Quantifiable Edges

This 3-Day Pattern Is Suggesting Caution For Today

noreply@blogger.com (Rob Hanna) — Mon, 20 May 2013 11:46:00 +0000

After Wednesday’s move to a new high, Thursday put in an inside day. With Friday closing at another new high the study below triggered, which I have only previously shared in the Subscriber Letter. It showed that SPY closed down the next day 13 of that last 15 times following a 50-day high, then an inside day, and then another 50-day high. Below I have listed all 15 instances.

Risk/reward here heavily favors the short side. The average drawdown is slightly over 4 times the size the average run-up. Also notable is that every instance saw drawdown of at least 0.35% the next day, but only 1 of the 15 instances saw run-up of at least 0.35%. Traders may want to take this into consideration for the upcoming day.

Revisiting Consistently Strong Closes

noreply@blogger.com (Rob Hanna) — Thu, 16 May 2013 12:55:00 +0000

The market has seen a lot of finishes near the top of its daily range lately. When the market consistently closes near the high of the day it suggests optimism on the part of traders. This end-of-day optimism is now at a level that suggests it is overdone and there is a good chance of a pullback. The study below was last seen in the 1/16/13 blog and it exemplifies this concept. I have updated all of the statistics.

While the downside edge appears to remain in place for a full week, most of the edge has been realized over the 1st 2 days. Below is an equity curve showing how the edge has played out using a 2-day exit strategy.

The strong downslope appears to confirm the bearish edge, even with the action of the last few instances.

Note: To calculate the “8-day Average Closing % Range” I am simply measuring where in the daily range SPY closed each day. For instance if it traded at a low of $146.00 and a high of $147.00 and closed at $146.75, then it would have closed in the 75th percentile of the daily range. A close at $146.50 would have meant 50%.

I then take a simple moving average of the last 8 days. If that average goes from below 75% (where it usually is) to above 75%, the study is triggered.

What Monday's Weak Breadth Could Foreshadow

noreply@blogger.com (Rob Hanna) — Tue, 14 May 2013 13:19:00 +0000

Monday’s weak breadth could imply negative ramifications over the next few days. In the past I looked at instances where the SPX closed higher while the NYSE Up Issues % came in under 40%. Results above the 200ma showed a steady and persistent downside edge. I have updated them below.

The numbers here appear to suggest a downside edge. Perhaps the market is readying to lay off the gas for a day or two.

This Pattern Suggests We Could See More Upside In The Next Few Days

noreply@blogger.com (Rob Hanna) — Mon, 06 May 2013 12:31:00 +0000

Short-term strength is often followed by short-term weakness, but when that short-term strength is unusually impressive, it can create a situation where that extreme strength will beget more strength. When the market leaves an unfilled up gap that is considered a sign of strength. When it does it 2 days in a row and closes at a 50-day high, that can be considered exceptional strength. That is what happened on Friday, and it triggered the study below, which I last shared on the blog on 9/10/12. All stats are updated to present day.

The size of the follow-through isn't terribly large. But it has been very, very consistent that at least some follow through was achieved in the next few days.

What Happens After 6 Months Of Gains

noreply@blogger.com (Rob Hanna) — Wed, 01 May 2013 13:21:00 +0000

April marked the 6th month in a row that SPX has managed a positive close. I have seen many analysts suggest this means the market is overextended and due to correct in the coming months. So I decided to take a look for myself. I ran a study to examine past performance following 6 consecutive months of gains.

The 1st month out of the gate looks to have about breakeven odds. After that everything points to the bullish case, with strongly positive stats across the board for the next 10 months or so. In fact, 10 months out all 14 instances were higher. Below I have listed the 14 instances.

Some strong results here. Based on this, it appears that the bulls should be celebrating that 6-month rally, rather than the bears trying to use it as evidence for an overdue pullback.

