Weakness and Calender Effects

On Thursday last week the SPY fulfilled the bullish setup (see my posting ‘Overbougth’ w/strong Uptrend) which was triggered on the close of Monday, January 11 when the SPY closed lower on a session after the SPY’s 2-day RSI closed above 96 (a so-called ‘overbought‘ market indicating that it’s becoming increasingly difficult to find the ‘greater fool’ willing to buy your shares for an even higher price) and Wilder’s 2-day DX (Directional Movement Index, not to be mistaken for the Average Directional Movement Index (ADX)) closed above 95 the day before (both on the same session), indicating a strong underlying uptrend and forecasting at least one higher close above the trigger day’s close over the course of the then following five sessions (but regularly three sessions later), see table below.

But although since 01/01/2009 the SPY always posted a higher close (than the trigger day’s close, in this event last Monday’s close) 4 and 5 sessions later, it was the first occurrence (since 01/01/2009) that the SPY was trading below the trigger day’s close 4 (and probably 5 as well) sessions later (see stats below), which could be an early indication that upside momentum is waning and and the market could’ve reached a short- or intermedium term top.

On Friday (which coincidenced with a session immediately preceding a long weekend, the release of the Consumer Price Index and Option Expiration Friday), the SPY lost -1.12% on the close which triggered another interesting setup.

Table I below shows the SPY‘ historical performance (since 01/01/1990) on the then following session after the SPY had lost at least -1.0%

• Setup 1: on any session,
• Setup 2: on the close of a session immediately preceding an exchange holiday during the Tuesday to Thursday timeframe (means a one-day gap between two sessions),
• Setup 3: on the close of a session immediately preceding a regular weekend (means a two-day gap between two sessions),
• Setup 4: on the close of a session immediately preceding a long weekend (an exchange holiday on a Friday or Monday, means a three or more -day gap between two sessions).

Interesting to note that while the market in general shows a statistically significant (the respective t-score exceeds the +1.645 mark for statistical significance, means there is a low probability that this positive effect occured by pure chance only) short-term mean-reversion tendency (especially with respect to those occurrences immediately preceding an exchange holiday during the Tuesday to Thursday timeframe, with 5 out of 5 higher closes), the opposite applies to those occurrences which fell on a session immediately preceding a long weekend (5 higher and 14 lower closes the next session).

With the setup’s Distribution of Returns at 22.69% (means one half of the setup’s returns fell in the lowest quartile of the SPY’s at-any-time returns), and Top 10% Losers (disproportionately high) at 31.58% (means 31.58% = 6 occurrences) falling into the SPY’s worst 10% performing sessions, this setups shows a significantly negative tendency on the then following session (in this event on Tuesday, January 19), although 19 occurrences only is something to be careful to read anything statistically significant into it.

Table II below now shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following 1 to 5 sessions when the SPY closed lower at least -1.0% on a session immediately preceding a long weekend (setup 4).

Looking up to five sessions ahead, there is a slight improvement only in comparison to the negative tendency on the then following session. With 58.89% the respective probability for at least one higher close (than the trigger day’s close) over the course of the then following five sessions significantly undercuts the at-any-time probability of 79.62% for at least one higher close over the course of the then following five sessions.

Table III below now shows the SPY‘ historical performance (since 01/01/1990) over the course of the then following 1 to 5 sessions when the SPY closed lower at least -1.0% on Option Expiration Friday.

And even when the SPY had lost at least -1.0% on the close of Option Expiration Friday (unfortunately again a small sample size only), historical probabilities and odds show a negative tendency over the course of the then following five sessions (although not statistically significant, but neither probabilities for a higher close nor the median trade and/or Distribution of Returns favor the long side in any way) .

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And last but not least some intraday stats (Table IV) concerning those historical occurrences (since 01/01/1990) where the SPY closed lower at least -1.0% on Option Expiration Friday or lower at least -1.0% on a session immediately preceding a long weekend.

It is remarkable that on the then following session the SPY

• was trading at a lower level (than the previous session’s close) at the end of the first hour on six out of every ten occurrences,
• managed a higher high than the previous session’s high on only 1 out of every 5 occurrences (19.15%) the next day, significantly lower (to say the least) than the at-any-time probability for a higher high of 51.93%,
• posted a higher low on two out of every three occurrences  (29.35%), significantly lower than the at-any-time probability for a higher low of 52.66%,
• closed above the previous session’s high on only one out of every 10 occurrences (10.64%), significantly lower than the at-any-time probability for a close above the previous session’s high of 29.35%, and finally
• the Distribution of Returns (the percentage-rank of the medium trade) and Top 10% Losers (the percentage-wise number of occurrences falling into the bottom one-tenth of the worst performing at-any-time sessions) on almost all intraday performance stats show a statistically signifcant tendency for a temporary follow-through of Friday’s weakness.

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Bottom line: With some serious weakness (a loss of at least -1.0%) on a session immediately preceding a long weekend and/or on Option Expiration Friday, and taking into account that the SPY broke it’s recent streak of 10 consecutive higher closes (all since 01/01/2009) four and five sessions after the he SPY’s 2-day RSI closed above 96 (a so-called ‘overbought‘ market) and Wilder’s 2-day DX (Directional Movement Index) closed above 95 (indicating a strong underlying uptrend), historical probabilities and odds are (significantly) tilt in favor of some follow-through of Friday’s weakness during the (shortened) next week. A short-term pullback to the upside on Monday’s/Tuesday’s GLOBEX and/or right at the start of Tuesday’s regular session might provide a favorable short-term opportunity on the short side of the market (2 to 3 session timeframe).

Successful trading,
Frank

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Disclaimer: No position in the securities mentioned in this post at time of writing.

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