Daily Commentary - Posted on Thursday, March 11, 2010, 9:22 AM GMT +1

3 Comments


Mar Thursday 11

Implications of High RSI(2) Readings

On Wednesday’s session, and with respect to the SPY (SPDR S&P 500 ETF), Wilder’s Relative Strength Index (RSI) for a 2-day period closed above 95 the sixth day in a row, and above 99 on the fourth consecutive session.

With respect to the latter, the last occurrence dates back 15 years (see stats below), which – at least with respect to historical probabilities and odds – might have positive implications looking out 10 sessions ahead.

Table I below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session when the RSI(2) closed above 99 on the fourth consecutive session.

Interesting to note that historical probabilities favor a continuation of the uptrend over the course of the then following 10 sessions. After four consecutive RSI(2) readings above 99 (on the close), the SPY closed higher 5 sessions later on 12 out of 14 occurrences, and was never trading (intraday, not only on the close) lower than -1.46% below the trigger day’s close over the course of the then following 5 sessions, so historically downside potential was more or less not existent. In addition, the SPY was trading higher 10 sessions later on 11 out of those 14 occurrences, and did never close lower greater than -0.29% below the trigger day’s close.

And on a session immediately following a fourth reading above 99 (in this event on Thursday, March 11), the SPY never lost more than -0.33% on the close, although one should be carefull to read anything statistically relevant into something with 14 occurrences only over the course of 20 years .

But with Distribution of Returns (represents where the setup’s median return is ranked in comparison to the – ranked in descending order – median at-any-time return) only slightly above/below the 50% mark, none of those occurrences being part of the top 10% best and worst performing at-any-time sessions, and the SPY closing higher greater than +1.0% five sessions later on only one out of those 14 occurrences, upside potential will probably be limited as well, so a sideways trading, rangebound marked with an upside bias seems tto be he most likely outcome.

Almost the same conclusion can be drawn with respect to historical occurrences where the RSI(2) closed above 95 on six consecutive sessions. Table II below shows the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2, 4, 5 and 10 sessions assumed one would’ve bought the SPY on the close of a session where the RSI(2) closed above 95 on the sixth consecutive session.

Historically on a session immediately following a sixth reading above 95 (in this event on Thursday, March 11), the SPY never lost more than -0.47% on the close (24 occurrences), and did never close lower than -0.43% below the trigger day’s close 4 sessions later. And out of those 24 occurrences, the SPY has always posted at least one higher high than the trigger day’s intraday high over the course of the then following 10 sessions.

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

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Comments (3)

 

  1. kyle says:

    Frank

    Thanks for this analysis — very interesting stuff. Larry McMillan (option strategist) just tweeted the following: “In the past, when $VIX has risen for 3 days while the market is on a long winning streak, that is usually a very bearish combo”

    Have you ever looked at the scenario he talks about? There has also been some interesting put/call ratio readings of late — a few days of high index puts vs. calls combined with a low ratio for equities only. do you ever factor options into your analysis? That was one interesting part of your ex-dividend analysis — since the spy goes ex-dividend on option expiration, it could be that monday is often down as part of an expiration hangover rather than something strictly dividend related.

    thanks

    Kyle

    • admin says:

      kyle,

      thanks a lot for your kind words.

      Options (volume, Puts and Calls trading on an Up- and Downtick) are part of my analysis, but I rarely take into account Equity or Index Put/Call ratios. The CBOE Equity Put/Call ratio of the 90th is completely different (with respect to regular readings, averages and so on) to the last decade. A reading of 0.42 (like on Tuesday) was nothing to write home about between 1996 and 1999, while there were only 14 sessions since 01/01/2003 closing lower than 0.42.

      Renny Young at MarketTells shows that three lower closes for the Equity Put/Call Ratio has positive implications, but that it is difficult to read anything into an absolute level or a temporary low (like the lowest reading of the last month).

      In addition:
      I just check for the follwinig setups:
      1) The SPY’s RSI(2) closed above the 95 level on two consecutive sessions (winning streak) while the $VIX closed higher on the last three sessions. 10 occurrences since 1990, the SPY was trading at a higher level 10 days later on 8 out of those 10 occurrences.

      2) The SPY’s RSI(2) closed above the 90 level on three consecutive sessions while the $VIX closed higher on the last three sessions. 14 occurrences since 1990, the SPY was trading at a higher level 10 days later on 12 out of those 14 occurrences.

      3) The SPY closed higher on three consecutive sessions while the $VIX closed higher on all three sessions as well. 12 occurrences since 1990, the SPY was trading at a higher level 10 days later on 10 out of those 12 occurrences.

      Downside potential was more or less non-existent with respect to all three setups. From my perspective, the market is climbing the famous ‘wall or worry’. I didn’t find any bearish implications and checked for Larry McMillans tweet as well. Unfortunately he didn’t post his setup, historical occurrences and respective probabilities and odds in order to check against his specific setup.

      Best,
      Frank

  2. kyle says:

    Thanks — that is helpful. did you have any thoughts on the VIX including Larry’s comments?

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