Of course there has also been a lot discussed about “Sell in May” and the possible weak upcoming seasonality. I did a detailed study on this in the intermediate-term section of the Subscriber Letter this past week. If you would like to read it you may sign up for a free trial using the link below.

http://www.quantifiableedges.com/members/register.php

The Impact Of A Breakaway Gap

noreply@blogger.com (Rob Hanna) — Tue, 30 Apr 2013 13:28:00 +0000

In the 9/7/12 blog I looked at the short-term importance of an unfilled upside gap accompanying a breakout. With yesterday’s breakout to a new closing high occurring along with an unfilled up gapI have revisited that study below.

Results here are strong across the board.

Now let’s look at instances where the 50-day high breakout was not accompanied by an unfilled gap. Interestingly, the number of instances was nearly the same. This study also appeared in the 9/7/12 blog.

As you can see these moves to new highs that don’t start with an unfilled gap are much less reliable over the short-term.

Technicians will often use the term “breakaway gap”. This suggests the gap occurs on the same day as a base breakout. The idea is that the new high causes excitement and the gap leaves a good amount of people sidelined or stuck short. When it doesn’t immediately fill, it leads these people to chase and helps to propel the market even higher.

Interestingly, as I showed yesterday on Overnight Edges, breakaway gaps like this have not led to a positive overnight session.

What Recent Moves Up Suggests About The Pullback That Began On Friday

noreply@blogger.com (Rob Hanna) — Mon, 29 Apr 2013 12:18:00 +0000

Strong, persistent moves often do not roll over immediately. Real persistency can set up a situation where strength begets more strength. An example of that concept was triggered with Friday’s setup, where we had the 1st down day after 5 consecutive higher closes.

Initially there appears to be a moderate inclination for a bounce. Once you get out 9-10 days the upside edge appears very substantial. Based on this, there appears a good chance that the dip that started Friday may not get too far before the market again moves higher.

When SPX & VIX Both Rise For The 2nd Consecutive Day

noreply@blogger.com (Rob Hanna) — Fri, 26 Apr 2013 12:12:00 +0000

I am looking at a mix of bullish and bearish studies right now. One indicator arguing for the bears is the VIX. The VIX is a measure of volatility and it typically moves counter to the SPX. So it will most often rise when the SPX moves down and it will drop when SPX rallies. Yesterday both the SPX and the VIX closed higher. And they did so for the 2nd day in a row. The study below is an old one that looks at other times this has occurred and the market is in a long-term uptrend. All results are updated.

While not overwhelming, the numbers here provide the bears some hope over the next 1-2 days.

A Volatility Contraction During A Strong Bounce, And What Has Followed Historically

noreply@blogger.com (Rob Hanna) — Wed, 24 Apr 2013 13:13:00 +0000

In July of 2009 I introduced the 3/10 Offset HV indicator. It essentially takes a short 3-day measure of Historical Volatility and compares that to the 10-day measure of 3-days ago. Low readings indicate there has been a contraction in volatility. High readings indicate there has been an expansion. Anything at or below 0.25 is regarded as extremely low. Often after sharp contractions we see a volatility expansion take place.

On Tuesday the 3/10 Offset HV for SPX came in at just 0.22. I found it particularly odd that the 3/10 Offset HV was so low considering we've seen a fairly strong move higher over the last three days. Wondering whether that meant downside risk is now greatly increased, I ran a study.

I found it quite interesting that the numbers here all seem to suggest an upside edge. I suppose to get the 3/10 Offset HV indicator that low while the market is rising so strongly would require some volatile activity prior to the bounce. Being above the 200ma, that scary, volatile period will often pave the way for a continuation of the rally.

What The Last 2 Days Unfilled Gaps May Be Suggesting

noreply@blogger.com (Rob Hanna) — Thu, 18 Apr 2013 13:24:00 +0000

I am seeing a real mix of evidence right now, as neither bullish nor bearish short-term evidence is dominating. The study below is one example of a study from last night’s letter with possible bearish implications. It examines 2-day moves like SPY has just encountered.

