I’ve shown many times before how strong selloffs rarely end when the 1st day of the bounce is meek. Most of the time to get a strong multi-day move off a low, you need a convincing day-1 bounce. Tonight I decided to flip this concept on its head a little bit and examine what happens after a small pullback day during a strong upmove. For this study I used the 2-day RSI. The 2-day RSI is a very sensitive indicator so it would take a very small decline from a very overbought position in order for it to remain above 90 on a down day. This is what happened on Thursday and what I examined below.

Today is a Fed Day. I’ve shown in the past how Fed Days have had a substantial upside bias. This was illustrated most clearly in my September 23, 2009 post showing a chart of all Fed Days. Of course at this point in time the market is strongly overbought. For those wondering whether this negatively impacts the chances of a positive Fed Day, it doesn’t appear to based on this post from March 18, 2009.

With trading conditions likely to be slow mid-day as the announcement approaches, traders may want to review some of my other Fed Day studies as well.

I’d also like to point out some recent work by others on the subject. This past Friday Tom McClellan reproduced my September 23rd Fed Day chart for his “Chart In Focus” and added his own observations and commentary. Tom’s chart actually went back a bit further than mine and he breaks it down by fed chairman, which I found interesting. You can see Tom’s take on it here:

http://www.mcoscillator.com/learning_center/weekly_chart/fomc_announcement_days_tend_to_close_up/

And last night in his “Gap Wrap” video, Scott Andrews of Master the Gap showed some interesting research that discussed the probabilities associated with gaps filling on Fed Days. He showed both gaps up and gaps down statistics, and the results were quite interesting. You may view his video here:

http://www.masterthegap.com/public/410.cfm

Some readers may recall that I’ve previously labeled December op-ex week “The Most Wonderful Time of the Year”. Op-ex week in general is normally pretty good. And while December has been the most reliable month, both March and April have produced more profits going back to 1984. Below is a table that breaks down op-ex week performance by month. It assumes buying the close on the Friday prior to op-ex and selling the close of op-ex Friday. If there was a holiday on that Friday, then the Thursday before the weekend was bought. I excluded op-ex week of September 2001 due to the extreme (and horrific) circumstances.



This positive seasonality could provide a bit of a tailwind this week for the market.

In last night’s Subscriber Letter I looked at the breakout to a new closing high in the S&P 500. I defined a breakout to be a close at a 50-day high after having no closes at a 50-day high for at least 10 days. In general these breakouts showed positive momentum for about a week and then fizzled out. I broke down the breakouts a number of different ways. One way was by using volume. I wanted to test the common supposition that high volume was better when an index broke out. Those results were quite interesting and I’ve included them below. First instances like yesterday with lower NYSE volume.



Here we see a solid inclination for some upside follow through over the next week. But how does this compare to those times that the volume came in higher on the day of the breakout?



What was a decent edge over the first week is now essentially edgeless. Many times on this blog I’ve shown how common trading knowledge is often wrong. This serves as yet another example of why it is important to question common knowledge.

If you’d like to see more results related to my study of breakouts last night you may you may take a free 1-week trial of Quantifiable Edges by signing up here. If you’ve trialed in the past but not in a while, then you may email me at support @ quantifiable edges.com (no spaces).

Tuesday’s Put/Call Ratio suggested some complacency among options traders. Below is a study I’ve shown a few times in the past in the Subscriber Letter that appeared in last night’s Quantifinder for gold subscribers.



This study gets off to a bit of a slow start, but then there appear to be solidly bearish implications for up to several weeks out. Even as much as 4-5 weeks out the % winners is exceptionally low, as are the win/loss ratio, the profit factor and the average trade.

