Consecutive 20-day Lowest Close

Yesterday close lower than yesterday and extend the streak of 20-day lowest close to two and the streak of consecutive 20-day lowest low to 4.

Let's first see what happen after 2 consecutive days making 20-day lowest close. To find situation similar to today, I specified the following additional condition:

1. Both volume higher than 20-day average.
2. Volatility higher than 20-day average.
3. Above 200-day SMA.

Since 2002, there have been only seven such instances and all have occurred between 2004 and 2007. Within the next five days, all instances moved higher than the open of the next day. Even though the size of sample is really small, I would be very cautios with any farther short postion in next few days.

Outside Day on 20-Day Low

The historical tendency played out nicely today. SPY made 20-day low on expanded volatility forming a outside day. I did a quick check on the historical stats on 20-day low made by outside day.

Since 2002, there have been 19 such instances. 15 instances close higher with an average of 0.70% and 4 instance close lower for average -1.34%.

My interpretation is that market has high tendency to consolidate, but if it does not, weakness ensues.

Stats on Fed Day

Dr. Steenbarger's blog is one of my daily must reads. In the article "How Do Federal Reserve Announcements Affect The Markets?", Dr. Steenbarger wrote that the volatility of the FED day has been exaggerated. The article was written near the end of 2006, I decided to do a quick check to see if the quality has changed.

Since 2004, there have been 48 FOMC announcement. 38 out of 48 has volume higher than the 20-day average. In average, SPY volume on FED day is 12% higher than the 20-day average.

29 out of 48 FED days have high low range greater than 20-day average. The SPY range is roughly 0.33 higher which is slightly more than two S&P points.

The quality Dr. Steenbarger described still holds true three years after writing the article. The most interesting thing I found in my research is that 29 out of 48 FED days close positive for the day. Five days later only 8 out of 29 days remain higher than the next open of the day following the FED day. Conversely, 18 closed lower on FED day and 7 out of 18 remain lower than the open of the next day. The sample is pretty low, but my interpretation is that the market tends to over extend itself on the FED day and also on the open of the following day reversion steeper than usual.

If the scenario plays out, I probably would want to align myself accordingly.

Inside Day followed by Outside Day

What's peculiar about last few days is steep drop followed by an inside day then an outside day in a midst of longer term rally. I did a simple test to see what would happen in days after such condition by specify the following condition:

1. Inside day followed by outside day.
2. Price is lower than five days ago.
3. Higher than 200 day simple moving average.

There have been 19 such instances since 2002. The result is overwhelmingly bearish in the next day but three and more days out, market becomes quiet positive. It would be interesting to see how this pattern plays out with the positive bias going into the FED day.

20 Day Low vs. Close Higher/Lower for the Day

When I first started learning swing trading, one of the fist thing learned is to trade breakout and follow the trend. I learned specifically to short SPY when it makes 20-day low and go long when it makes 20-day high As anyone who has done any trading, nothing was this easy. The market does produce big moves more often than normal distribution, but the likelihood of reversion is also higher than normal distribution.

I next ventured into the world of technical analysis, and learned that I should not be following trend. I should fade trends most of the time. Instead of selling 20-day low and buying 20-day high, I should buy when the market makes 20-day low with reversal bar.

In this post I compared the average of 1, 3, 5, 10, and 20 day out after SPY made 20-day low and breaking the group into days that closed higher and days that closed lower. Since 2002, there are 18 instances that SPY closed higher for the day when it makes 20-day low and 178 instances that SPY closed lower for the day on the day of 20-day low.

The chart shows two important points:

1. In average, SPY performs better when it closed higher for the day when making 20-day low.
2. Regardless how the day closes, SPY has positive expectancy.

However, hiding behind the positive expectancy is that when SPY close higher on the day of 20-day low, 5 and 10 days out about 60% of time SPY actually drops below the low.

Three Consecutive Lower Lows

It's been a while since my last post, I have taken time off blogging to work on compiling historical data and better ways to look for the edge.

Last Friday (1/22/2009) marked the third consecutive days SPY closed lower. Before today's opening, I did a quick check on the historical tendency on the day after three consecutive close. Without any filter, there are 108 instances since 2002 where SPY closed lower three consecutive days. Out 0f 108 instances, 60% of the following day closed higher, but three days out SPY has negative expectancy if going long. My interpretation is that market has high tendency to retrace after three consecutive lower closes, but the bounce is USUALLY not a big rally and market tends to chops and consolidate immediately after three days of consecutive lower close. After 10 days, market tends to retrace all the drops caused by the three days. However, when things goes wrong the floor just drops off. The most recent incidents are 12/19/2008 and 2/2/2009. SPY moved around -9% and -15% respectively 20 days out.

Adding a filter of the last drop being more severe than -1.5%, the picture changes completely. The next day closed lower 56% of the instances with average of -0.36%. The historically edge lies with the short side producing an average of -0.36% and -0.19% for longs. Market also tends to bounce back very strong after such severe drop 5 days out with peak of 2.93% 19 days out.