The suggestion here is that more downside appears likely over the next few days.

Happy Tax Day!

noreply@blogger.com (Rob Hanna) — Mon, 15 Apr 2013 13:15:00 +0000

Today is the day taxes are due in the U.S. The reason tax day may be important is that it is the last day that people can make IRA contributions to count for the previous tax year. This can create a last-minute rush and you will often have an inflow of funds heading into the market right around and on April 15th. Fund managers will often put this money to work immediately and it creates a positive bias for the market. Tax Day itself seems to have benefited over the years. Below are some stats that demonstrate this.

What Has Followed Large Unfilled Employment Day Gaps Down

noreply@blogger.com (Rob Hanna) — Mon, 08 Apr 2013 12:17:00 +0000

Employment Days will often occur in conjunction with a strong price move because the employment report is frequently viewed as an important piece of economic data. Still, it has been quite rare to see the employment report lead to a large gap down that never fills during the day. This happened on Friday. When it has occurred in the past selling has generally continued into the next trading session. This is something I last showed in the 9/6/11 subscriber letter. An updated list of all instances is below.

Since the beginning of 1997 not only have all instances closed negative, but intraday drawdown has been larger than intraday run-up in every case. Traders may want to keep this in mind today. (Of course fighting against this is the recent tendency of the SPX to change direction every day. An up close Monday would mark the 13th day in a row that SPX has changed direction, leaving the streak as the single longest ever - it is currently tied with a 1994 streak at 12.)

As usual, it should be an interesting day..

When Large Caps Hold Up Relatively Well On A Decline From A High

noreply@blogger.com (Rob Hanna) — Tue, 02 Apr 2013 12:47:00 +0000

Large-caps definitely held up better than the rest of the market on Monday. Coming from a 50-day high, this caused the study below to trigger. It was last seen in the 9/18/12 letter. Stats are all updated.

The implication here is that when the SPX is coming off a high level and it holds up relatively well despite broad selling, it will often have further to drop. The selling in the broad market could spill over into the large caps. There’s a chance they could even play catch-up to the downside. The good news for bulls here is that the bearish inclinations have only lasted a couple of days.

An Intraday Look At Holy Thursday Historical Performance

noreply@blogger.com (Rob Hanna) — Wed, 27 Mar 2013 17:28:00 +0000

Last year I showed that the Thursday before Easter (also known as Holy Thursday) has exhibited a bullish inclination over the years. Today I thought it would be interesting to break out that performance by overnight vs. intraday returns. Intraday returns will be shown here. Overnight returns can be found on Overnight Edges.

The study below shows historical performance from open to close on Holy Thursday.

Numbers here are solidly bullish, though not as overwhelming as the total numbers would suggest. This is thanks to much of the strength coming the night before. Below is the list of instances.

Instances highlighted in purple are the 5 that started with a gap down. All 5 of these gaps were filled at one point during the day, and all 5 instances saw SPY close above where it opened (with 2 of them making for the largest 2 gains of the 19 listed).

There are numerous ways to try and take advantage of this information. In general, traders should be aware that Holy Thursday has exhibited seasonal strength, and that strength has often begun to exert itself the night before. For a more detailed breakdown of the overnight returns, check out today’s Overnight Edges blog post.

An Unusual And Potentially (Short-Term) Bearish Inside Day

noreply@blogger.com (Rob Hanna) — Wed, 27 Mar 2013 12:21:00 +0000

Yesterday was interesting and unusual because it posted an unfilled gap up and a close above the open, but still finished as an inside day. This triggered the below study in the Quantifinder.

Implications are somewhat bearish for a 1-day time frame. I also discussed this setup in the subscriber letters over the weekend, because not only did it trigger yesterday, but also it triggered on Friday.