On February 11th the market put in a Follow Through Day according to the original IBD definition requiring at least a 1% rise in one of the major indices on rising volume. I mentioned the Follow Through Day and dedicated a few posts to it in mid-February. The S&P is now less than 1% from new highs and very close to hitting a level that that would qualify the current rally as “successful” based on the rules I set up in the original Follow Through Day test a couple of years ago. This would mean the lesser of 1) a new high or 2) a rally twice as large as the distance from the close of the Follow Through Day to the bottom of the downmove. Meanwhile the Russell 2000 is already hitting new highs.

In the last few years IBD has changed their rules and stated that a 1.7% rally on higher volume should be required instead of a 1% rally. Ironically the first major index to actually put in a 1.7% rally on higher volume since the February bottom is the Russell 2000, which did it on Friday - as it was hitting new highs. Not a great bottom call when you’re already at new highs. Over the last few years I’ve suggested ignoring the new rule. In a study I did a little over 2 years ago I showed how waiting for a 1.7% FTD would have missed several rallies. The current instance now serves as yet another example. Not that I a see a huge value in the 1% FTD rule, but it has been at least marginally effective and can be used to set up a positive risk/reward scenario. Additionally, requiring a 1.7% FTD not only puts you at risk of missing the rally but it also hasn’t proven to be any more predictive than the original 1% requirement.

Yesterday I explored a pattern where the SPY made a gap up, a move higher and then closed poorly. It showed bullish inclinations. Wednesday’s bar shared a lot of matching characteristics with Tuesday’s. Below I looked at other times there were back to back bars with such similar traits.



Instances are a little low, but results don’t get much more bullish than this when looking out 1-5 days.

A quick reminder rather than a new study this morning…

Typically we see the 1st day of the month provide a bit of a bullish tendency. This tendency really began to take hold in the late 80’s when 401k plans started to become more popular and regular stock inflows began to occur at the beginning of the month. Last July I broke this edge out by month. Below is a copy of that chart (not updated).



(click chart to enlarge)

I’ve circled the March stats. You can see that over the last 23 years March has been the 3rd worst both in terms of “% profitable” and in terms of “net profits”. There have been 11 winners and 12 losers and the total profits have been right in line with long term drift. So while April – July show a bit of an upside edge at the beginning of the month, March hasn’t had the same past results.

The Quantifiable Edges Subscriber Letter turned 2 a few days ago.

Since the Letter began 2 years ago it has undergone a huge amount of improvement- much of it driven by subscribers.

In the beginning the Subscriber Letter was not accompanied by a website. While I’ve made several changes to the format of the letter, the biggest changes have come in the form of website functionality. Some of the major improvements over the last 2 years include (but are not limited to):

1) 2008 - The Charts page which tracks a fair amount of indicators discussed in some of the studies – several of which are unique to Quantifiable Edges.

2) 2008 - The Systems page with numbered systems. Originally when I had a system that would trigger a signal in a stock or ETF I would just publish the rules in that night’s Letter. Subscribers wanted a database of the published systems along with their rules. I also threw in Tradestation code for any Tradestation subscribers.

3) 2008 - The triggers spreadsheet. Shortly after the Systems Page was created I decided to create a spreadsheet that showed any S&P 500 stock or liquid ETF (non-inverse, non-leveraged) that triggered one of the systems that day. This spreadsheet is updated each night and is a frequent source of trading ideas for many subscribers.

4) 2009 - The Archives. The archives pages allow subscribers to pull up any subscriber letter back to the 1st one on 2/25/08 and see what was written. This came in handy for subscribers who felt the current environment was similar to one I had discussed previously and wanted to see what I’d written then.

5) 2009 – The Quantifinder. With this addition searching the archives became obsolete. If a study was published that provided an edge and would qualify under the current market conditions, the Quantifinder finds it for you and provides a link right to the publication or blog post.

6) 2009 – The Aggregator System. The intraday version of the Quantifinder made it possible to sort through hundreds of published studies as the market was still trading and anticipate which ones were setting up to trigger. With this information subscribers can now get a nice preview of tonight’s letter even before the market closes. And the Aggregator System semi-automates the index trading principles I’ve discussed since the inception of the Letter and lets subscribers trade on that nights research information before the market even closes for the day. Over the 2 year period of the Subscriber Letter the Aggregator System has returned a hypothetical 122% on the SPX.

