Daily Commentary - Posted on Thursday, October 14, 2010, 2:46 PM GMT +1


Oct Thursday 14

Overbought Market, and Similarities between 1997 and 2010

On Wednesday’s session, and utilizing Bollinger Bands %B with a 14-day EMA (Exponential Moving Average) and 2 standard deviations (for a detailed explanation of the Bollinger Bands %B concept see Stockcharts.com), the SPY closed above the 1.10 threshold (%B equals 1 when price is at the upper band, > 1 therefore means more than 2 standard deviations above the mean) on the 7th session in a row.

Although this has happend on a total of 36 occurrences since 1990, only 2 occurrences were single events, not immediately being followed by another (the 8th) close above the 1.10 threshold.

Table I below shows all occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 5 , 10 , 21 (regularly 1 month) and 42 sessions (approximately 2 months), assumed one went long on close of a 7th consecutive close above the 1.10 threshold (utilizing Bollinger Bands %B with a 14-day EMA and 2 standard deviations).

(* no close below trigger day’s close during next 42 sessions)

Especially noteworthy are the following pattern:

  • with 26 higher and 10 lower closes, the SPY seems likely to post a(nother) higher close on the then following session (in this event on Thursday, October 14), which supports the bullish bias concerning the unfilled gap up and a close below the midpoint on Wednesday’s session ( see SPY w/ Gap Up and Close below Midpoint ),
  • on those occurrences before 2010, the SPY was almost always (except for 2 out of 28 occurrences) trading at a higher level 1 and 2 months later,
  • even on those occurrences in 2010 where the SPY was trading at a significantly lower level 1 and 2 months later, the SPDR was trading at an almost unchanged level (in comparison to the trigger day) 5 (1 week) and 10 sessions (2 weeks) later, and
  • with up to now 9 occurrences in 2010, there was only one other year (1997) where the SPY posted a higher number of 7 consecutive sessions closing above the 1.10 threshold (utilizing Bollinger Bands %B with a 14-day EMA and 2 standard deviations).


Even if the most recent history repeats itself (like those occurrences in 2010, where the SPY was trading at a significant lower level 1 and 2 month later), probabilities and odds are at least tilt in favor of a sideways trading market – if not trading higher – over the course of the next 2 weeks (an imminent u-turn seems less likely), whatever happens thereafter. At least for the near future, buyers will probably be eager to buy every dip.

Successful trading,


Disclosure: Long SDS (UltraShort S&P500) at time of writing.


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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).



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(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)


Comments (5)


  1. […] See the original post here: Overbought Market, and Similarities between 1997 and 2010 […]

  2. […] This post was mentioned on Twitter by Brian Shannon, Frank Hogelucht and Dave, Alexander Alex. Alexander Alex said: RT @TradingTheOdds: Overbought Market, & Similarities between 1997 & 2010 URL: http://bit.ly/cyj7Gh ($$ $SPX $ES_F $NDX $NQ_F) #Forex […]

  3. […] Signs that the market is getting overbought.  (Fund My Mutual Fund, Trade the Odds) […]

  4. bob says:

    Hi Frank,

    Do you do similar analysis on individual securities? I am asking because AAPL reports monday after the close and in this particular case there is more at stake than an individual stock as it is now 21% of the NDX. Alternatively, if you can give us your take on the NDX (or Q’s) for tuesday that should be a proxy for AAPL.


    • TradingTheOdds says:


      I almost always use the SPY as a proxy for the general market’s direction. With AAPL 21% of the NDX, everything can happen (like GOOG reporting after Thursday’s close). This would be less likely with respect to the S&P 500.


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