examined where the SPY closed within its daily range. I used SPY rather than SPX for this test because the daily range is typically more accurate with the ETF thanks to the staggered market opening. Below are all times like Tuesday where the SPY closed in the bottom 25% of its daily range prior to a Fed Day.

Stats here are strongly bullish. Last night’s Subscriber Letter examined the results in even more detail. It also showed what happens when SPY closes in the TOP 25% of its daily range on the day before a Fed Day. You may sign up for a free trial subscription by clicking here if you’d like access to that report.

You may also check the Fed Day label to see previous blog posts about Fed Days.

Poor Breadth On Bounce Somewhat Discouraging

I’ve shown numerous studies over the last couple of years that illustrate weak bounces from oversold conditions are often followed by downside.

A study that appeared in last night’s Quantifinder is an example of this. The study was last shown in the 6/24/09 blog post and is updated below:

Notable about the above study is that 4 of the last 5 instances showed positive returns 5 days out. The one instance that never closed below the entry was the last instance on 11/2/09. Still, the stats are convincing enough that I’m not inclined to completely ignore them.

Gaps Up From 10-day Lows

SPY is set to gap up just over 1% as I type this morning. I’ve shown before that large gaps up from low areas will often spark short covering rallies. Let’s look at some stats. First, here is a look at 1% + gaps up from 10-day lows (all stats look at the last 17 years):



Decidedly bullish edge here. The average loss size suggests risks are high, though.

Buy what if the market pulls back and the gap up is only between 0.5% and 1%?



Now you’re looking at basically a coinflip.

VIX Stretched Over 20% From The 10ma While SPX in Uptrend

The VIX provided some notable action Thursday. It closed up over 19% and is now stretched over 20% above its 10ma. Below is a test of other times we saw the VIX stretched this much while the SPX was trading above its 200ma.



The VIX is one of several indicators I am seeing that is suggesting a bounce is near.

Why I Always Look Deeper Than The Stats Table

The evidence I most often show when illustrating a study is a statistics table like the one below. But it’s not all I look at and it never tells the whole story. In the subscriber letter I’ll often go into more detail on some of the studies. Tonight I thought I’d show an example of one study whose stats table I consider to be a poor representation of the truth.

Tuesday’s rally was the biggest % gain in at least 10 days. It followed Friday’s selloff which was the biggest % drop in at least 10 days. With the market trading above the 200ma and a new 10-day high being made on Tuesday, it made for an unusual setup. Below is a stats table showing similar setups in the past.

From the stats table it appears there is a fairly strong inclination for more upside over the next several days. Now let’s zoom in a bit on some of the results. I chose to zoom in on the 6-day here exit since that had the highest win %. Below is an equity curve with the 6-day exit strategy.

While the surface stats looked good, this chart tells a much different story. For one, there haven’t been any instances in nearly 10 years. Also, the 10 years prior to that there were only 5 instances and the return from them was breakeven. In other words, it’s been over 20 years since any edge has been exhibited by this study. In fact, just about the entire “edge” appears to be thanks to the 80’s. So while the initial results looked substantially bullish, this is definitely not a study that I would want to base a trade on. Traders who conduct their own studies should keep this lesson in mind. It's important to carefully examine all results and not jump to conclusions based of the first set of numbers.

High To Low In 1 Day Revisited

One study that popped up in the Quantifinder Friday night is from the 6/16/09 blog post. It looked at quick moves from a high to a low. I’ve updated that study below:

Such sharp moves from a high level often see spillover in the following days.