Daily Commentary - Posted on Monday, February 6, 2012, 11:21 AM GMT +1

1 Comment


Feb Monday 6

Gaps, Highs and Bollinger Band

The SPY‘s (S&P 500 SPDR) had closed at a fresh 6-month high on Friday, February 3, 2012, and – with respect to technical analysis – looks ”overbought” (a 5.0%+ run-up over the trailing month, 2-day RSI > 97.50, a full gap up > 0.50%, a close above its upper Bollinger Band, …).

But ”overbought” does not necessarily suggest that a favorable shorting oppotunity may be provided, leave alone that a short- or intermediate-term has been reached.

Table I below shows the SPY‘s performance (cumulative returns) 2 days and 3 months later, at the end of the year (at year’s end), followed by the number of sessions until the SPY posted a(nother) higher close, and finally the number of sessions until the gap had been filled in the event (all at the same time) the SPY‘s (S&P 500 SPDR)

  • left a full gap up (today’s low above previous session’s high), and
  • closed above its upper (20,2) Bollinger Band (20-day moving average, 2 standard deviations), and
  • had closed at a 6-month high.

Although upside potential had been limited over the short-term (the SPY had never been up 1.0%+ one and two session later), chances for a(nother) higher close 2 days later are still significantly better (16 : 7, ~70%) than the market’s at-any-time chances for a higher close two days later (54.44%).

The SPY had closed at a higher level at least once over the course of the then following three sessions on 21 out of 23 occurrences, and had closed at a higher level 3 months later on 20 out of 23 occurrences (or 87% of the time), significantly greater than the 68% random chance for a higher close 3 months later. In addition, the SPY had closed out the rest of the year with a gain in all years except 2011 (in 12 out of 13 years).

And last but not least, the gap had been filled before the SPY had posted a(nother) higher close on only 2 out of 23 occurrences (12/01/2003, 02/04/1993; on 09/15/2006 the gap had been filled intraday, but the SPY posted a higher close). Therefore a close above Friday’s close before the gap will (eventually) be filled seems to be much more likely than vice versa.

(click on image to enlarge)


Table I
SPY at 6-month high, above (20,2) Boll. Band w/ full gap up

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Conclusion(s)

It appears quite likely that any short-term weakness before the open (GLOBEX) or during Monday’s (February 6, 2012) regular session might provide a favorable short-term buying opportunity targeting a close above Friday’s close during the remainder of the week.

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). Index data (e.g. S&P 500 cash index) does not account for dividend and cash payments.

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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 Pinnacle Data Corp., and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

Comments (1)

 

  1. John says:

    Each day I search for Ned Davis Research tidbits. Being that your research is neddavisish:) I thought you would find this link very interesting.

    http://www.usatoday.com/money/perfi/stocks/story/2012-02-05/stocks-unemployment-jobs-market/52977944/1

    All the Best

    John

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