A Fed Day Setup That Has Seen SPX Higher 3 Days Later Every Time Since 1982

noreply@blogger.com (Rob Hanna) — Wed, 20 Mar 2013 11:56:00 +0000

Tuesday’s decline was the 3rd down day in a row. Many people are now aware that Fed Days have historically had a bullish tilt. So 3-day selloffs leading up to Fed Days have been quite rare. But they have also been a very bullish setup. The table below shows the hypothetical results of buying at the close on the day before a Fed Day if it was at least the 3rd consecutive lower close. The exit is 3 days later.

All of the 15 instances saw the market higher 3 days later. These are some very encouraging numbers for the bulls. I do have a concern here. There has only been 1 instance in nearly 15 years. And that took place in 2005. The setup has certainly been potent over a long period of time. But I am much less enthused about it than I would be if all these instances would have taken place over the last 10 years. Still, with an undefeated record I think it is worth consideration.

The 1st Short-Term Closing Low In A While

noreply@blogger.com (Rob Hanna) — Tue, 19 Mar 2013 13:29:00 +0000

The market had gone quite a while without a pullback before the last 2 days. Monday, for the 1st time in a while, SPY closed at a 5-day low. The study below looks at at other instances of SPY closing at a 5-day low after going at least 2 weeks without one.

Results here suggest a decent upside edge.

Large Gaps Down When The Market Was Near A Long-Term High

noreply@blogger.com (Rob Hanna) — Mon, 18 Mar 2013 06:12:00 +0000

It looks like we should see some strong action on Monday. News out of Cyprus has S&P futures down about 1.5% as I type this late at night. I decided to look back at other times that SPY was trading near a 200-day high and then gapped down over 1% overnight.

There have not been a whole lot of instances, but early indications suggest there could be more selling after the open. Below is a list of all the instances.

November 2009 was the only instance that put in much of a gain. And even that one failed to fill it gap at any point during the day. None of the others even bounced back as much as 0.6% on an intraday basis. If the market does open as weak as it appears it may at this point, then chances of a strong upside reversal don't appear very good.

Reviewing Performance After Strong Closes Going Into OpEx

noreply@blogger.com (Rob Hanna) — Fri, 15 Mar 2013 11:58:00 +0000

The study below looks at times the market closed at a high level just before options expiration. I last showed it on the blog last June. It generally has been a bad time for an overbought market.

The numbers here are fairly compelling and suggestive of a possible downside edge over the next week.

Putting A Series Of Higher Highs Into Context

noreply@blogger.com (Rob Hanna) — Tue, 12 Mar 2013 13:14:00 +0000

I’ve often spoke in the past of the importance of putting smaller patterns into proper context based on larger patterns or trends. In Sunday night’s Gold & Silver Subscriber Letters I showed some studies that exemplified this concept nicely.

The studies looked at the possible impact of 5 consecutive days of SPY making an intraday high. (This triggered at the close on Friday.) I broke it down to see all times the 5 higher highs were accompanied by a 50-day high versus times they weren’t. First let’s look at times where 5 higher highs occurred without a 50-day high.

Stats over the 1st few days suggest a possible downside edge. After 5 higher highs the market will often need a breather.

But what of times (like Friday) when a strong uptrend exists and the market is also making a 50-day high? Those stats can be found below.

Interestingly, the number of instances was exactly the same. But with an intermediate-term rally also occurring the tendency to pull back no longer exists. So 5 higher highs do not appear to suggest a bearish edge in situations like the one that set up a few days ago.

An Updated Look At Op-Ex Week Returns By Month

noreply@blogger.com (Rob Hanna) — Mon, 11 Mar 2013 11:43:00 +0000

There is a possible seasonal influence that could have a bullish impact on the market this week. Op-ex week in general is pretty bullish. March, April, October, and December it has been especially so. S&P 500 options began trading in mid-1983. The table below is one I have showed on the blog the last few years in March. It goes back to 1984 and shows op-ex week performance broken down by month. All statistics are updated.