7) 2010 – The QE Aggressive NDX Trend Timer – Released February 1st this system uses trend, momentum, and relative strength to trade the NDX. I’ll post more details in an upcoming post, but this system is currently free for all gold subscribers.

These are just the major improvements. There have also been several minor ones along the way. There is always more in the works, and I already have several additional projects in development. And while the gold subscription price will go up someday, at this point it is the same $75/month or $750/yr that it was two years ago without any of the above functionality.

If you haven’t taken a trial in a while, feel free to send an email requesting one to support@ quantifiableedges.com (no spaces) and I’ll set you up with a free week to check out the new functionality.

Now back to your regularly scheduled programming…

Much of the time when the market has had bad days as of late people have pointed to troubles in Greece and Europe as the reason. I decided to isolate the US market a bit to see how much of the selling really could be attributed to Europe’s woes. The top pane of the chart shows closing half-hour readings for the SPY from the market top in the middle of January through Thursday’s close. The bottom pane shows an indicator that measures the movement of the US market from the time Europe is all closed at 11:30 EST until the NYSE closes at 4pm EST.

In examining Tuesday’s action the Quantifinder spotted an interesting study from the 8/7/09 Blog that looks at QQQQ. I’ve updated the results below:



To me this appears to be a decent though not overwhelming edge that sees a good portion of the bullish tendency play out in the 1st two days.

It has now been 5 trading days since the 2/11 classic Follow Through Day (a gain of 1% or more on higher volume). In the February 1, 2008 blog post I examined implications of market action directly after FTD’s. In that post I found this early action to be a strong indication of whether a FTD was likely to succeed or not. A move higher in the SPX over the 1st 5 days after a FTD led to a successful rally about 2/3 of the time.

In the current situation “success” would be a move to 1,147.41 or higher. This is just barely under the January high of 1,150.45. In other words, based on this study, there appears to be a good chance the market will at least test its January highs before it breaks its February lows. One thing to note is that there still has not been a FTD under the current (1.7% gain) IBD definition, so it will be interesting to see what happens here.

Tuesday was a 90% Up Volume day on the NYSE. At the same time volume declined from Friday’s levels and was below normal. It’s rare to see volume decline on a day when breadth is so overwhelmingly positive – especially when the market is in a long-term uptrend. Going back to 1970 I was only able to identify 6 other instances.



I’ve found many times that extreme breadth will often trump volume. Instances here are too few to draw any solid conclusions, but there is certainly no suggestion that the weak volume spells doom for the rally.

I discussed on Friday that Thursday’s action qualified as a follow through day (FTD) under Investors Business Daily’s classic definition in which a higher volume rise of 1% or more in one of the major indices is required. Apparently IBD didn’t count it since it didn’t quite meet their new 1.7% rise definition. I’m not a big fan of the new rule and believe the 1% requirement is more useful that the new 1.7%. For details on why I feel this way you may refer to this old blog post on the subject:

http://quantifiableedges.blogspot.com/2008/01/follow-through-days-pt-2-does-every.html

I thought it might be interesting to examine a few new ideas with regards to FTD’s today. Before I do that I’ll first point you to the post where I defined the rules of the tests. I basically followed all of the rules as IBD laid them out. Two rules that IBD has never clearly defined are what entails “success” or “failure”. I defined “failure” to be a close below the intraday low of the bottom prior to the FTD. I defined “success” as a move either 1) twice a large as the distance from the low of the potential bottom to the close of the FTD, or 2) a new 52-week high. More detailed explanations of the rules may be found using the link below:

http://quantifiableedges.blogspot.com/2008/01/ibd-follow-through-days-pt-1-are-they.html

Under these rules, and requiring an 8% pullback before looking for a FTD, there have now been 71 FTD’s since 1971. 37 have been “successes” and 34 have been “failures” for a winning % of 52%. One of the findings I published during the 2008 series on FTDs was that FTD’s coming after smaller pullback had a better success rate than FTD’s coming after larger pullbacks. It was this research that led me to ponder whether this FTD may have a better chance of success because the rally attempt is occurring while the SPX is above its 200ma. It would seem to make sense that there might be a better chance of success since the long-term uptrend has not clearly turned down at this point.

