Daily Commentary - Posted on Monday, November 28, 2011, 11:41 PM GMT +1

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Nov Monday 28

Bouncing Back from Oversold Levels

After closing lower on seven consecutive sessions, with the (ratio) ‘adjusted‘ McClellan Oscillator (20.00% trend, 4% trend) hitting a near record-low on Wednesday, November 23 (see The McClellan Oscillator (Adjusted) ), major market indices finally bounced back today, leaving an unfilled gap up (intraday low greater than the previous session’s high) of 0.95%.

There have been thirteen occurrences since 1990 with SPY leaving an unfilled gap up of 0.95%+ (see stats below). Ten led to a lower close three sessions later.


In addition: The ratio of NYSE volume associated with advancing issues vs. volume associated with declining issues hit a near-record high today (~40 : 1). Since 1990, there’ve been three other sessions only where the ratio came in at an even higher level: 03/23/2009, 06/10/2010 and 08/11/2011.

But bouncing back from oversold levels in conjunction with spikes in market breadth had short-term negative implications in the past (although the number of occurrences is too small to read anything statistically significant into it, but at least something to keep in mind). Table II below shows the SPY‘s performance over the course of the then following five sessions in the event the 2-day RSI (Wilder’s Relative Strength Index) closed below 5, immediately followed by a session where the ratio of NYSE volume associated with advancing issues vs. volume associated with declining issues exceeded 7.5 .

Up to now, the SPY closed lower the next day (in this event on Tuesday, November 29) on all of those 8 occurrences, and two and three sessions later still on 7 out of 8 occurrences (thereof closing lower 1.0%+ on 5 and 6 sessions respectively).

Conclusion(s): With leaving a gap up ≥ 0.95% and bouncing back from oversold levels in conjunction with spikes in market breadth, probabilities and odds are tilt in favor of s short-term consolidation of today’s gains.

Have a profitable week,

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 explicitly 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.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

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

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