Overbought Nasdaq With Low Spxy Reading Suggests Downside

We’ve seen numerous times how low Spyx readings typically lead to weakness or at least underperformance over the next few days. Both the S&P and the Nasdaq posted low readings on Monday. I decided to look at the situations where an extremely low reading came in an extremely overbought market as we’re seeing currently with the Nasdaq. This first test uses a Spyx level of 20 or below:

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A short-term bearish edge is apparent based on the above. Not shown but also notable is that 85% of all instances closed lower than the close of the trigger day at some point in the next 3 sessions.

The actual Nasdaq Spyx reading Monday was about 5. Lowering the Spyx requirement from 20 to 10 produced the following results:

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Instances here are a bit low but it appears the edge is even more pronounced with the extremely low Spyx reading.

A chart with the current S&P 500 Spyx reading is updated on the home page each night.

Some Thoughts On Bear-Only Edges

One study I looked at this weekend was how the market reacted following times when the SPY gapped higher, never traded down to the previous day’s close, and closed above its open as it did on Friday. Friday was a bit of a borderline example since the gap was small and it came within 1 cent of filling the overnight gap, but the results were interesting nonetheless. Rather than use a results table as I normally do I decided to show an equity curve of this study. The equity curve assumes a 5-day exit. It may be a bit difficult to read the dates below. The test was run from the SPY inception in 1993 though 2/6/09.

What I see is an incredibly strong and consistent tendency to reverse and trade lower has been evident since the bear market began in late 2007. This tendency did not exist prior to that. It is worth taking note of such test results for a couple of reasons: 1) To understand how the market is reacting to such setups currently (or in the recent past). By knowing what the market current tendency is you can position yourself to take advantage of it. 2) To consider possible implications if these kind of setups stop preceding strong negative market reactions. The bear market reaction has been extremely negative. If negative reactions to this or other similar bear-only studies stop occurring it could signal a shift in market dynamics and a possible rally.

Further Detail On The Recent Spyx Study

A commenter, Frank, on the recent Spyx study questioned how the setup has worked more recently as opposed to over the entire period from 1995-present.

Below is a short excerpt from Tuesday night’s Subscriber Letter which addresses Frank’s concern and provides more detail on the setup. It’s fairly common that I include additional information on studies in the Subscriber Letter, and this was one of those instances. As a refresher, the setup involved a 1.25% rise in the S&P 500 and a close below 25 for the Quantifiable Edges Spyx reading.

This setup has been especially bearish during the current bear market. Below are all instances since October 2007 along with their 4-day returns:



Ten for ten to the downside in this case.

Subscriber Letter Trade Results For January

Like December, January was a bit slow for trade ideas. A big reason for this was that there were no Catapult trade ideas that filled. There were several that triggered on 1/20 but the gap up on 1/21 kept them from receiving fills.

I only tracked 2 “system” trades in the Subscriber Letter during January. Subscribers that may trade more aggressively than me can find additional setups almost every night in S&P 500 stocks as well as ETF’s by checking the “System Triggers” page in the members section of the website.

The “Index” trades are typically SPY and QQQQ trades based on the short-term market outlook section of the Letter. The outlook is based on edges identified in my market studies. One tool I use to quantify the different studies is the Aggregator.

Now for the usual caveats and explanations before unveiling the results.


I don’t suggest position sizes. The primary reason for this is I’m not acting as a financial advisor. I don’t feel it is appropriate to suggest allocation sizes without understanding someone’s financial situation and risk tolerance. Even for my own trading I run different portfolios with different levels of aggressiveness. For instance, my most aggressive portfolio is my IRA. Here I may use options to sometimes get 400-500% leveraged. Other portfolios on the other hand normally take much more conservative stances and some rarely reach or exceed 100% exposure.


Since I don’t suggest position sizes this is should not be considered a performance report, but rather a trade idea scorecard. Therefore, no matter how objective I try to be the reporting of the results is always going to be skewed depending on how you approach the trades. For instance, I always recommend scaling into the Catapult positions in 3 parts, whereas the “System” trades (whatever system I unveil other than Catapult) are normally one entry. The “Index” trades I normally recommend scaling into as well. For my own trading I trade much larger size with the index trades than any of the individuals. I also control my exposure by limiting the total amount invested per day. As I mentioned, this will vary depending on the account I’m trading. My most aggressive account I may put in up to 100%/day and get heavily leveraged using options. A more conservative account may max out at 15%-20% per day.

It’s unlikely anyone would have taken all of the trades with equal amounts, so personal results would vary greatly depending on the trader’s approach. All that aside, below are January’s results (click to enlarge):





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January Barometer

The January barometer is a well known study that is often referred to. It states that “as goes January, so goes the year”. In other words, if January closes down, there is a good chance the entire year will close down. Of course the bear case has a head start. I decided to eliminate that head start and look at performance from the end of January forward. Below performance is shown from the end of January to the end of the year. I used the Dow Jones Industrial Average from 1920 – today. Dividends are not taken into account.

(click table to enlarge)

What strikes me here is that wins and losses are almost dead even – for all 11 time frames. When considering your trading approach from now through the end of the year I wouldn’t worry too much about January’s performance.

Low Volume Spyx Reading On Strong Up Day Historically Bearish

The Quantifiable Edges Volume Spyx indicator came in at a very low 15 reading on Tuesday. In general, very low readings have been bearish while very high readings have been bullish. (For those who are new to the volume Spyx indicator, click here for the introductory post on it.) Below is a study showing returns following all instances where the S&P rose at least 1.25% and the Spyx finished below 25.

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Most of the bearish tendency plays out within the first 4 days. As a baseline, over the same period the average 4-day return of the S&P 500 following a 1.25% gain with a Spyx reading ABOVE 25 is almost dead even at -$0.13. This is substantially higher than the average -$840.66 decline shown in the study.

An S&P chart with the volume Spyx indicator is updated each night on the Quantifiable Edges Home Page.

2% Gaps Down Revisited

SPY is nearing a 2% gap down this morning. I performed a study back in October which looked at the tendency of the SPY to close above its gap opening at some point in the next few days after such a large gap down. Below I have updated that table with the 7 additional instances that have since occurred. The edge remains squarely bullish.

(click table to enlarge)