Daily Commentary - Posted on Wednesday, October 13, 2010, 2:12 PM GMT +1

3 Comments


Oct Wednesday 13

Multiple 3-Month Highs (SPX) and Lows (VIX)

The posting had to be updated due to a wrong header, but the message didn’t change. Sorry for any inconvenience caused.

Apart from the fact that buying the dip seems to be the prevailing strategy at least for the time being (the SPY turned an early intraday loss of -0.86% into a third consecutive higher close), one of the more noteworthy pattern on Tuesday’s session was the fact that the SPY posted a fresh 3-month high on a third consecutive session, while the VIX (CBOE Volatility Index) closed at a fresh 3-month low on the third consecutive session.

In addition – utilizing a 10-day SMA with 2 standard deviations – the VIX closed below the 0.125 mark for a third day in a row (for a detailed explanation of the Bollinger Bands %B concept see Stockcharts.com), extremely stretched on the downside.

While not necessarily a sell signal (especially not with respect to the session immediately following the trigger day), all signals (on its own like the VIX stretched on the downside, and especially in conjunction) historically implied limited upside potential over the course of the then following 5 sessions.

Table I below shows all occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1 , 2 , 3 , 4 and 5 sessions, assumed one went long on close of a session where the VIX had posted a third lower close below its %B 0.125 mark (utilizing a 10-days SMA with 2 standard deviations) for a third day in a row .


(* no close below trigger day’s close during next 5 sessions)

Especially noteworthy are at least 2 pattern:

  • The SPY closed higher +1.0% or better (exactly) 5 sessions later on (only) 5 out of those 45 occurrences, while it closed lower -1.0% or more on 17 occurrences.
  • Even on those 5 occurrences where the SPY did not post a close below the trigger day’s close over the course of the then following 5 sessions, it never closed up better than +1.18% above the trigger day’s close on any of the then following 5 sessions.

In addition, on Tuesday’s session VIX (CBOE Volatility Index) closed at a fresh 3-month low on the third consecutive session as well. Since 1990, there’ve been only 11 other occurrences where the SPY posted a 3-month high on a 3rd consecutive session, while at the same time the VIX (CBOE Volatility Index) closed at a fresh 3-month low on the 3rd consecutive session.

Table II below shows all (11 up to now) occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1 , 2 , 3 , 4 and 5 sessions , assumed one went long on close of a session where the SPY had posted a 3-month high on a third consecutive session in the past, while at the same time the VIX (CBOE Volatility Index) closed at a fresh 3-month low on the third consecutive session.

Although 12 occurrences do never allow for reading anything statistically significant into it, it adds up to the SPY‘s probably limited upside potential looking 5 session ahead.The SPY closed lower (below the trigger day’s close) at least once over the course of the then following 5 sessions on all of those 11 occurrences, and closed below the trigger day’s close on 9 occurrences.

But easing the conditions and looking for those occurrences where the SPY had posted a 3-month high on a 2nd (instead of a 3rd) consecutive session in the past, while at the same time the VIX (CBOE Volatility Index) closed at a fresh 3-month low on the 2nd (instead of a 3rd) consecutive session, won’t change anything.

Table III below shows all (35 up to now) occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1 , 2 , 3 , 4 and 5 sessions , assumed one went long on close of a session where the SPY had posted a 3-month high on a 2nd consecutive session in the past, while at the same time the VIX (CBOE Volatility Index) closed at a fresh 3-month low on the 2nd consecutive session. (Please note: The respective signal had already been triggered on Monday’s (10/11/2010) close)


(* no close below trigger day’s close during next 5 sessions)

The same pattern again: Historically upside potential over the course of the then following 5 sessions had been (very) limited. The SPY either closed below the trigger day’s close at least once over the course of the then following 5 sessions, or on those 4 occurrences where the SPY did not post a close below the trigger day’s close over the course of the then following 5 sessions, it never closed up better than +1.55% above the trigger day’s close on any of the then following 5 sessions.

But: The SPY closed higher on the session immediately following the trigger day (in this event on Wednesday, October 13) on 15 out of the last 20 occurrences.

Conclusions:

With ES E-mini futures currently up +0.80% at time of writing (Wednesday, October 13, 2010, 07:35am ET), any additional upside potential might be (very) limited at least over the course of the remainder of the week (assumed the SPY closes up +0.80% today, we’d be up approx. +1.10% above the SPY‘s close on 10/11/2010, day 2, see Table III).

Successful trading,

Frank

Disclosure: No positions in the securities mentioned in this post at time of writing.

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m4s0n501

Comments (3)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht and Jason Aguillard, Greg Phatts. Greg Phatts said: RT @TradingTheOdds: New blog post: Multiple 3-Month Highs (SPX) and Lows (VIX) URL: http://bit.ly/aqJ7Il ($$ $SPX $ES_F $NDX $NQ_F) […]

  2. Predator says:

    Hi Frank,

    today FED NY releases the Tentative Outright Treasury Operation Schedule, as you highlighted in a previous post (POMO),it is difficult to trade short in this enviroment. Actually, at least until sep 15th mkt will have POMO>=9. Given the small number of occurrences of today’s post, I think it is better to trade long SPY, and wait for the FED NY.

  3. […] Continued here: Multiple 3-Month Highs (SPX) and Lows (VIX) […]

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