While December has been more reliable, total gains have been the largest during April and then March op-ex.

Book Review - Mean Reversion Trading Systems by Howard Bandy

noreply@blogger.com (Rob Hanna) — Fri, 08 Mar 2013 15:07:00 +0000

I am just about finished with Howard Bandy’s new book, “MeanReversion Trading Systems – Practical Methods for Swing Trading”. While I very rarely review books here on Quantifiable Edges, this one really stands out and deserves some attention.

Howard goes through every step of the systems-building process. He examines several different oscillators. He scrutinizes entry & exits techniques. He discusses risk control. And on top of it all, he provides code for everything he covers in the book. It is $50 for the book, which is a ridiculously low price. There are trading courses that cost many thousands of dollars that don’t provide as much good information as Howard’s “Mean Reversion Trading Systems”. All of the coding is done in Amibroker, which unfortunately I do not use. But since he lists it all out, those who use other programs like me can translate it into Tradestation, R, or whatever. And here is the kicker for anyone that does use Amibroker – Howard has actually set up a web page where book purchasers can download the code at no additional cost.

I commend Howard on his efforts. If you have an interest in developing your own trading systems, this book is a wonderful resource that I would highly recommend.

What The Recent Consolidation Hints At

noreply@blogger.com (Rob Hanna) — Tue, 05 Mar 2013 14:25:00 +0000

After the big reversal down last Monday the market has recovered quite a bit. What is interesting though is that it has closed within the range of that 1 bar every day for the last week. The bears failed to follow through on that selloff, but the bulls have not managed to move the SPX back out of the range either. This triggered the study below, which I last discussed a couple of years ago.

Over the last 24 years or so the SPX has burst higher out of this “failed selloff” and consolidation on a fairly consistent basis. But the implications are only bullish for a few short days. After that there does not appear to be a decided edge for either the bulls or the bears. I have a bit of a concern, though. Technically, the current setup does qualify. But the last 5 days have been a fairly nice rally. SPX just barely has missed breaking out of the range, and it has not “felt” like a 5-day consolidation. So while the study suggests a likely pop higher in the next few days, the likelihood may not be quite as strong as suggested.

The Quantifiable Edges Study of Tops

noreply@blogger.com (Rob Hanna) — Wed, 27 Feb 2013 20:00:00 +0000

A while back I did a study of major market tops for Quantifiable Edges Gold & Silver subscribers. The study goes back to 1970 and considers every SPX top that was followed by a decline of at least 20%. I identified two indicators that I found especially useful in determining when conditions may be ripe for a possible top. I recently updated the QE Study of Tops, and received a lot of positive feedback on it. A primary reason that I was inspired to update the study is that one of the indicators is currently flashing a warning sign. So I decided I would also make the study available to non-subscribers for a small fee.

The Study of Tops can now be purchased on the Quantifiable Edges website for $5.99. If you purchase a Quantifiable Edges subscription within two weeks of your Study of Tops purchase, your $5.99 will be refunded.

I certainly hope everyone finds it interesting and valuable. If you purchase it and don't feel it was worth the $5.99, then simply send me a note explaining why (relatively nicely), and I will refund your money.

Lastly, I also included a coupon (good through March 31) for a free trial of any Overnight Edges subscription as part of the Study of Tops.

You may purchase the Quantifiable Edges Study of Tops by clicking here.

A Failure of Bulls Followed by a Failure of Bears

noreply@blogger.com (Rob Hanna) — Wed, 27 Feb 2013 14:09:00 +0000

On Monday the bulls tried to make a move higher and failed, making for a higher high and a lower close. On Tuesday the opposite happened with a lower low and a higher close signifying a failure by the bears. This action triggered the below study in the Quantifinder. It was last seen in the 3/3/11 Subscriber Letter. I have updated the results.

Odds across the board, from Win % to Win/Loss Ratio and Profit Factor are all impressive, and suggestive of a short-term upside edge.