Daily Commentary - Posted on Friday, November 5, 2010, 9:48 AM GMT +1

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Nov Friday 5

%B and (really) Overbought ?

I’m currently on a short break, therefore a brief posting only.

On Thursday’s session, and utilizing Bollinger Bands %B with a 20-day SMA (Simple Moving Average) and 2 standard deviations (for a detailed explanation of the Bollinger Bands %B concept see Stockcharts.com), the SPY closed above the 1.25 threshold (%B equals 1 when price is at the upper band, > 1 therefore means more than 2 standard deviations above the 20-day mean) for the 4th time since 1990. The other 3 occurrences were 11/06/1996, 09/05/1995 and 12/23/1991.

And how did the market perform immediately following the other 3 occurrences ?

Table I below shows those 3 occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2 , 3 , 4 , 5 and and 10 sessions, assumed one went long on close of a session where the SPY closed above the 1.25 threshold (utilizing Bollinger Bands %B with a 20-day SMA and 2 standard deviations) in the past.

(* no close below trigger day’s close during next 10 sessions)

Interesting to note that on all of those 3 occurrences, the market never looked back and did not post a single close below the trigger day’s close over the course of the then following 10 sessions.

But 3 occurrences is – of course – nothing to read anything statistically significant into it. In order to increase the sample size, I looked for those occurrences where the SPY closed above the 1.15 (instead of 1.25) threshold (utilizing Bollinger Bands %B with a 20-day SMA and 2 standard deviations) in the past.

Table II 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 , 5 and and 10 sessions, assumed one went long on close of a session where the SPY closed above the 1.15 threshold in the past.


(* no close below trigger day’s close during next 10 sessions)

Interesting to note that the SPY

  • never lost more than -0.32% on the then following session (like on Friday, November 5), and posted (another) higher close on 14 out of 20 occurrences on the then following session,
  • closed at a higher level 3 sessions later on 16 out of 20 occurrences (or 80% of the time),
  • never closed lower (than the trigger day’s close) more than -0.71% 5 sessions later (significantly better than the at-any-time chance for not posting a lower close of -1.0% or more 5 sessions later), and finally
  • closed lower -1.0% or more 10 sessions later only once (max. loss -1.73%), but higher +1.0% or more on 12 occurrences.

Conclusions:

From a statistical and historical point of view, a close at least 2 standard deviations above the 20-day SMA indicates that the market will trade on a firm note over the course of the then following 2 weeks, and downside potential – if any – will probably be more than limited.

Successful trading,

Frank

Disclosure: No position in the securities mentioned in this post 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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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

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

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Comments (2)

 

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