Despite the fact that most recently the market regularly defied all probabilities and odds for closing lower, on close of Monday, February 7 2011, another negative setup had been triggered calling for a lower close (SPY: below 131.97) at the end of the current week and /or right at the start of the next week (Monday, February 14).
On Monday’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 1.00 threshold (%B equals 1 when price is at the upper band, > 1 therefore means more than 2 standard deviations above the 20-day mean), which had – even during the most recent run-up in the markets – been a reliable indication that buying power will probably be exhausted over the short-term, andalling for some lower prices ahead.
Table I below shows the SPY‘s performance over the course of the then following five sessions in the event the SPY closed at least 2 standard deviations above its 20-day SMA in the recent past (since 2009).
The market’s chances for a higher close one to five sessions later were always (for every single session) at or around 35% (almost 1 : 2), significantly lower than the SPY‘s at-any-time chances for a higher close one to four sessions later (52.71% | 53.89% | 55.08% | 55.41% | 60.76%), and fully compliant to the negative outlook when the S&P 500 was up 2.5%+ month-to-date on the first session of the second week of a month (see SPY UP > 2.5% MtD on Day 1 of Week 2).
In addition, the SPY never looked back and did not post a single close above the trigger day’s close (in this event the close on Monday, February 7) on six occurrences (but lapsed for the recent occurrence due to the fact that the SPY closed higher on Tuesday, February 8), but did not post a single close below the trigger day’s close only once (05/05/2009). And the SPY closed higher 1.0%+ five sessions later only once, but lower -1.0%+ on six occurrences.
Probabilities and odds are (party heavily) tilt in favor of some consolidation of recent gains over the course of the next couple of sessions, but don’t overstay your welcome on the short side of the market (the market may position it selves again for a resumption of the uptrend).
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If the information provided is helpful for your own trading business, any donation to my Be it! Children’s Charitable Foundation is much appreciated (donations can be sent via PayPal).
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Disclosure: No position in the securities mentioned in this post at time of writing.
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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