A Bounce Study Suggesting More Downside

In an older study in the Subscriber Letter I looked at bounces after SPX is strongly short-term oversold as measured by RSI(2).  What I found in that letter was that lower-volume instances on the first day of the bounce have performed much better over the next few days than higher-volume bounces.  I won’t rehash the whole study here, but I will show performance following higher volume bounces like Thursday.

As you can see, it appears that such bounces suggest a short-term downside edge.

One reason the blog has been slow this week is that I am preparing for my trip to Atlanta next week to speak at the MTA meeting there.  If you’re in the Atlanta area and would like more info on my talk you may check out the link below.  You don’t need to be an MTA member to attend, but you should consider joining.

http://www.mta.org/eweb/dynamicpage.aspx?webcode=atlanta

A Columbus Day Edge Revisited

While the stock market is open on Monday, banks, schools, government offices, and the bond market are closed.  In past years with the bond market closed, the stock market has done quite well on Columbus Day.  Of course the most famous Columbus Day rally was in 2008 when the market gained over 11% after having crashed the week before.  Last year in the 10/10/11 blog I showed that positive momentum leading up to Columbus Day has generally led to a positive Columbus Day.  Columbus Day has been celebrated on the 2nd Monday of October since 1971.  Below is an updated version of last year’s study.

I’ve circled some of the more impressive stats here.  With 77% of trades profitable and winners twice the size of losers risk/reward has been very favorable.

Gaps Up to Short-Term (but not Intermediate-term) Highs on Employment Days

A positive reaction to the employment report has the market ready to gap up this morning.  Below is one way that I examined some odds for the day...

I wouldn't get too excited about this with the low sample size, but early indications appear to suggest a mild hint of a downside edge between now and the close.

What Yesterday's VIX Action Hints At For Today

Somewhat unusual about the rise in the SPX Monday was that it was accompanied by a rise in the VIX as well.  Most of the time they mirror each other.  One quirk with the VIX is that it has a tendency to fall on Fridays and rise on Mondays. Therefore this setup is more common on Mondays than any other day of the week. The table below examines performance on Tuesdays after this has occurred.

I only show 1-day results here because anything longer shows no inclination.  And while the edge here isn’t terribly strong, it is interesting that the VIX’s inclination to rise on Mondays does not seem to completely eliminate the tendency for the SPX to pull back the next day.  Of course if this setup happens on a Friday, then the downside edge is more pronounced.

This Pattern Has Always Led to Higher Closes for SPY

The price action in SPY showed some real strength in that it gapped up, never filled, and closed above the open.  When the market is coming off an oversold level in an uptrend and is still not overbought, this pattern will often be followed by further gains.  This was shown in the subscriber letter last night (click here for a free trial).  And in the 5/22/12 letter I also showed that when the SPY pattern occurs following a short-term low it appears to provide a bullish edge, but when it occurs after an intermediate-term low then the bullish inclinations no longer hold true.  The current setup is bullish and I have updated the stats below.

The reliability and the size of the moves are both impressive.  This study suggests the rough start this morning is likely to be overcome in the next few days.

What Happens In Vegas

The International Traders Expo is going to be at Caesar's Palace from November 14-17, 2012.

I've been to this expo a couple of other times and have really enjoyed it.  I'm pleased to announce I'll be back this year and giving a presentation on Saturday the 17th from 1:15pm - 2:15pm.

The topic of my presentation will be "Overnight Edges - A Quantitative Look at Overnight Market Movements and Opportunities".  I'll be covering a lot of my newest and most compelling research with regards to the overnight market.

For more information and to register for the expo (free), click here.

I hope to get the opportunity to meet many readers and subscribers at the Expo.

Turnaround Tuesdays Revisited

It’s been a while since I updated the Turnaround Tuesday study, so I thought I would do so today.  The stats tables below all show results of buying at the close when SPX is down for a certain number of days and the exiting the following day.  The results are broken out by day of the week.  Note that the day listed is the trigger day – not the performance day.  So the Monday trigger tracks Tuesday’s performance.  Tuesday’s trigger tracks Wednesday’s performance…and so on.

In every case Tuesday has shown the most gains – hence the Turnaround Tuesday reputation appears well earned.  Though it wasn’t the highest percentage in every case, it was the strongest day on average.

Interestingly, I this time I also looked at instances where the SPX had pulled back more than 3 days.  Those results are shown below.

Under conditions of a 4 day or greater pullback Tuesday has disappointed.  Monday has been the standout winner.

But none of this tells the whole story.  For a more detailed breakdown of overnight vs. day gains I would suggest checking out the Overnight Edges TurnaroundTuesday study.  Results there are quite intriguing.