Volume Spyx Indicator Suggesting A Pullback

Earlier this week I introduced the Volume Spyx indicator. Testing has shown that risks often outweigh rewards during days following low Spyx readings. We’ve now had three days in a row of readings below 30. Below is a test which looks at similar streaks:

Over the next 7 days there appears to be a bearish bias. Not seen in the above table is that 75% of instances closed below the entry at some point in the next 3 days, 84% in 5 days and 94% within 9 days. A decent sized pullback tends to occur at some point in nearly all instances.

The Dangers Of Shorting Near A Potential Bottom

One thing traders need to keep in mind in the current environment is that when the market is bouncing off of intermediate-term lows it is more likely to get overbought and STAY overbought than when it’s simply consolidating in a downtrend. Shorting bounces off lows typically carries an extra level of risk because of this.

Let’s look at the how the market set up as of Tuesday’s close as an example. SPY closed higher 3 days in a row. Tuesday was the narrowest range in the last 5 days. When trading under the 200-day moving average, this combination can signal the market is likely to pull back. See the test below:



The propensity to pull back is most pronounced over the first 4 days.

Now let’s break down the above results a little differently. First let’s look at times the SPY set up as above but was NOT coming off a 50-day low:



Results here are decidedly more negative than in the original study. Two days out for example there are only 18% winners.

Now let’s look at the first setup again, but this time we only want to see those trades that were coming of a 50-day low:



There is no longer a bearish edge to the setup. In fact, there appears to be a bit of a bullish one. Now 2 days out there are 82% winners. (Although instances are low and that’s not really the point.) The point is that it is much more dangerous to short a market coming off of fresh lows. This is especially true when the lows occurred on extremely oversold conditions.

While previous attempted rallies did quickly roll over the last 2 months, that’s not always the case. Examples of oversold bounces off lows that would have been especially dangerous to short include August 2007, October 2002 and September 2001.

Introducing Volume Spyx

Over the Summer I developed a volume-based indicator that I decided to call Volume Spyx. I have been watching it closely ever since and have posted several studies to the subscriber letters associated with Volume Spyx. Essentially, it looks at an array of securities and compares their volume. Spyx readings are calculated for the NYSE (and compared to the S&P 500) and for the Nasdaq. I primarily use it on daily charts, but weekly have also tested well, and there even seems to be some edge using intraday bars. What I found is that in general, high Volume Spyx readings suggest a bullish bias and low Volume Spyx readings suggest underperformance or a bearish bias.

Below is a table taken from the S&P 500 Spyx Volume 1 document (Volume 2 should be out shortly). The document is 6 pages long and details market statistics related to Spyx levels. The document is available in the Quantifiable Edges Charts page. To access the charts pages you must be a subscriber, but trial memberships are available with just a name and email address. (Click here to sign up.) The table below looks at the period 1/1/1994 - 6/30/2008.


While volume Spyx can be used to help establish a trading bias on its own, Spyx tend to show larger edges when used in conjunction with price movement or other indicators. Below is a study from last night’s Subscriber Letter which demonstrates how I might use Volume Spyx in my analysis.

Low levels of Volume Spyx have typically led to market underperformance. This is especially true when they occur on an up day. There have only been 2 instances where the S&P 500 Volume Spyx has come in under 40 and the market has gained 5%. Therefore I loosened the parameters to a 3% gain.


Still the number of instances is low, but a low Volume Spyx combined with a price spike higher has been a bad combination. Below are the 7 instances and their 2-day returns:



I will be pointing out unusual Spyx activity and what it may suggest as instances arise. I’ve also decided that at least through the end of the year I will post the chart of the S&P 500 Volume Spyx on the Quantifiable Edges home page for all to see.

Thanksgiving Edge?

I’ve often heard about the positive tendencies of the market to rally Thanksgiving week. So I ran a quick test:



The above results actually go through the Monday following Thanksgiving. Positive tendencies may have existed in the distant past, but over the 21-year period I looked at there doesn’t appear to be any edge – bullish or bearish.

The market rallied hard on Friday after hitting historically extreme conditions. There are reasons to be optimistic about some follow-through this week. Thanksgiving doesn’t appear to be one of those reasons, though.

XXXtreme

So every few weeks a new selloff emerges that attempts to one-up the previous selloff. I showed some tables with incredible extreme conditions on 10/9 and 10/27. And now I present…contestant #3.



Also notable is that the CBI popped up to 13 today.

The top 3 breadth stats come from Worden Bros. TC2000.

P.S. Traders may want to take a look at the charts following the previous two extreme posts.

When Studies Collide

Monday’s breadth study suggested a bounce was likely. On Tuesday the bounce arrived. The S&P rose about 1%. But breadth was still miserable. The NYSE Up Issue % came in at 36%. Weak breadth on an up day is something I’ve gone over before. Three such studies from the blog came on June 10th, September 11th, and October 24th. While the bullish study from last night remains valid, these three are all in conflict with it.

Frequently I’ll see studies based on different indicators conflict with each other. It’s normal. One tool I use to help me sort through the studies is the Quantifiable Edges Aggregator. It helps to provide a quantified snapshot of all I’m seeing and aids me in setting my market bias.

Having studies based on one indicator conflict with each other is not normal. In this case it’s NYSE Up Issues %. It muddies my interpretation of the given indicator and dilutes its value. It’s very rare but in such cases I simply zero out the studies. When the edge is not clear, I step aside and wait until there is a clear edge.

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Just a quick reminder to those in the Boston area that I'll be giving a presentation on short-term market edges tonight.

This Breadth Indicator Says We May Bounce Soon

One indicator I watch is the 10-period EMA of Up Issues / (Up Issues + Down Issues). When it gets extremely low it normally signals the market is oversold and likely to bounce. On Monday it crossed below 0.36. Below is a study showing how the market has performed other times the indicator has dropped this low.