What I found when examining the 71 follow through days that now qualify based on the original study was that only 23 closed above the 200ma. Of those 23, 14 turned out to be winners and 9 losers. This 61% success rate is better than the 48% success rate that has occurred below the 200ma with 23 winners and 25 losers. It isn’t overwhelmingly better, though. I’m not sure the distinction is worth making.

With the markets rising more than 1% on higher volume exactly 4 days after a potential bottom, Thursday can be labeled a Follow Through Day (FTD). As I mentioned last night I did an extensive study of FTD’s on the blog back in 2008. A summary page with links may be found here:

http://quantifiableedges.blogspot.com/2008/07/follow-through-days-quantified.html

Among the links found on that page, traders might be especially interested in the study of short-term implications from Feb 1, 2008. In that post I point out that while intermediate-term traders often view the FTD with bullish optimism, swing traders may see it as a short setup since the market is now “overbought in a downtrend”. We’ve seen many, many times before that overbought doesn’t necessarily mean a downside edge and oversold doesn’t’ necessarily mean an upside edge. This is why two lines are incorporated in the Aggregator and why confirmation is needed with both lines before a position is taken. So below I’ve updated the stats showing SPX performance in the days following a FTD.

It’s now been a few days since we hit the lows. With a potential bottom in place IBD followers and some other intermediate-term traders are eagerly awaiting a Follow Through Day (FTD) signal to start putting money to work again. FTD’s get a lot of press but they are largely overrated as a predictive indicator and many reports on them from IBD and others are filled with lore rather than facts. Back in 2008 I did a series on FTD’s. I examined many claims about them and quantified them in detail. Traders who would like to learn more about FTD’s or who would like a refresher may want to check out that series starting with the overview at the link below:

http://quantifiableedges.blogspot.com/2008/07/follow-through-days-quantified.html

Two useful breadth statistics that are tracked by Worden Bros. are the % of Stocks Trading Above the 200ma (T2107) and the % of Stocks Trading Above the 40ma (T2108). At the current time the difference between these two readings is very large. 72% of stocks remain above their 200ma, but only 24% stocks are above their 40ma. The only other time since 1986 when Worden Bros. began tracking these statistics that the difference has been this large was late October / early November of 2009. To get such a large difference between the readings you would need to have a strong pullback occur in a strong uptrend. I was curious to see whether such a strong pullback was likely to derail the long-term uptrend and lead to further selling. To get a better sense I lowered the required difference between the two to 40. Below are those results.



In general, returns were positive from day 1. From a long-term perspective, such sharp pullbacks have been followed by additional buying. Any uptrend strong enough that such a large number of stocks were trading above their 200ma that the difference could be as large as 40 simply didn’t fall apart when a strong selloff occurred. The 2004 instance saw a retest of the highs before the market underwent a lengthy but shallow selloff. The other instances all rallied through their old highs and kept rising. Instances are definitely low but results couldn’t be any more bullish.

While we are now way above a difference of 35, I also ran that to get a few more instances.


This seems to confirm the previous findings and suggests the current breadth differential is indicative of not a market about to fall apart, but rather a market that is likely to resume its uptrend – or at least test its recent highs.

I looked at yesterday’s selloff a number of different ways last night. The overriding theme suggested this selloff is already getting overdone. Below is one example of a study I ran.



Instances are low, but with 100% winners on days 2, 7, 8, and 9 as well as very strong average trade results over the period I felt it was worth considering.