Myself and other market followers have noted the amazingly consistent nature of the market recently. For example, you can see in the following chart that the S&P 500 Index (NYSEARCA:SPY) (SPX) has been above 80 on Williams Percent R (using our unique methods of tracking and analyzing this technical analysis indicator) for 21 straight trading days and counting, now.
From an eyeball test and past experience, this is a noteworthy trend for its consistent nature. Normally we would expect to see "bullish re-tests" of the 80 level, as well as tests of the 50 mid-level and the 20 bearish level during this time frame. There also has been much talk in the media among many "experts" that the market is overbought and tired in its uptrend. So I decided to examine past SPY data to see what the aftermath of such a trend looks like and whether the data showed any significant results.
SPY Daily Chart - Current:
What does the data show? Well, it's a mixed bag. Additionally, it's important to remember that the current SPY streak is still intact (as of Thursday's close for the week), so as we continue to remain above 80, this is becoming more and more of an outlier unusual event.
I looked at the 20 day milestone in depth, this is a logical level to use because 20 trading days basically represents a month-long trend. I also looked at 25 day long streaks (25 days will be marked if we remain above 80 on Percent R through next Thursday's close), because we are still going in the current trend and to see if there was an noticeable shift.
The results for both 20 and 25 day tests are below, with holding periods of 5 trading days, 10, 15 and 20. First of note here is that the past patterns of 20 day streaks were followed by a market that was only about 50%/50% higher on a 5, 10, 15 trading day basis. I would consider this underperformance versus a normal period, given that the SPY has more than net doubled since 1993, although we have some large market swings in both directions. However, by 20 days after the signal (roughly a calendar month), the market has resumed its uptrend over 70% of the time.
It is interesting that the data is different for the more unusual 25 day streaks. Remember that the longer this current trend goes, the more rare an occurrence it is. You can see below that 5 days after a 25 day move is still under 50% higher on the market move. However, 15 and 20 days out, the market has been higher over 90% of the time -- that is a strong trend in my view.
SPY Performance After An Extended Percent R Streak:
So what conclusions can we draw from this data? Well, it looks as if there is a difference between a 20 day and 25 day Percent R above 80 streak. So we really need to wait until the streak ends to compare apples to apples -- we are currently on a 21 trading day streak, as I previously mentioned
And even looking in depth at the 71% positive results of the 20 day streak with 20 day holding period, those results also show some danger to the market -- for when this indicator was "wrong", it was very wrong. For example, we had 20 day+ streaks in both 2001 and 2007 that preceded huge multi-month market down moves. Take a look at the following charts:
SPY Daily Chart 2001
SPY Daily Chart 2007
The bottom line appears to be that we are only 50/50 to move higher in the very short-term -- not a strong conviction here. However, next week is an important week -- if we manage to get through the 25 day straight threshold, then the 3 to 4 week outlook beyond that is looking very bullish, based on past technical analysis history of this index and indicator. If you are interested in systemized index options trading, please check out our Index Options Timer program or call 1-800-244-8736.
Disclosure: SPY Calls recommended earlier this week based on trading system signal.