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| Symbol | Sector | Return | Exposure | Trades | Last Trade | Status |
|---|---|---|---|---|---|---|
| SPY | Equity Investment Instruments | -5.58% | n/a | 37 | 31-Dec-09 | Prior Holding |
06-Feb-10
Feeling Bullish After Friday?
Holding Rationale for SPY.
It might be hard for technicians not to be bullish after Friday’s (2/5/2010) close.
After a tiny gap-up on the opening, the SPY traded down ~-2% and then reversed to close just above the open and above yesterday’s close. This action creates an interesting candlestick which shows the battle between the bulls and bears. (See circled candlestick on chart).
Another interesting feature of Friday’s trading was the surge in volume. Volume on Friday surged to close more than 2x greater than the 50 day volume moving average. The chart shows the number of shares trading hands was reminiscent of the volume surges when the market was forming the March 2009 lows.
MACD looks as if it might have made a higher low, diverging from price, while VIX closed more than 5% above its 1o day moving average (this VIX setup is a high-probability buy signal if one closes the trade when the VIX closes back beneath its 10 day moving average).
All these appear to be bullish signals.
I have to admit, I was feeling pretty bullish after seeing the market reverse from its death spiral to close higher.
I decided to test a set of conditions similar to the characteristics of today’s trading to see what typically happens afterward.
The Setup
Using SPY…
1. One day ago, the market closes at a new 20 day low.
2. Today, the H-L range is greater than 1.5%
3. Today, volume is more than 2x greater than the 50 day moving average of volume.
4. The close is higher than the open.
Buy the SPY next open, and sell the close n bars later.
Results
About the axis of the graph.
- The horizontal axis shows how long the trade was held. Exiting on day zero means the trade was closed the same day it was opened.
- The left vertical axis shows the percentage of winners
- The right vertical axis shows the percentage gain of the average trade.
The setup appears to have a bullish edge.
Caveats
There were only 22 instances of this setup since 1995.
The same conditions as tested above also existed on Friday’s close for IWM, QQQQ, and DIA. The setup is decidedly bearish on the QQQQ and IWM over the full 30 days after buying and only marginally effective for the DIA.
Because the volume surge on Friday was surprisingly large, I increased the surge requirement to 2.5x the average. This adjustment halved the number of instances of this setup to 11, and made the setup only marginally effective up to 5 days after the buy day, and then bearish to neutral for the following 25 days.
Considering these caveats, you may decide, as I have, that the setup may not be as bullish as it first appeared to be.
By the way, if you enjoy reading this type of study, the undisputed master of the genre is Rob Hanna over at Quantifiable Edges.
Posted at 20:06 in Holding Rationales | Permalink | Top
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