Extremely Small Range and a Down Close

So here’s a little something that came out of the Wayback Machine last night based on yesterday's action:

This test suggests the setup has somewhat bearish implications. There are a few things to note here that aren’t evident in the above table. First, 24 of 29 instances (86%) saw the SPY close below its trigger day close at some point in the next 4 days. This is quite a high number. Interestingly, the last 2 times it has occurred, 4/7/09 and 5/5/09, it has led to swift rises and there was no lower close. That speaks to the power of the recent up move from the March lows.

Below is an equity chart from Tradestaion that shows the results using a simple 5-day holding period. You can see the sharp spike that occurred with the last 2 instances.

Mythbusting Some 2-day Volume Patterns

On Thursday the market dropped on rising volume. On Friday it rose on lower volume. I can’t tell you the number of times I’ve read that this pattern is bearish. The classic line of thinking suggests that you want the market to rise on higher volume and drop on lower volume. Therefore many technicians have a habit of looking at any 2-day period such as Thursday & Friday and automatically determining good or bad based on what day the volume rose and what day it dropped. If it had fallen on lower volume and risen on higher volume you’d undoubtedly be able to find someone writing about how that was a bullish volume pattern. Let’s take a look at some 2-day volume patterns to assess the validity of such analysis.

There are 4 simple patterns I looked at for this study:
1) Up day on up volume followed by down day on down volume.
2) Up day on down volume followed by down day on up volume.
3) Down day on down volume followed by up day on up volume.
4) Down day on up volume followed by up day on down volume.

Before viewing the results, to give you some context, the average day over the test period gained about 0.03%, or $30. Now let’s look at the 1st scenario first.

So you have a strong move higher followed by a light volume pullback. Based on the overly-simple classic analysis this would seem to be a very positive pattern. In fact over the following three days there has had a negative implication, and looking out 1 week there is still a strong underperformance vs. a typical 5-day period.

Keeping the same price pattern and flipping the volume pattern we get scenario #2 above. This would often be looked at as a negative volume pattern. Let’s look and compare it to #1.



The price pattern still underperforms over the 1st 2 days, but it’s made up for by the end of the week. All of the expectations are net positive and the results are much stronger than scenario #1. This may come as quite a surprise to most people.

So now let’s move on to scenario #3. Here we have a down day followed by and up day with a “classically bullish” volume pattern.

Not seen above is that while net expectations do turn positive again starting on day 6, they still are the worst of the 4 scenarios even looking 2 weeks out.

Lastly, let’s look and compare the 4th scenario to the 3rd. This last scenario is the one we saw on Thursday and Friday – a down move on higher volume followed by rebound on lighter volume. Traditional analysis would suggest this is worse than scenario #3…



Traditional analysis would again fail here. In fact this was the most bullish 2-day pattern of the bunch.

Of further note I actually ran the tests out as far as 2 weeks. The end results were all the same as above so I didn't feel the need to show that much data.

While I didn’t take much stock in this kind of simple volume analysis before the study, I was quite surprised to find the results were so strongly in opposition to what is commonly believed.

A couple of quick parting thoughts:

1) Don’t be sucked in to believing that up volume on up days and down volume on down days is necessarily a bullish pattern. Also down volume on up days and up volume on down days aren’t necessarily bearish. There’s a lot of misinformation out there and the real answer may be much more complex.

2) This doesn’t mean volume isn’t a useful tool. I’ve found it especially useful at extremes. Traders who would like to sample some ways in which volume can be used to create an edge can check out the past volume studies by clicking here or using the volume label on the right hand side of the blog.

Daily Trading Coach Review & Historical Data Spreadsheet

My trading books can basically be categorized in three ways.

The first are books I read (or read part of), and when I’m done I put them down and never open them again. They don’t inspire ideas. They don’t contain information that requires reviewing. They don’t provoke me to explore new methods or strategies. These books are a waste of time.

The second group do get me excited about a new indicator, method, or technique. They are written well and with an heir of authority that leads me to explore their ideas further. Unfortunately, the ideas are either over-hyped, misleading, or too difficult to implement. Eventually, these too collect dust. On some level, these are worse than the 1st group since they take up even more of my time. Of course there is always some value in learning what doesn’t work, and at least these books provide me with that.

Unfortunately most trading books I’ve read fall into categories 1 and 2.

