2/3/2010 Consolidation After Two Higher Closes

The most salient feature of today's market is that SPY consolidated after two days of higher closes. I did a search on the historical data of SPY since 2000 to see the historical tendency of the day after. By using the rules of 2 higher highs, followed by a small negative drop, and above SMA200, I found 18 instances. 60% closed higher from the open of the next day and with an average of 0.11%. There is no obvious edge on either side, but I will align myself with the long side and will be looking for entering long position at favorable location.

With the market trading 6 point below yesterday's cash close forming a potential gap at 6:32 AM, I looked into the historical data and found that when market gaps down, the historically tendency does even better, an average of 0.23% vs 0.3% when market opens above yesterday.

50-Day High to 50-Day Low and Inside Day

After seeing "From A 50-Day High To A 50-Day Low In 8 Days" post on "Quantifiable Edges", I decided to run my own testing seeing what happens after SPY move from 50-day high to 50-day low in less than 8 days.

Since 2002, I found 4 such instances on 3/10/2004, 5/16/2006, 2/26/2007, and 7/25/2007. Regardless of number of days out, decent size drop occurred after all 4 instances with and average of -1.76%, -1.63%, -2.30%, -1.42% and -1.22% for 1, 3, 5, 10, and 20 days out.

Interesting inside days seems to occur soon after such quick drop, which also took place on 2/1/2010 after a move from 50-day high to 50-day low within 8 days. This finding somewhat give support to my hypothesis that the market is in the consolidation phase. The weakness may continue, but I do not expect severe drop to follow unless there is some sort of catalyst.

A Day of Consolidation

Today (2/1/2010) ends up being another inside day. This is the second inside day within two weeks with the last one being 1/25/2010. Historically when SPY is trade below 50-day moving average but above 200-day moving average, it seems that frequent inside days signals a some sort of bottoming process and high possibility of market retracing the losses within 20 days.

I sound very uncertain because, inside day does not seem to help much on timing the rally.All I can be certain is that imminent farther sever drop does not seem likely under current condition according to historical data.

Another phenomenon I observed is that when the inside day is made on volume lighter than 20-day average, the chance of next day close higher is 60% vs. 33%, and average return of 0.15% vs. -0.07% (n=16 vs. n=15). This could be purely random, but interesting nonetheless. Today's volume happens to less than 20-day average.

So how does this information help intra-day trading? I am more incline to go long at lower extremes rather than fading breakouts, and I will tend to take profit a little bit early when fading breakouts.

Stats on Market Profile Normal Day

According to the definition in Jim Dalton's book "Mind Over Market", the main character of Normal Day is its wide Initial Balance not upset during the day and it is more of an exception rather than normal.

After this morning's somewhat slow trading, I decided to spend some time doing some counting on Normal Day, and here is what I have found:

Since 9/7/2005, there have only been 20 trading days that has the characteristics of Normal Day outside of holiday. It is indeed a exception rather than the norm to have market traded within the IB outiside of holiday.

Another interesting observation I found is that Normal Day is generally caused by lack of participation rather than strong directional conviction. Outside if IB, the volume of each 30-minute period is -36% less than 20-day average of the same 30-minute period. The two 30-minute periods that make up IB has 7% more volume than 20-day average.

From the daily data, I doubt Normal Day has any much significance. I can't find any strategy to trade Normal Day to produce profit better than a coin flip.

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.