The last group are books that I refer to over and over throughout the years. They are sometimes inspirational, sometimes instructional, and sometimes both. I’ve just finished Dr. Steenbarger’s “Daily Trading Coach” and I now have a new book to add to my elite shelf.

Like the Traderfeed blog, it’s completely packed with inspiring information and ideas. Most books have 1 or 2 great ideas in them. This has too many to count. One thing I particularly like is that it is broken up into 101 short “lessons”. Personally, I find long chapters difficult to get through when reading a book. The average lesson is only about 3 pages long – perfect for someone with a short attention span or little time for reading.

It’s basically a mix of psychology, common sense, and actionable ideas to help traders of all kinds improve their trading. One section that may be of particular interest to readers of this blog is the last chapter that serves as an instruction manual on how to use Excel to download and test historical patterns. Dr. Steenbarger provides step by step instructions on building, filtering, and sorting the data to frame market hypotheses. He describes how to use the data to help generate ideas – not to just test already existing ideas. Most readers will find this one chapter contains more valuable information than most books.

With Dr. Brett’s permission, I reproduced the sample spreadsheets he described in Lessons 95 through 99. Anyone who would like to download a copy of the spreadsheets may do so on the main Quantifiable Edges site. You may link to the download page by clicking here.

Of course some of you may be aware that I am one of the bloggers that was interviewed in the book (Lesson 87 – The Power of Research). After reading the book, I can say I’m truly honored to be associated with it in my small way. I’m sure I will be reading and referring back to the Daily Trading Coach over and over throughout the years.

Very Narrow Range

Tuesday’s SPY range was the lowest in over 3 months. Since 1999 there has been a bit of a downside bias following narrow range days. The narrower the range in relation to recent ranges, the more bearish the inclination has been. Below is a table showing the 10-day returns following a day that was the narrowest range in X days:



Of course this morning the excitement over the jobs report seems to be trumping any narrow-range tendencies so far.

Subscriber Letter Trade Idea Results For April

April was a very quiet month as far as tracked trade ideas for the Quantifiable Edges Subscriber Letter. In fact it was the quietest. There were only 5 trade ideas that were filled. Four of them were index trades and the other one was a system trade plucked from our nightly “systems triggers” sheet. There was one Catapult that triggered but did not receive a fill due to a gap up the next morning that never closed. A big part of why April was so quiet, in fact, was that the market had several unfilled gaps in the direction of our trade ideas. So while only 5 trade ideas filled and were tracked in the Letter, at least 8 others went unfilled. While this occasionally happens, it’s unusual to see it to the extent that occurred in April. More active or aggressive traders could also have plucked ideas from the systems triggers sheet, which typically has at least a few triggers listed each night. Since there were only 5 filled trade ideas, I’ve listed them all below along with the summary stats. (I typically only post the summary stats in the blog and reserve the full list for the Letter.) First, of course, the usual caveats and explanations.

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. Simply adding up the results of the individual triggers as I do below is an admittedly poor representation of returns. A net positive or negative does not necessarily mean a person following the ideas would have made or lost money during the period measured. And the sum total is certainly not representative of what a portfolio would return. All that aside, below are April’s results (click table to enlarge):

And the individual trades (click table to enlarge):

If you haven’t checked out the gold membership area yet, then click here to sign up for a free trial (only a name and email address required). It’s not just trade ideas. It contains research far beyond the blog as well as members-only charts, systems (with code included), and custom indicators.

Breadth Measures Hitting Historical Highs

I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday - and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.



This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.

How The Long-term Trend Can Influence Results

We continue to see light volume dominate the indices and the ETF’s as the market is hitting new highs here. QQQQ triggered a study that was shown on the blog a little over a year ago on 4/22/08. Below is an updated results table of that study, which looks at very low volume while the market is in a short-term uptrend.

While I didn’t look specifically at the longer-term trend in that post, it is often helpful to put studies into their longer-term context. The last couple of days QQQQ has closed above its 200-day moving. Below I broke down the results of the original test into those times it triggered below and above its 200-day moving average.

Filtering by the long-term trend can have a dramatic effect on certain studies. QQQQ is the first major index to cross its 200-day moving average. Should the rally continue and the other major indices follow it will be important for traders to keep the long-term trend in mind when considering trades.